London: A Financial Supercop For The City

All financial services will come under the eye of Howard Davies

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. Indeed, he is savoring one of his last days on Threadneedle Street. 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. The 46-year-old former McKinsey & Co. consultant is about to face the sternest test of his career. Tony Blair's Labour government has tapped Davies to help keep its long-standing promise to clean up Britain's scandal-plagued financial industry and beef up protection for investors. Beginning on Aug. 1, Davies will head the Securities & Investments Board, Britain's top securities regulator.

He will oversee a controversial reshaping of the way Britain's financial industry, which contributes an estimated $250 billion a year to the economy, is policed. The plan is 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 gain sweeping powers over services ranging from mutual funds to commodities trading to insurance.

LARGE BASKET. This wholesale redesign of Britain's regulatory system offers big opportunities and poses big risks. If Davies manages it successfully, the City could steal a march on rivals by setting a paradigm for centralized, efficient regulation in a world where financial disciplines are becoming increasingly integrated. One-stop regulation may also make it easier for watchdogs in one financial capital to coordinate with those 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 the Securities & Futures Authority, an SRO. Although lax management was the primary cause of the debacle, a more broad-gauged regulator might have spotted the improprieties.

But some experts ask if it makes sense to consolidate supervision of such diverse 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."

Michael Taylor, a professor at the University of Reading and an authority on financial regulation, concurs. He notes that experiments with single regulators have been confined to countries such as Finland and Denmark, whose financial centers are relatively tiny. "The worry is that people are going to be seriously overstretched," he says. Even in the U.S., the powerful Securities & Exchange Commission oversees only the securities markets, while banking and insurance fall under state jurisdictions. And Japan's Ministry of Finance, whose departments control virtually the entire financial industry, is notoriously poor at sniffing out abuses.

There also is controversy over what the governing philosophy should be in the centralized new system. British prosecutors want it to resemble the U.S. SEC, 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." London banks also worry that fees to regulators, which now add up to millions of dollars per year for big institutions, will rise.

So Davies has to walk a fine line between reassuring the industry players and delivering the clean markets and investor protection his Labour bosses demand. "Ministers have not told me to go out there and kick ass and screw people," he says, chuckling. However, "we want safe banks, not ones that are going to run pyramid schemes or money laundering."

Davies also warns that he will continue to push the banks to tighten up the lax controls that contributed to such crises as the Barings collapse or last year's $730 million asset management debacle at Deutsche Morgan Grenfell. In the past, senior managers in Britain have often escaped blame for such fiascos by pleading ignorance, but Davies says that will no longer wash. He also will lobby the government to tighten the laws on market abuse--an area in which London has seen few convictions.

SALES TRIP. Davies believes that speaking with a single regulatory voice will help Britain advance its interests more effectively in Brussels and in international financial circles. In fact, Davies 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. He wants to make sure that lines of communication aren't severed during the transition. And he says he finds "a huge amount of interest" in what could be a groundbreaking experiment. "Because of London's importance, people do look," he says.

Although some suspect that Blair and Chancellor of the Exchequer Gordon Brown decided to turn the City upside down without really thinking it through, their choice of Davies could make them look smart. Well-connected politically, he is rated one of Britain's most clever and flexible managers. "He is extremely quick at picking up a new situation," says Sir David Lees, chairman of GKN PLC, a major industrial company on whose board Davies served.

If there's a worrying aspect about Davies, it is that he has risen too far, too fast. He has been at the Bank of England for only two years. Prior to that, he held the top post at the Confederation of British Industry (CBI), the lobby for the country's major companies. Sir Michael Angus, the former chairman of Unilever PLC who picked Davies for the CBI job, believes that Davies has what it takes to steer an independent course. "He is not susceptible to bullying," Angus says.

Davies credits McKinsey, where his clients included Citibank and Lloyds Bank PLC, with introducing him to the financial industry. McKinsey, in fact, is helping staffers at the Bank of England and the self-regulators to design the new structure. To deal with the uncertainty that is causing massive staff defections at the SROs, Davies plans to have most elements 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 or BCCI 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.