Commentary: What The City Of London Needs Is A Good Broom

Ever since the days of Margaret Thatcher, Britain has been known for its wide-open financial markets, loose regulation, and the belief that tough competition was the best way to prevent market abuses. But lately, the shine has been rubbing off Britain's hands-off economic legacy. The City of London has been rocked by one scandal after another. Dirty money has spilled over into Parliament, which has been tarnished by allegations of Conservative MPs receiving payoffs from businesspeople and others who wanted favors. Says Alan Doig, a professor of public-services management at Liverpool Business School: "Britain has an undercurrent of corruption that is quite significant."

The consequences of Britain's new sleaze factor seem to be warping political and economic life. While Britain has long been the world's model democracy, cynicism is setting in as the impression grows among voters that members of Parliament are a venal bunch whose services can be bought for a fistful of pounds. With hundreds of billions of dollars under management, the City must also be careful that mounting financial shenanigans don't turn off investors.

BIG CHANCE. It's time for a housecleaning. Britain needs to roll back some of its laissez-faire policies and get serious about regulating both the markets and political figures. After 17 years in power, Prime Minister John Major's Conservatives don't seem to recognize the impact of recent scandals. It may take a Labor victory to crack down on sleaze.

Labor is more in tune with the public clamor to clean things up--not least because it makes political sense. Labor promises greater disclosure of political contributions. Mike O'Brien, the party's finance spokesman, says that Labor also plans to streamline the hodgepodge of mostly industry-sponsored regulatory institutions under an independent Securities and Investments Board. The party is also considering a new bank supervisory agency alongside the Bank of England, which has been criticized for being too protective of banks.

While Labor may not have all the answers, the notion of public service for its own sake certainly needs restoring. Thatcher's critics say that her emphasis on the profit motive changed the mind-set of some public officials. Businesspeople came to believe that an MP could be bought. Lax parliamentary rules don't help. MPs, who make $67,000 a year, face no limits on outside earnings or gifts if they register them. But MPs are not supposed to take extra money for performing parliamentary favors for clients.

Such an alleged payoff touched off a furor recently in the British press. The incident dated back to the 1980s, when Harrods Chairman Mohamed Al Fayed says that a lobbyist convinced him that "an MP could be hired in the same way that you hire a taxi." Al Fayed acknowledges that he passed money to MP Neil Hamilton to win his help in corporate battles. After The Guardian newspaper wrote about the incident in 1994, Hamilton sued the newspaper. Although Hamilton still professes his innocence, he recently dropped the suit and agreed to pay some of the newspaper's court costs.

ROGUE TRADER. With such scandals grabbing headlines, polls show that British voters overwhelmingly back wider disclosure of political funding. Pressure is also growing to tighten up the City of London's regulatory agencies, which are perceived as beholden to their member financial institutions. "Self-regulation has about as much chance of a happy outcome as a chicken spending a weekend with a fox," says Rowan Bosworth-Davies, an ex-Scotland Yard fraud specialist who is now a consultant with the law firm of Titmuss Sainer Dechert.

Of course, a regulatory system with real teeth might not pick up all the problems. But it may scare potential offenders and keep managers on their toes. They were certainly asleep at Barings in 1994 and 1995 when a rogue trader ran up more than $1.3 billion in losses, bringing the bank down. There also seems to have been a serious lapse at Deutsche Morgan Grenfell, where shortcomings in supervision contributed to major losses in its mutual-fund business.

In politics, too, harsher standards won't eliminate corruption. But if the rules seem to be a joke, they are bound to be flouted. That's why Britain must move decisively to clean up its act now. If it doesn't, it could lose one of its most valuable assets: its reputation for high standards of conduct.

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