Flawed PIA nears moment of truth: Former chairman Sir Gordon Downey argues that a new agency would be preferable to the two-tier approach

IN TWO months the Personal Investment Authority is due to become the single retail regulator for the financial services industry. This seems unlikely at present: fewer than half the intended members have applied for admission; and only about 2.5 per cent have been accepted.

As former chairman of the PIA board, I am concerned that its credibility is still in question. Why is this the case, and what can be done about it?

It is worth remembering that the PIA's only purpose is to improve investor protection. The present multiplicity of regulators is confusing and there is much to be said for imposing common standards and a single point of enforcement. But the aim must be to safeguard the interests of consumers, not to establish a pecking order for big players.

The task was never going to be easy. It meant bringing together disparate sectors of the industry - banks, building societies, life offices, unit trusts and independent financial advisers; and doing so by consent since, under existing legislation, no one could be compelled to join.

Potentially, the need for consent was a strength and a weakness. If practitioners and consumers could agree on a blueprint, this level of commitment could provide the PIA with unprecedented authority. But there was always the risk that powerful prospective members would seek to dictate terms as the price. Regrettably, this has led to in-fighting that has had less to do with the public interest than with commercial advantage.

As chairman, I felt the PIA was not worth having unless it was based on consensus. But the Securities and Investments Board (the senior financial regulator) believed that if the banks could be persuaded to join, the rest would have no option but to follow. The board felt this would be easier to achieve with a chairman who had roots among the big players and no past attachment to Fimbra, the regulator for independent financial advisers. And since PIA had to be authorised by SIB, I agreed to step down.

On reflection, I believe this approach was wrong in principle. Consent still seems to be a problem - and a genuinely independent chairman had advantages over a former practitioner, however well-known to large institutions.

I also believe that too high a price is being paid to persuade the banks and others to join. It seems wrong in principle that, for example, they should be consulted over the appointment of the 'public interest' members of the PIA board. And it was largely at their insistence (and that of SIB) that PIA member firms are to be required to maintain capital of pounds 10,000, even if they do not handle clients' money. This requirement the Government successfully opposed in Europe on the grounds that it was irrelevant to investor protection. In my view it is also anti-competitive and likely to eliminate many small independent financial advisers providing a useful service to consumers.

The lack of commitment by all parties re-opens the question whether a system based on voluntary membership can work at all. I supported PIA because I thought it could enhance investor protection. In any case there was no obvious alternative since the Government had ruled out fresh legislation. But if consensus cannot be achieved without prejudicing consumer interests, new legislation may have to be reconsidered.

Assuming the PIA does survive, how can it be made effective? I believe two steps are needed. First, the present chain of accountability of PIA to SIB and SIB to the Treasury involves unnecessary duplication and expense. The concept of a two-tier system of regulation might have been justified on the grounds that a practitioner-based lower tier (PIA) would report to an upper tier (SIB), which would be the custodian of the public interest - the pattern envisaged by Parliament when it passed the Financial Services Act.

However, the position has changed. At the insistence of SIB, the PIA board is required to have a public interest majority. So what distinctive function does SIB perform? To avoid second-guessing, it might be better to make PIA a designated authority (like SIB), answerable directly to the Treasury. This would seem to achieve some of the advantages of a 'statutory' form of regulation some institutions have been pressing for.

Second, the PIA has to persuade prospective members that it is not a colonial outpost of SIB. Smaller firms, in particular, will need some reassurance that they are not facing an unreasonably hostile regulatory environment. Clearly, this has been made more difficult by having a chairman and a chief executive from that stable. But, if the accountability to SIB were broken, I am sure the board should be strong enough to adopt its own agenda.

Unless it can rapidly establish credibility among consumers and all parts of the industry, the only solution will, in my view, lie in fresh legislation rather than consent.

Before his appointment as chairman of the PIA, Sir Gordon Downey was chairman of Fimbra, the regulator for independent financial advisers. Last September, he was replaced as chairman of the PIA by Joe Palmer, formerly chief executive of Legal & General and a director of the Securities and Investments Board.

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