7 OCTOBER 1997
SPEECH BY HOWARD DAVIES, CHAIRMAN,
THE SECURITIES AND INVESTMENTS BOARD

As those of you who follow these things closely will know, the SIB review of the LME last year made 38 recommendations for change. The good news was that, apart from those 38 areas, everything was fine.

So the most useful thing I could do this evening would, I think, be to go through those 38 points - spending just a few minutes on each - distilling the main lessons which emerged.

Useful, perhaps. But I suspect that I might thereby provoke an unacceptable degree of volatility around the room - and maybe even some backwardation - straight back out to the bar.

So, instead, let me just make three short points.

The first is about motives - ours, not yours. The prime aim of our oversight of the exchanges in our care is to promote clean and orderly markets. We are not regulating for the sake of it; and we want to work with the grain of the market, and in the interests of its customers and users. Those interests are best served by promoting competition. And of course the ultimate test is whether people are prepared to trade.

So while our aim as regulators cannot be - directly - to promote the commercial interests of the market, we are encouraged by its growth, as the surest sign of customer confidence. That growth, in turn, tells us that one of our most crucial regulatory objectives is being achieved. Customers are prepared to trade. So I am delighted that, as Raj said, market volumes have been so strong recently.

Second, our review - based in very large part on a survey of the views of market participants and users - did show evidence of concern about market governance and a particular need to strengthen independent membership of the Board. There was no great hostility in the responses, but the status quo was no longer acceptable to many of you.

Third, the review showed that there was a need to enhance the resources available to the executive, to upgrade its market monitoring, and its regulatory capability. While it is not my brief to argue for armies of regulators, within our regulatory structure a market must have the capacity to police itself effectively.

Of course there were many other, specific recommendations about warehousing, and many other issues, which need not detain us tonight.

The good news, from our point of view, and yours I think, is that the leadership of the Exchange, and especially Raj himself, have gripped these issues hard, and made considerable progress over the last few months.

The announcements he has made tonight will significantly strengthen the Board, and its capacity to act decisively in future. I support them strongly. Of course there is more to do, as Raj and his staff know. Reform programmes are easy to launch, harder to pursue to a conclusion. That is the challenge from now on.

The affairs of the LME have, for one reason or another, occupied quite a piece of the SIB’s time in the last year or two. And I would not pretend that we have heard the last of the Sumitomo story. There is likely to be further enforcement action, by the UK regulators, including the LME, and the Hamanaka criminal case continues on its exotic way through the Japanese legal system.

Meanwhile, we feel that the market here is back on the right track, after a difficult period. And the figures support that conclusion.

Our own track, at the SIB, is now a very different one, of course.

The world of financial regulation was thrown into turmoil by Gordon Brown in his first heady weeks in office.

I would not want to pretend that the move to a single financial regulator was unambiguously welcomed by the Bank. Or that, when I took over the chair (or the nine chairs, since nine organisations are coming together) I had a fully worked through plan to achieve the merger.

But I have to say that, in the five months which have elapsed since the announcement, the logic of one single regulatory authority has come to seem stronger and stronger.

The trend towards consolidation of financial institutions continues apace. Events of the last two weeks alone have emphasised that the sheer scale needed to compete effectively in wholesale markets will be available to relatively few players in future.

BZWRIP sums up my point, I think. And at the retail end there is increasing convergence of products and markets. The consumer who takes out a PEP-backed mortgage, or a unit trust, or an OEIC, finds it hard to understand why the same product should be regulated by two or more agencies, or that the ultimate parents, offering the same services at the front end, should be subject to different prudential regimes at the back end.

I am convinced that we can do better than this, and give London a regulator, and a regulatory regime, which is fit for purpose in the 21st Century. One sensitive to the needs of consumers and markets. And, crucially, one able to adapt as those consumers, and the markets in which they deal, themselves change.

To do so we shall need help from the market, of course.

The best help you could give would be to be very well behaved boys and girls for the next couple of years while we get it all sorted out. In red-blooded markets this may be too much to ask. But do your best.

However, we also need more active help. Because practitioners themselves must be involved in the design of the new regulator, and indeed of the legislation with which we shall work.

In three weeks time, on 28 October, we shall be launching the new body to the market, and beginning an extensive and intensive period of consultation on all aspects of the work. I hope that you will play your part in that work.

 

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