It is a hot summer afternoon in London, and the spacious office in the Bank of England is sweltering. But the heat doesn't seem to bother Deputy Governor Howard Davies. While waiting to be summoned to a meeting with bank Governor Eddie George, he thinks over the weekly soccer match from which he has just returned. "This is hard, competitive stuff," he says of the game.
He might as well be talking about his next job. Tony Blair's Labour government has tapped the 46-year-old Davies to help keep its promise to clean up Britain's scandal-plagued financial industry and beef up protection of investors. Beginning on Aug. 1, Davies will head the Securities & Investments Board, Britain's top securities regulator.
He will oversee a reshaping of the way Britain's financial industry, which contributes an estimated $250 billion a year to the economy, is policed. Labour wants to expand the SIB to monitor virtually the entire sector. The so-called self-regulatory organizations (SROs), which are industry-funded and cover discrete activities, will be dissolved, and the Bank of England will lose its key role in bank supervision. Davies will monitor everything from mutual funds to commodities trading to insurance.
This redesign of Britain's regulatory system poses big opportunities and big risks. If Davies manages the task successfully, London could set a new paradigm for centralized regulation in a world where financial disciplines are increasingly integrated. And one-stop regulation could make it easier for watchdogs in one financial capital to coordinate with their counterparts in another.
For example, in the events leading to the 1995 collapse of Barings PLC, Bank of England supervisors were unaware of the wild futures trading occurring at the Singapore branch of the bank's securities arm, which fell more under the jurisdiction of an SRO. Although lax management was the primary cause of the crisis, a more centralized regulator might have spotted the improprieties.
BIG BASKET. But some experts ask whether it makes sense to consolidate supervision of such different industries as insurance, commodities trading, and investment banking. "Fitting all that under one roof is going to be a challenge," says U.S. Federal Reserve Board Governor Susan Phillips. "I'm not sure all of the ramifications have been thought out."
There also is controversy over what the governing philosophy should be in the new system. British prosecutors want it to resemble the U.S. Securities & Exchange Commission, where investigators actively track down fraudsters. But the attitude toward financial crime has traditionally been softer in London, where banks fear losing clients to offshore rivals. Warns one senior banker: "If you impose a strict regime in a free market, other centers that aren't so inhibited will draw away business." So Davies must walk a fine line between reassuring industry players and delivering the clean markets his Labour bosses demand.
Davies believes that speaking with one regulatory voice will help Britain advance its interests in Brussels and in international financial circles. He has already gone on the road to explain the new system to the U.S. Federal Reserve, the Bundesbank, and the Hong Kong Monetary Authority, to make sure that lines of communication stay open during the transition. And he says he finds "a huge amount of interest" in the experiment.
QUICK STUDY. The choice of Davies to carry it out could make Blair and Chancellor of the Exchequer Gordon Brown look smart. Well-connected politically, Davies is considered one of Britain's most flexible managers. "He is extremely quick at picking up a new situation," says Sir David Lees, chairman of GKN PLC, a big industrial company on whose board Davies served.
Davies intends to have most of the new organization in place by next spring even though the enabling legislation won't come until 1999. But all the planning in the world won't shield Davies if another Barings materializes in the razzle-dazzle City. He has led a charmed life so far. But he will need all his skill and not a little luck to keep it going.