After Northern Rock it's a hard place for Adair Turner at the FSA

Katherine Griffiths in the Sunday Telegraph
1st June, 2008

The new chairman of the Financial Services Authority has some testing times ahead of him, says Katherine Griffiths

It has taken months for the Government to persuade Adair Turner, one of the Labour party's favourite business gurus, to take the job as the next chairman of the Financial Services Authority. Lord Turner is understood to have had several reservations, including how much time he would need to devote to the job, as he is also in charge of the Government's committee on climate change.

Adair Turner, the new chairman of the Financial Services Authority

Adair Turner takes over from Sir Callum McCarthy in late September

Turner, a businessman with considerable experience of dealing with Downing Street, has spent the past few weeks gaining assurances that the Government will back the FSA through the testing times of the next few months.

Morale at the City regulator is at an all-time low after the near-collapse of Northern Rock, and a series of forthcoming legislative and regulatory changes could put it on a collision course with the Bank of England and the financial sector.

The Treasury finally won Turner over last week. The appointment won praise from business, but the feeling was that Turner, 52, is taking on one of the most difficult tasks in the City. One senior banker said: "This is a fiendish task. There is almost unlimited downside but very little chance for glory, and it is not as if Adair even needs a gong."

Turner, who became a life peer in 2005, takes over from Sir Callum McCarthy in late September. John McFall, chairman of the Treasury Select Committee, which has a record of subjecting both the bosses of banks and the regulator to public interrogations, said he expects Turner to lose no time in tackling some of the FSA's trickiest problems.

High on the list, McFall said, will be for Turner to help the FSA's chief executive, Hector Sants, address the problems thrown up by the FSA's failure to spot the dangers of Northern Rock's business. "We want to see him effecting cultural change at the FSA, particularly at the senior management level," McFall said.

The FSA was heavily criticised by both the Treasury Select Committee and by the regulator's own internal audit of the Northern Rock debacle, which resulted in the bank's nationalisation in February. What will be vital to sorting out the FSA's internal problems, it is widely believed in the City, is boosting morale, and improving the quality and knowledge of staff.

That will mean spending more money on training and salaries, and could present difficult political questions that Turner, who has spearheaded several Government initiatives, may be best placed to navigate.

Externally, the fall-out from Northern Rock has been other countries calling into question the FSA's "principles-based" approach. Carlos Conceicao, who was the FSA's head of enforcement for wholesale markets and is now a partner at the City law firm Clifford Chance, said Turner, as chairman, will have to tackle those external problems.

"One of his key challenges is to maintain - or perhaps repair a dent in - the high regard in which the FSA is held around the world, as quality of regulation has been a key factor in making London a major financial centre," Conceicao said.

Dealing with the FSA's shortcomings over Northern Rock comes at the same time as a crisis of a confidence in the markets. Kari Hale, who helped formulate the FSA's principles-based approach and is now a partner in Deloitte's financial services division, said the effect is a "double whammy".

The regulator will have to grapple with difficult questions such as how to regulate liquidity, dealing with the demands for quick solutions from politicians and the concerns from banks which do not want to see their profits shorn from having to keep lots of capital on the balance sheet.

"The appropriate level of security is a really tough question. Currently banks have to hold five days of liquidity. If a big UK bank had to hold one month's worth, it would represent an opportunity cost of hundreds of millions. If it was made to hold three months, the cost would approach £1bn," Hale said.

As the FSA works with international bodies to hammer out a new regime on liquidity and risk, the next few months will also represent difficulties at home. Legislation is due to go through Parliament which will give the Bank of England greater regulatory powers over banks. Many in the FSA resent the new system and believe it is an encroachment on their turf.

The FSA can also expect a showdown with the banks over issues including the deposit guarantee scheme. The regulator may increase the amount of savings which are guaranteed in the event of a bank going bust, and it has also signalled it may levy an annual fee from the banks to fund the scheme. To bring the guarantee up to the equivalent level of the US would mean creating a £12.5bn pot. The banks are opposed to such a move.

Another area of contention is the FSA's "treating customers fairly" regime, which it is pushing financial services companies to apply to how products are sold. The sweeping change could leave companies open to mis-selling charges, industry insiders fear.

Perhaps the most high profile challenge for Turner will be to deliver on the FSA's pledge to crack down on market abuse. The regulator believes a new computer system, Sabre II, will help track stock market trades much more effectively, which could see it asking difficult questions within two days of an unusual event rather than two weeks, the current standard.

City figures believe the FSA will also need legislative change to give it the power to offer plea bargains, if it wants to catch the sophisticated individuals believed to be making millions from insider trading. Even then, the maximum sentence for insider trading is seven years, a far less frightening prospect than the jail sentences for white collar crime in the US. The Chancellor, Alistair Darling, recently supported plea bargaining, but no details have been given.

McCarthy, who is tipped to take a heavyweight job at a bank when he leaves the FSA, has become one of the most high-profile figures among regulators in his role as chairman. But, because of a series of setbacks, the FSA has come to be seen as a light touch, observers said. "That is not correct and Adair will have to demonstrate that," an industry figure said.