Tony Blair Is Shaking A Stick At The City
Britain's Labor Party long has promised to take a broom and 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 up quickly on 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 hardly a match for today's complex financial markets and is ripe for change. Indeed, 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.
LURID PRESS. Tying the City's hands too tightly could damage the international competitiveness of a fast-growing industry that now accounts for 19% of Britain's gross domestic product. After all, one reason that Frankfurt and Paris can't touch London as financial centers is that they are regarded as overregulated. "I hope that this Labor administration understands that the City is a golden goose," says a senior executive at an international bank in London. Nevertheless, Labor may be planning more radical changes than it had suggested when it was in opposition. Indeed, "Blair is sending a message that the years of sleaze we have gone through are over," says Rowan Bosworth-Davies, a former Scotland Yard fraud specialist who is a consultant with the law firm of Titmuss Sainer Dechert.
If Labor comes up with a more transparent, coherent system of regulation, that could be good for the City. 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. Some Labor appointments, including the No.2 Treasury official, Alistair Darling, have a clear vision for regulatory reform. In the months before the May 1 election, Darling called for a regulator "with sufficient clout, reputation, and stature to deal with its international counterparts."
But Labor is also being driven by a clamor to root out the causes of recent scandals in pensions and other financial services. And, of course, the lurid publicity about huge bonuses in the City makes the finance industry an easy target. The fear is that the party's laudable wish to protect retail investors and pensioners from scoundrels could have the unwanted side effect of hobbling the City's international institutions. Now, Brown has increased such concerns by appointing Helen Liddell, 47, as Treasury Economics Secretary. The formidable Scottish politician has no track record on finance, but she has a flair for publicity.
As the official who will deal with City rules, Liddell has made a bold start by immediately tackling a long-festering pension scandal. In the late 1980s and early 1990s, several hundred thousand Britons--including teachers, miners and police--were talked into swapping the pensions provided by their employers, which were often public-sector organizations, for private pensions that turned out to be much less generous. The pitch, encouraged by then-ruling Conservatives, was that alternative schemes would be better. This has been a major political and media issue since 1992, but the providers have only reviewed about 10% of 500,000 "priority" complaints.
On May 14, Liddell summoned to her office some 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 the victims of these schemes in a hurry or face fines and a tougher regulatory regime. Even before the meeting, however, Liddell's threats started bearing fruit. After years of dawdling, the Personal Investment Authority (PIA), which regulates most pension providers, ordered its members to speed up the examination of the victims' claims. Total compensation could come to $4 billion.
The pension mess illustrates one of the big problems with City regulation. Self-regulatory organizations such as the PIA, which are controlled by the industries they are supposed to govern, may be unwilling to hold members' feet to the fire. Indeed, much has been made of the fact that the PIA's Chairman, Joe Palmer, was until 1991 the chief executive of Legal & General, one of the firms with many outstanding cases.
Moreover, the present 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. "No one takes responsibility," says Garry Heath, chief executive of the Independent Financial Advisers Assn., which represents providers of retail finance services. "Everyone blames everyone else."
TOO TRUSTING. To curb the buck-passing, Labor plans to eliminate self-regulatory organizations altogether and put a strengthened SIB in charge of everything from securities to futures and pensions. However, the worry among experts and the City's big institutions is that Labor will be mainly concerned with dealing with retail problems affecting small investors.
That could well be what is driving Liddell. The new Treasury Economics Secretary, who declined to be interviewed, has said that she lost the pension she built up while an executive in the newspaper organization of the late Robert Maxwell in the late 1980s. Maxwell is alleged to have siphoned more than $700 million from his companies' pension funds before dying in mysterious circumstances in 1991.
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 BCCI was a criminal operation. When Labor was in opposition, the party suggested that the central bank's supervisory role could be given to another agency. Now that it's in power, Labor will at least want to create a broader agency to keep an eye out for potential failures. The government also will have to address the overlapping authority of the Bank of England and the Securities & Futures Authority, which regulates the City's investment banks.
For all the ambitious proposals, everything will amount to shuffling of nameplates if Labor doesn't choose tough 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 has announced he wants to step down. Enforcement officials also want better tools to bag financial criminals. One prosecutor says it would be a big plus if evidence gathered through wiretaps could be used in court. He also complains that without plea bargaining, which is not used in the British judicial system, it is difficult to turn small fry into witnesses against the bigger fish.
COSTLY ADVICE. Whether protecting small investors or pursuing misdeeds inside big banks, regulators need to get tough, says Phillip Thorpe, head of the Investment Management Regulatory Organization Ltd., a self-regulatory organization. But Thorpe thinks that in the end, strengthening preventive measures such as compliance systems is more important than chasing crooks. Thorpe is tough on those who get out of line. He has already handed out some hefty fines, including $3.2 million to Deutsche Morgan Grenfell for failing to properly supervise fund manager Peter Young last year. Thorpe has also fined Lloyds Bank PLC $520,000 for improperly advising its clients on their pensions.
As Blair and his team take their broom to the City, they'll 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.