Britain's Labor Party long has promised to clean up the not-always golden square mile comprising the City of London. So it comes as little surprise that Prime Minister Tony Blair's new government is turning its attention to financial reform following Chancellor of the Exchequer Gordon Brown's audacious move to allow the Bank of England to set rates on its own.
The City is watching Blair and Brown with trepidation even though its hodgepodge of regulatory bodies is ripe for change. London has already suffered some spectacular financial scandals, such as the collapse of Barings PLC in 1995 and a fund-management debacle last fall at Deutsche Morgan Grenfell that could cost the investment bank $730 million.
Tying the City's hands too tightly could damage the international competitiveness of a booming industry that accounts for 19% of gross domestic product. But Labor may be mulling more radical changes than it had suggested when it was in opposition. "Blair is sending a message that the years of sleaze are over," says Rowan Bosworth-Davies, an ex-Scotland Yard fraud specialist who is a consultant with the law firm Titmuss Sainer Dechert.
A new structure that would allow British regulators to cooperate more easily with U.S. and other international regulators would be an improvement on Britain's current fragmented system. But Labor is also being driven by a clamor to root out the causes of recent scandals in pensions and other financial services. Huge bonuses in the City also make an easy target. The fear is that the party's wish to protect retail investors and pensioners from scoundrels may have the side effect of hobbling the City's international institutions. Brown hiked such concerns by appointing Helen Liddell, 47, as Treasury Economics Secretary. A formidable Scottish politician, she has no track record on finance but a flair for publicity.
Liddell has made a bold start by tackling a long-festering pension scandal. In the late 1980s and early 1990s, several hundred thousand Britons were talked into swapping the pensions provided by their employers for private pensions that turned out to be much less generous. On May 14, Liddell called in two dozen top executives from such prominent banks and insurance companies as Barclays and Prudential Corp. She warned them to come up with a plan for compensating victims in a hurry or face fines and tougher rules. Liddell's interest in pensions is personal: She lost hers, built up while working for publisher Robert Maxwell in the 1980s. Maxwell allegedly siphoned off more than $700 million in company pension funds before his death in 1991.
The pension mess illustrates one of the big problems with the City's reliance on self-regulatory organizations. Controlled by industries they are supposed to govern, they may be unwilling to hold members' feet to the fire. Moreover, the chain of command stretches from the Treasury to an umbrella organization called the Securities & Investments Board (SIB) and only then down to the self-regulatory organizations.
SPINE NEEDED. Labor now plans to eliminate self-regulatory organizations altogether and put a strengthened SIB in charge of everything from securities to futures and pensions. Another possible target for the new government is the Bank of England. The bank was blasted for being overly trusting of Barings and for waiting until 1991 to shut down the Bank of Credit & Commerce International after it knew that the bank was a criminal operation. Labor will want to create a broader agency to watch for potential failures. It also will have to address the overlapping authority of the Bank of England and the Securities & Futures Authority, which regulates investment banks.
For all the ambitious proposals, everything will amount to shuffling of nameplates if Labor doesn't choose regulators with a no-nonsense attitude. The first big test will come with Labor's choice of a replacement for Andrew Large, chief executive of the SIB, who says he wants to step down. Enforcement officials also want better tools to bag financial criminals. As Blair and his team take their broom to the City, he will have to be careful not to let a populist backlash against the City go too far. It may be a greedy, unsentimental place. But it is probably also the best asset Britain has.