Karina Robinson talks to the FSA’s Sir Howard Davies.

Sir Howard Davies likes complications, a good thing since the UK’s financial super-regulator has a wider brief than any other regulator in the world, ranging from life insurance to the future of the London Stock Exchange to global financial issues.

Not least of the challenges facing him is to shepherd UK banks through an expected slowdown in growth – if not a recession – in the US. Although the Federal Reserve officially still insists there will be a soft landing, Alan Greenspan’s half-point rate cut in January raised expectations of a shrinking economy, causing the chairman of the Financial Services Authority to take note of some of the possible consequences.

“A regulator is meant to be congenitally anxious, a wet blanket, someone who spots clouds in the bluest of skies,” he says.

As a result, the Financial Services Authority (FSA) is keeping a careful eye on margin trading, especially in firms with highly leveraged positions.

Sir Howard cautions that banks should pay more attention to US market volatility and liquidity risk. The debt of a number of large US companies has plummeted from investment grade to junk in six weeks, while markets like that for high-yield bonds have closed up quickly, leaving some banks with unsaleable paper.

The FSA is also keeping an eye on bank exposure to telecommunication companies. A number of corporates have borrowed heavily to bid for licences for the third generation of mobile phones, even as their share prices suffer.

But Sir Howard does not think the situation is dire. “Some banks will lose money, but British banks are well capitalised so it is not life threatening,’’ he says. His love of difficulties was given full vent in his five year stint as head of the Audit Commission, a body charged with promoting efficiency in the public sector.

The job, which he took on in 1987, involved assessing everything from police forces to the nation’s museums while juggling the public good and taxpayers’ money. “It was a terrific licence to interfere in the most interesting areas of public life,’’ he claims.

Regulators worldwide will be interfering more with their charges if the Basel Committee’s new capital adequacy proposals are adopted. The changes closely follow an earlier paper, the key difference being a move away from standardisation.

Instead, 8% of risk-adjusted assets will continue to be the minimum capital requirement, but extra capital will be demanded depending on the sophistication of the bank’s internal risk mechanisms and on the regulator’s perception of its management and business.

“All banks are equal, but some are more equal than others,” says Sir Howard, tongue firmly in cheek. In fact, this validates the UK approach, which differentiates between banks and makes the regulator more of a judge.

The end result is that UK banks will be very advanced in fulfilling the new criteria and will be forced to make few changes. This is not true of other countries, such as Germany. Sir Howard says his opposite numbers in the German regulatory body told him they would need to recruit at least 100 staff to implement the more proactive stance.

On another global financial issue, that of a worldwide banking authority, Sir Howard is dismissive, saying it implies a loss of sovereignty that countries will not accept. However, in a more subtle way, a similar effect is being achieved by the combination of more rules and codes of conduct in related fields, such as insurance, as well as in banking itself.

The IMF’s brief to monitor countries’ financial systems and undertake a financial assessment will underpin this, as will the regulators in the main financial centres. If the IMF chooses to criticise a country’s banking system, implying the regulator is not up to scratch, the authorities in London or Tokyo could refuse to grant banks from that country a licence, he says.

Forty-nine year old Sir Howard has a reputation as a motivator, a lesson he learned quickly when he was headhunted from management consultants McKinsey, where he had a maximum of three people working for him on any project, to the Audit Commission, where he had 1000.

At the FSA, he has 2000 staff and a wide spread of businesses to cover, making it crucial to keep and inspire a good team, as well as ensuring communication lines are always open so that nasty surprises are kept to a minimum.

The ability to get a message across to different audiences is undoubtedly one of the main reasons Sir Howard’s jobs have almost always had a public profile.

He was a very vocal director general of the Confederation of British Industry (CBI) for three years before becoming deputy governor of the Bank of England and then chairman of the Securities and Investments Board, which became the FSA in 1998.

From 1982 to 1987 he worked for McKinsey, with a sabbatical in the middle as a special adviser to former Tory Chancellor Nigel Lawson, returning to his roots in government service. He gets riled – the only time in the interview – when the accusation that he has moved jobs too quickly is aired.

“Complete nonsense. The notion that I flit about is not true,’’ he bristles. “I haven’t done my CV since 1987,’’ a rather naïve statement since at his level of experience the jobs come to the man, rather than the man having to apply for the jobs. As for his move from the CBI to the Bank of England after only three years of a five year term, “it was not my fault that Rupert Pennant-Rea decided to have an affair with a journalist”, he says, referrring to the then-deputy governor’s hurried resignation.

On the home front, the FSA has been criticised for its handling of the disaster at Equitable Life, the 238-year old mutual insurer forced to close to new business with inadequate reserves to meet its liabilities. The FSA, it turns out, was aware of the difficulties as far back as 1998 but argues that it did not alert policyholders in order to increase the chances of finding a buyer for the business.

In response to the accusations, however, it has agreed to hold an internal inquiry. Sir Howard’s least favourite job, and one of his first, was as private secretary to the British ambassador in Paris, a role that involved organising parties, which required nothing more complicated than the protocol of seating plans.

He joined the Foreign & Commonwealth Office because they answered his job application, unlike the BBC. Having wanted to be a journalist, and as a former editor of Cherwell, the Oxford University newspaper, he now keeps his hand in by writing book reviews. This helps maintain his precision of language, an attribute he also has – according to an old friend – in French.

When at a rugby match in France in the 1970s, supporting a Welsh team, Sir Howard screamed abuse at the French in a Marseille accent, the legacy of his university year abroad in that city. So convincing was his accent that French fans seated nearby assaulted him and he narrowly escaped losing a few teeth.

The anecdote shows some of the characteristics that mark him: a love of sport (he is an enthusiastic supporter of Manchester City), cleverness, the ability to be irritating, outrageous and to get out of hot situations. Only some of these are useful to regulators, especially one who has been accused of being too powerful.

Critics contend that as an executive chairman with three managing directors under him he wields too much authority. They say there is a need for a chief executive. Sir Howard insists it would be the same as the governor of the Bank of England being a non-executive director. He is also adamant the FSA is not too powerful, with its all-encompassing brief, and that it has less authority than the US Securities & Exchange Commission (SEC).

He also denies that the FSA recently stepped up its investigation into the leaking of price-sensitive information by company directors to keep up with the SEC, which recently introduced a fair disclosure rule to stop the practice. The rule already existed in the UK and “a number of untidy practices around’’ were already being investigated. Money is clearly not Sir Howard’s main motivators.

One of his few recorded indulgences is a 1977 Triumph Stag, not the private planes or the country mansions that would have been his if he had stayed at McKinsey. If complicated challenges are what he is after, the FSA may fulfil that criteria, but the question is, for how long?

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