The regulation of the financial services sector, including the banks, is familiar ground for Howard Davies. As chairman of Britain's Financial Services Authority he has powers that aspiring Irish financial regulators can only dream of.
A former deputy chairman of the Bank of England and once head of the Confederation of British Industry (CBI), Mr Davies took over at the Securities and Investment Board (SIB) in August 1997. Two months later, the SIB changed its name to the Financial Services Authority. Next January, it will have absorbed the last of the remaining regulatory agencies, completing the process to create a super-regulator for all financial services: banks, stockbrokers, fund managers, life and pensions companies, building societies, friendly societies and the personal investment community. With nearly 2,000 employees and a budget that will reach about £180 million sterling (£200 million) next year - paid for by industry - this is an agency that means business: not only does it regulate and supervise all financial services companies, but if need be, it also imposes heavy fines and sanctions against transgressors.
Speaking at his Canary Wharf office last week, Mr Davies (47) declined to comment directly on Allied Irish Banks controversial £14 million settlement with the Revenue Commissioners or the controversy in the Republic over bogus non-resident accounts. Such a case has not arisen in Britain, "to my knowledge" and anyway, he says, this would clearly be a matter for HM Inland Revenue, the British equivalent of the Revenue Commissioners.
Would the FSA have any role if such an event ever did arise in Britain?
"The general principle of our supervisory position is that in order for a company to be considered a fit and proper financial institution, it must obey all the laws to which it is subject.
"An institution not properly calculating its tax bill," he says, "might be doing something else wrong, which could be a danger to the depositor."
One of the FSA's primary purposes is to protect the consumer at all times.
"But it's true that we don't police an institution's tax-paying record - that is a job for the Inland Revenue. "If we had that kind of problem with one of the banks," he says referring to the AIB situation, "we would have to assess the extent to which it revealed some systemic problem in the bank which was a regulatory matter. Such as whether the reporting up to the people at the top was faulty, or the controls or management structure was faulty. Or whether there was an individual who connived and therefore might be deemed to be unfit and improper."
It was a banking crisis - the Barings collapse and before it BCCI - that partly prompted the last British government, and the current Labour government, to proceed with the creation of the super-regulator, he says. Also, the Labour government had made it clear that it wanted the Bank of England to be primarily a monetary authority with independent power to set interest rates and other policy matters and not a regulatory one. The third trigger, he says, was that both the Conservative and later the Labour government had finally come to the conclusion that "Government itself should not really be the regulator. And that has been followed in other industries - energy, rail, transport, telecommuncations.
"Ministries, they concluded, are about policy and legislation while the regulatory function should be done by agencies that are set up for that purpose, with people on top who are personally accountable."
It was obvious, he says, that civil servants and ministers who either could not or did not want to take responsibility were unsuitable regulators.
"It is now very obvious who is at fault if some regulatory collapse occurs in this country - it is me." Here in the Republic, where regulation is applied by a variety of Government agencies and Departments such as the Central Bank, the Department of Enterprise Trade and Employment, the Office of the Director of Consumer Affairs, the Office of the Register of Friendly Societies and a mish-mash of trade bodies acting on behalf of the Department such as the Irish Brokers Association, the situation is not dissimilar to that of Britain before the 1980s.
In Britain now, individual accountability is sewn into the fabric of the new regulations. Everyone from the company chief executive, senior officers, middle managers and even sales staff or intermediaries must be individually registered with the FSA.
"One of the trends of the last two or three years is an increased focus on senior management responsibility," explains Mr Davies. "The new legislation says that as we regulate, we must take account of the fact that the prime responsibility of making sure that customers of the institution are dealt with fairly, etc, rests with the senior managers of the firm."
A chief executive does not have to know exactly what every salesman is doing, but there has to be "a control mechanism in place and a chain of responsibility that reports upward. Under the new system, the Barings chief executive would know that its entire capital was being sent to Singapore. If that didn't happen, it would clearly be negligent and that would be a basis for regulatory action or discipline applied to the chief executive."
The biggest scandal the FSA has inherited is that of pensions misselling which has so far cost £11 billion with tens of thousands of cases still being investigated. Under the old regulatory system and also under the FSA, firms that were involved in misselling or other malpractice have been fined and had their salesforces suspended or retrained. As with the AIB example, Mr Davies was reluctant to comment on the 600-plus cases of churning by Irish Life salesmen that were unearthed this summer and are still under investigation.
Cases like this have been commonplace in Britain, he admits - misselling is "endemic" - and the usual regulatory response is, "first, to focus on redress, to get customers reinstated to the position where they would have been had they been properly dealt with.
Typically, we fine the company. There have been a number of fines recently for pension misselling where the fine was just £1,000 for a small, single practitioner to £750,000 for a sizeable firm. "We have also required companies to take their salesforces off the road, and retrain them. Until they have demonstrated they can control their salesforce properly we won't allow them to hire any new people." There is no single life and pensions provider who has not had some problem with the regulator, he says firmly, but he believes that generally, the British banks' record is "quite a bit better". FSA bank supervisors are more routinely occupied with overseas banks based in the City than with domestic ones.
It is more than a decade since stricter regulatory registration was introduced in Britain - and Northern Ireland. Resistance to the notion of regulation has waned, says Mr Davies, mainly as the scale of the Barings collapse and the pensions misselling scandal has emerged. "People have said, `we cannot defend the idea that you can have such a collapse and no action be taken against very senior people'. They know that is indefensible and have stopped trying."
Nor is the cost of compliance a source of significant complaint, he says, with the notable exception of small operators, mostly individual financial advisers who not only complain about the cost - on average a payment of £2,000 to the FSA - but also the amount of form-filling and record keeping required of them. "It is unfortunately true," says Mr Davies, "that the regulation burden is disproportionately large for small operators, but the risks, of course, to consumers, are the same. Therefore you need a regime with a similar degree of intensity." The old PIA system was too burdensome, he says and the agency is aiming to make parts of the new one more risk-based: the more an adviser can prove a good compliance record and has the appropriate systems in place, "the more they will be left alone - broadly". Does he ever see a day when the SFA is wound up - due to superb compliance and good standards of practice by industry?
He smiles wryly. "I don't ever see us self-liquidating." He says the FSA must protect the consumer, who is always going to be subject to new risks. It must also assess the ability of companies to control themselves - this, he says, has international, not just domestic repercussions given the City of London's global significance.
The FSA also has a mandate to educate consumers, something it will pursue in earnest this coming year. Finally, it has to ensure that no industry under its supervision is used for illegal purposes, such as money laundering.
