Outlook: Howard's end is cause for celebrating an FSA job well done

Mobile meddling Ê

"The trouble with being flavour of the month", Sir Howard Davies, chairman of the Financial Services Authority, once told me, "is that you are inevitably tomorrow's fashion reject". They were prescient words. The FSA started life in a welter of high praise, both for the idea of a single regulator for the financial services industry, and for the apparently flawless execution of the concept by Sir Howard and his team.

For a while, he was indeed flavour of the month. After years of regulatory confusion and mismanagement, the City just loved the idea. So too did the public as the scale of mis selling and incompetence that had been running riot in retail financial services became all too apparent. There were concerns. Unduly oppressive, costly and bureaucratic regulation has been a real possibility right from the start.

Sir Howard none the less made an excellent ambassador for the idea of tough but sensitive regulation that could both make the City a more competitive place and improve the quality of the savings industry. His press was good, and all around the world the FSA was held up as a model for successful financial regulation in the modern age.

Unfortunately, regulators can never be fashionable for very long. Being loved, respected and admired doesn't come with the territory. When things are going right, they are accused of being an unduly costly waste of space. When they go wrong they'll invariably get it in the neck for being asleep on the job.

Sir Howard these days finds himself regularly accused of both. Over the past year in particular, he has found it a pretty bruising experience. Actually, the number of failings under Sir Howard's watch have been small by past standards of financial regulation. There have only been three of any significance – Independent Insurance, Equitable Life and more recently, the split caps investment trust débâcle.

In the second of these cases, the die was cast long before the FSA came into existence and in the third, the FSA wasn't directly responsible for regulating the sector anyway. All the same, there has been a more or less constant backdrop of negative PR for the past year or two. Even the City's wholesale markets have turned against Sir Howard. A recent survey by the Financial Services Practitioners Panel found a high degree of concern about the quantity and cost of FSA regulation.

As it happens, the complaint is at root nothing to do with what the FSA has or hasn't done. Rather it is the unprecedented event of a three-year bear market. Sir Howard finds himself getting the blame both for the humungous destruction in savings and for the systemic faults the stock market meltdown has exposed. He couldn't in truth have done much about either, but that doesn't stop everyone holding him to account.

Who would be chairman of the FSA? Most candidates might reasonably think it a poisoned chalice. It shouldn't be regarded that way. On the whole, the FSA has been a success and Sir Howard's achievement in pulling together so many disparate regulators into a functioning whole is an heroic one. Once upon a time, it was the US Securities and Exchange Commission that would always be held up as the shining example of capital markets regulation at its best. Not anymore. In the aftermath of the bubble, its reputation lies in tatters. That's not true of the FSA, which has weathered the downturn well.

Even so, I think Sir Howard would probably agree that the FSA has become too personalised around his chairmanship. It is rarely possible to read about the FSA without in the same sentence reading about him, as if the FSA were some kind of personal fiefdom. Sir Howard's move to the LSE (that's the college, not the London Stock Exchange), is an excellent move, both for him and the LSE, but the Chancellor might perhaps take the opportunity of his early departure to split the roles of chairman and chief executive.

John Tiner, managing director of the FSA, is already a shoo-in for the main job, but it would be wise to bring some grey hair, perhaps in the form of Andrew Crockett, outgoing managing director of the Bank for International Settlements, in on top as a non executive chairman. The FSA has already more than demonstrated its raison d'être. Sir Howard was the right man for that task. He has served the City and the public well, but the organisation now needs to move on. Regulators shouldn't be celebrities. Their aim should be that of becoming just part of the landscape, and their ambition should be limited to competent, unobtrusive and uncontroversial regulation.

The FSA has been too much in the limelight. Splitting the top job would send the right signals as it moves into a maturer phase of development.

Mobile meddling

It might be a good idea to get that new mobile phone for Christmas after all. On 8 January, the Competition Commission is due to publish its conclusions on the so-called "termination charge" and all the indications are that it will side with Oftel in supporting a further tightening of price controls. The mobile phone companies threaten to compensate by raising other charges. Subsidies on handset sales might be reduced or perhaps vouchers reintroduced on pre-paid deals. However they do it, all four network operators are determined that whatever the regulator takes they will get back again through other means.

Which rather leaves you wondering what the point of the year long Competition Commission investigation of termination charges was in the first place. The termination charge is the bit of the mobile tariff the network operators charge for routing the call to their subscribers. It's a big chunk of the total. It plainly made sense to control that part of the tariff when the mobile market was divided into two incumbents and two new entrants, since it gave the incumbents an unfair advantage. Today the four operators are of broadly equal size, so the relative advantage of the termination charge is removed. It has become just a part of the general charging mix.

Even so, Oftel wants to broaden price controls from the original two incumbents to the other two and in the process make them more oppressive. Oftel's point, which is accepted by the Competition Commission, is that there can be no competition in the termination charge, since when you call a mobile you don't have a choice of networks on which to terminate the call. You are obliged to pay whatever the network charges.

In the US, the problem is solved by making the mobile owner pay for all incoming calls, which is possibly why mobile telephony is still relatively undeveloped on the other side of the pond. In any case, it's not thought of as an option here.

In an interim report, the Competition Commission seemed to agree that the operators had been maintaining termination charges at well above costs, which it proposed to estimate "on the basis of an appropriately formulated LRIC model (the bottom-up approach)...cross checked against ...the top down approach". Now there's a thing. No doubt this is all very professional and intellectually pleasing, but it doesn't bear much relation to the real world.

Competition in the mobile phones industry is already intense, and the two most recent newcomers to the market have only recently turned profitable. This is an industry, moreover, which puts others to shame in terms of its record on both investment and innovation. Why interfere? If the effect of unduly harsh regulation of the termination charge is only to bring about a general rebalancing of the charging mix, then it won't have helped the consumer one jot. Indeed, since BT, the main fixed network operator, is not obliged to hand on the benefit of any reduction in the termination charge to its customers, the effect might in the round be to raise charges. Oftel's designs look uncomfortably like meddling for the sake of it.

jeremy.warner@independent.co.uk