As the most powerful policeman the City has ever seen, the Financial Services Authority chairman has the regulation knighthood, the ivory tower and the ear of ministers. So far, so traditional. Yet anyone who has met him or heard him speak will know that in this case the book should not be judged by its cover.
Take Sir Howard on his own office. ‘Over-mighty regulator. Prosecutor, judge and jury. Monster bureaucracy. Unaccountable behemoth,’ he once wrote.
‘These are just a few of the politer epithets which trip lightly off the word processor whenever the Financial Services Authority makes headlines in the financial pages.’
Or on the legislative process. ‘Having a Bill in parliament is a bit like having a skip in front of your own house,’ he has said. ‘Other people put their rubbish in before you’ve had a chance to fill it with your own.’
Clearly, he is no mealy-mouthed regulator.
Broad interests in the City
Nevertheless he is not entirely comfortable with the suggestion that he is something of a primary colour in a sea of grey. ‘I think I probably have broader interests than many in the City,’ he acknowledges. ‘But that’s partly because I have had a more varied career background than many others.
‘I’ve done a variety of things and I’m always keeping my hand in writing book reviews and that sort of thing so I normally have a broader view. But there are other colourful regulators around. Perhaps they hide a bit.’
It was back in 1997 that the Financial Services Authority began its quick step to supremacy, taking over the responsibilities of the Securities and Investment Board, the Personal Investment Authority and a number other members of that formerly disparate band of City regulators.
And today it is Davies whose empire – attractively headquartered in light-bathed offices in Canary Wharf – takes in everyone from the largest fund manager to the high street accountant who offers investment advice.
At some point this year – no later than November, the Treasury confirmed last week – the legislation that created the FSA will bite fully. That date – known as N2 – will bring thousands of accountants under the wing of the FSA. On that day responsibility for regulating accountants who conduct investment business will be passed from the institutes to the FSA.
Already many accountants are saying they are more scared of Sir Howard than of their own accounting institute. When I tell him this, it elicits a wry laugh. ‘I hope so,’ he says. ‘That’s the way we would like it to be.’
He describes the current arrangement as not ideal. ‘There are slightly different standards and different kinds of enforcement practices that apply in different parts of the market even though from a consumer point of view they are all doing the same thing,’ he says.
‘So if you are getting investment advice from someone who happens to be an accountant, you are regulated in a slightly different way to someone who happens to be a lawyer and again in a slightly different way to someone who happens to be a financial adviser. We think it makes a lot of sense to have a consistent approach to that.’
An uneasy change
But it is a change that is fraught with potential difficulties. At the moment there are around 14,000 firms that give investment advice. Of them 1,000 are accountants.
For the new arrangement to work the FSA will only monitor those that conduct mainstream investment business. But drawing a line between those for whom investment business is a key part of their activities and those for whom it is an sideline is not easy.
‘We estimate around 2,000 firms do investment business as a business rather than incidental to their other business,’ he says.
He uses the example of a lawyer or accountant who puts a client’s money on deposit so it is available for specific use at a particular point in the future. ‘Is that investment advice?’ he asks. ‘Well, not really.’
Conversely, there are those that the FSA is looking to regulate. ‘Of course there are lots of accountants who say “come to us and we will advise you on your financial planning”. That is their business and we want to regulate them.’
But he acknowledges the inherent difficulties of this approach. ‘It’s very much in the FSA’s interests to ensure we do not end up regulating incidental business. If that happens it will be a nightmare for us.
‘Frankly, we’re at a delicate point. When the date is finally announced and people have to apply to be grandfathered into the new regime we’ll then discover how many people want to be grandfathered in and it’s only then we’ll discover whether we have got the thing right.
‘If we have waves of accountants beating a path to our door, we will not be pleased.’
At one stage last year it looked as though this regulation would be conducted by some combination of the professional accounting, legal and actuarial institutes. In the end the FSA decided to keep it in house.
‘Eventually we concluded it would be more cost-effective to do it ourselves,’ Sir Howard says. ‘I have to say when we first started on this exercise in 1997, I had half-expected we would contract this out. But perhaps it was a combination of the development of our own internal thinking about how we would handle this business and the ways in which we could do it quite cost effectively in house.
‘I think the institutes were also all a bit, if you like, balkanised. The Law Society, the chartered institute, the actuaries – it was quite difficult for them to all come together.’
More widely, the FSA’s role is essentially to maintain confidence in – and promote public understanding of – the UK financial system.
It also seeks to protect consumers and contribute to reducing financial crime. The split however is not an even one. ‘I’d be surprised if financial crime turned out to be more than 5% of the activity,’ Sir Howard says, though he recognises it is growing.
‘Consumer education is also growing. Later this year we will be producing what are generically known as product league tables of costs and charges and life insurance products,’ he says. It’s not something the FSA has tried before, but it is an area in which Sir Howard is something of a pioneer. Under his controllership, the Audit Commission developed the controversial ‘league table’ technique and it has been adopted widely since.
Having spent five years establishing the commission as most politicians’ public sector regulator of choice, Sir Howard left for the CBI in 1992.
Three years later he moved on to the Bank of England, drafted in as a safe pair of hands to replace Rupert Pennant-Rea, whose sexual indiscretion cost him the deputy governorship. He joined the FSA from there.
An impressive CV
But even before his move to the Audit Commission kick-started one of the most impressive CVs around, Sir Howard had already demonstrated the right credentials to reach the very top. He spent five years with McKinseys in the mid-1980s – where his closest colleagues included William Hague, Tory environment spokesman and former Asda supremo Archie Norman and Adair Turner, former CBI chief.
‘I worked directly with William, Adair and Archie,’ he says. ‘There was one project where there was me, Adair, William Hague and Adair’s now wife. There was another one, which had me, Archie and Adair. One of the projects bizarrely was on cigarette marketing, not something any of us particularly wish to …’ He trails off. ‘But mainly financial stuff.’
Before that he spent a decade trudging the corridors of Whitehall. His nine years at the Treasury included 12 months as special adviser to then chancellor Nigel Lawson, writing speeches, a skill he uses to excellent effect today. He has also enjoyed – or perhaps endured – a spell at the Foreign and Commonwealth Office, including two years as private secretary to the British ambassador in Paris. ‘It was useful in terms of understanding how the European Community works,’ is probably his most positive comment about his time there.
Management by walking about
He relishes his current role. Flitting between his desk and the lectern he sometimes uses to sign correspondence, he is clearly a fan of the management by walking about school of thinking. The FSA’s offices are all open plan – and even Davies’ own desk is not hemmed in.
And he holds no truck with claims that the FSA’s structure should more closely mirror the corporate structures of the City.
The FSA is a company that keeps its expenditure out of public expenditure limits (Sir Howard’s pay tops £250,000 and other executives have needed to be tempted away from the often-inflated salaries of the City) but this, he says, is of little significance.
‘Frankly, yes we are unlike most companies. But that’s not the only respect in which we are unlike most companies,’ he says sharply. ‘We are unlike most companies in every other way as well and it’s really not a useful analogy.’ And he adds: ‘It’s a direct copy of the Bank of England. And it’s actually pretty much a direct copy of every other regulator in the world.’
But that appears to be his only frustration, though he is reluctant to discuss what his next move will be. ‘All I’ve said about this job is that I have a five-year contract until July 2002 that I expect to fulfil. At that point we shall see. There is no point thinking about it, there’s an election to come and goodness knows what. ‘So I’ve no idea.’
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