Sir Michael Peat: Once holder of the purse, now keeper of the royal honour

It was not without significance, to use the kind of carefully judged phrase so favoured in royal circles, that Sir Michael Peat was the man before the cameras this week. He was the courtier chosen to read out the statement denying that the Prince of Wales had been involved in a compromising "incident" with a Palace servant.

Sir Michael is private secretary to Prince Charles. But he is much more. He is a man who is, perhaps uniquely, trusted equally by both the Queen and the heir to the throne. His television interview, following on from the Clarence House statement, was therefore an important signal that the Royal Family is united behind the strategy to go on the offensive over the allegations which have been circulating widely in chattering circles, on the internet and now in the foreign press. Because of an injunction British newspapers are not permitted to say what they are.

The ascetic-looking, egg-headed, immaculately turned-out senior courtier was for 12 years a close servant of the monarch before, last year, she offered him to her eldest son to sort out the Prince's sometimes chaotic office. Some suspected that Sir Michael's brief was also to keep the Queen informed about Charles's wayward entourage and to end the internecine squabbling between the two courts.

The background of Sir Michael, 53, is as appropriate as his appearance. Impeccably upper middle class - his father was a Privy Purse auditor, as was his great-grandfather William Barclay Peat - he went to Eton and Trinity College, Oxford, before doing an MBA at Europe's top-notch business school at Fontainebleau in France. He spent 20 years in the family accountancy firm KPMG (formerly Peat Marwick) where he made valuable contacts among the firm's many wealthy and aristocratic clients. Who better for the Palace to approach in 1990 with an invitation to join the Royal Household as Keeper of the Privy Purse in charge of the Queen's £20m domestic annual budget?

At once he embarked on a formidable campaign to put the finances in order. Within five years he had halved royal spending with a raft of measures which ranged from double-glazing the windows (to cut heating bills), renewing royal dishwashers (to break less crockery), replacing white marquees at garden parties (green ones are half the cost), to closing the subsidised staff bar (but cleverly giving staff a pay rise to lessen the pain).

He was the man who axed the royal train (after learning that it cost £35,000 for every outing). He replaced 100th birthday telegrams with congratulation cards (saving £19,000 a year). He cut back on the royal staff (many of whom thought they had a job for life). He also removed minor royals from the Civil List (leaving only the Queen and Prince Philip still being paid directly from the public purse). "He went through the place," one courtier said, "like a hot knife through butter."

But he did so with a winning combination of ruthlessness and charm. He forced the Duke of Edinburgh to start switching off lights when he left rooms. (Philip was heard to complain that Peat would have him using cheap OAP tickets next.) It was a report by him which concluded that Prince Edward's film company, Ardent Productions, was a dead loss, forcing the prince to pull out. More significantly it was Sir Michael who, just three years after his arrival, persuaded the Queen to start paying income tax on her private wealth.

Sir Michael's cuts in palace spending save the taxpayer £37m a year so that, he boasts, the Queen now costs each of her subjects only 58p a year. (And he has drawn up plans for more drastic economies, including paying off all the minor royals permanently with an annuity, rationalising royal grace-and-favour homes and closing Kensington Palace.) No wonder he was known in Buck House as "the axeman". It was he who was given the job of evicting Princess Diana's butler, Paul Burrell, from his royal home in the grounds of Kensington Palace after her death.

Over the years he has become not just the keeper of the privy purse but also the keeper of royal confidences. The Queen has come to rely on his advice on non-financial matters. It was he who coaxed the Queen to endure a Jubilee rock concert in the grounds of Buckingham Palace.

It was with mixed feelings that the Queen agreed to transfer him to the payroll of Prince Charles. Before that happened he had first to pass "the Camilla test". Invited by the Prince to a dinner at Holyrood House, he found himself seated next to Charles's long-standing companion. "Michael was charm itself," one of the Prince's circle said. "He is the only senior member of the Queen's household to properly acknowledge Mrs Parker Bowles, and that means a lot to her and the Prince."

But Michael Peat's loyalties lie to the institution, not the person. That became clear when, not long after Sir Michael moved, Charles's office became embroiled in a series of unseemly allegations involving self-indulgent princely extravagance, favouritism among courtiers, the sale of royal gifts, and claims of male rape and cover-up.

Sir Michael decided on an internal investigation - under his own chairmanship - which made critics predict a whitewash. It was an impression he did little to dispel when, despite saying he would proceed, "without fear or favour", he appeared to undermine his objectivity by branding all the allegations as "lurid".

In the event his 105-page report concluded that although there were serious shortcomings in the organisation of the palace, it would be invidious to blame anyone. But for all its bland phrasing decisive action followed. The Prince's favourite servant, Michael Fawcett, whom the media nicknamed "Fawcett the Fence", and who had been cleared by the inquiry, was forced to resign anyway. Mr Fawcett, the servant who famously held a urine bottle for Charles to provide a sample, was man the who successfully took out an injunction preventing a Mail on Sunday story about him last week.

He was not the only casualty. Charles's trusted spin doctor, Mark Bolland, a flamboyant gay from a comprehensive school whom Princes William and Harry nicknamed "My Lord Blackadder", went too. He and Sir Michael had a fundamental disagreement over media strategy. In the years following the Prince's divorce Mr Bolland successfully begun to reburnish Charles's tarnished image. Public hostility towards Camilla - at its height in the months after Diana's death - diminished and the Prince's popularity ratings steadily rose.

But the Bolland strategy involved feeding the media "Charles good, all other royals bad" stories, most particularly at the expense of Prince Edward and the Countess of Wessex. Sir Michael disapproved. He objected, too, to Mr Bolland's insistence that the royals must embrace the world of celebrity. He began to cut back the Prince's high-profile meetings with celebrities and tried to shift attention to Charles's official work as patron of 350 charities and voluntary organisations. Sir Michael, who for all his studied charm has a tongue "that can suddenly turn from oily to fiery", routed his rival. Six months later the Prince's senior press secretary Colleen Harris, who had agreed with the Bolland strategy, also dramatically quit after what the press reported as "nuclear showdowns" with Sir Michael.

Shortly after Mr Bolland's departure, stories began to appear juxtaposing Sir Michael's being given a new £165,000 Bentley on extended loan with the fact that a director of the firm had been given a personal honour by the Queen on the advice of staff. There was a row over £115,000 of public money spent on refurbishing the five-bedroom, four-bathroom apartment (floored with Italian marble and hung with paintings from the royal collection) that Sir Michael shares with his wife Deborah at Kensington Palace - a flat which Princess Diana had once complained was a "grander house than mine". Though in defence it was revealed that £47,000 a year is deducted from the Peat salary, it also emerged that his total pay package was estimated at £300,000.

The Bolland/Peat feud also casts interesting light on Mr Bolland's recent interview in which the former spin doctor pronounced of the fiasco over the trial of Diana's butler: "None of that would have happened if the Prince had been very strong and determined in saying this prosecution should not go ahead. It is impossible to argue against the point that it was a complete fuck-up that should never have happened - the Prince of Wales should have done more to stop it. But he's not a terribly strong person."

Sir Michael Peat is unlikely to be daunted by any of this. He is known to stand his ground. He has in recent months upbraided Prince Charles for sending lobbying letters to government ministers - on everything from the design of buildings to the plight of Tibet and most famously a letter to the Prime Minister arguing the cause of countryside protesters in which he said that farmers are now worse treated than ethnic minorities.

He has also bearded his boss on the question of his mistress. With the backing of the Queen, he prevented Camilla Parker Bowles from going with Prince Charles on his high-profile trip to India this month. He has scaled back Camilla's public appearances with the Prince. She is no longer invited to sit in on Charles's crucial diary meetings. A report in Hello! magazine recently said of Camilla: "She and her family now refer to Sir Michael Peat as 'The Enemy' - the term that Diana used about the Prince's previous private secretary."

Camilla makes no secret, to her friends and family, of her irritation at this downgrading. But if Prince Charles shares it privately he knows that publicly, now of all times, he needs Sir Michael more than ever.

His enemies at the court are said to refer to Michael Peat as The Bidet - "You know what it's called but you don't know what it's for." In these troubled times it is a judgement with which the Queen and her eldest son must vehemently disagree.

Life story

Born Michael Charles Gerrard Peat, on 16 November 1949

Family Married Deborah Sage in 1976. They have two daughters and two sons

Education Eton; Trinity College, Oxford (MA); INSEAD, Fontainebleau (MBE); Fellow Institute of Chartered Accountants 1975

Career KPMG 1972 to 1993; director of finance and property services of Her Majesty's Household from 1990 to 1996; keeper of the Privy Purse, treasurer to the Queen and receiver-general of the Duchy of Lancaster since 1996; private secretary to the Prince of Wales since 2002

Honours Knight Commander, Royal Victorian Order 1998; Commander, Royal Victorian Order1994

Salary Estimated to be £300,000 a year

Nickname "The Axeman"

Recreations Sport, history, literature

He says "It would have made a better story if it had been between two members of the Royal Family, wouldn't it? What can one do except laugh?"

They say "The way he has helped to move the Royal Household on is a credit to him, and has done much to scotch all the talk about the demise of the monarchy." - Nicholas Soames MP