Financial Times: Test of power for market watchdog: Sir Philip Watts, ousted chairman of Royal Dutch/Shell, has complained that the FSA "identified and prejudiced him" in its action against the company. (ShellNews.net)

Published: September 18 2004

Big Brother, the Spanish Inquisition, Goliath - it is easy to caricature the Financial Services Authority. Perhaps the world's most powerful regulator in terms of scope, it has also been raising its profile as an enforcer.

Now it faces a series of challenges from companies and individuals on the receiving end. Legal & General, the life assurer, is appealing against a £1.1m fine for mis-selling endowment mortgages: its hearing started this week at the Financial Services and Markets Tribunal. Sir Philip Watts, ousted chairman of Royal Dutch/Shell, has complained that the FSA "identified and prejudiced him" in its action against the company. A tribunal hearing is also pending over a £750,000 fine on Paul Davidson over a spreadbet.

The importance of the tribunal is that it is an independent body that re-examines FSA decisions. If the regulator has been unjust, or simply sloppy, this will be exposed and the credibility that is crucial to its effective policing of markets will be damaged.

The time is ripe for such reviews. The FSA has replaced a suite of self- regulatory bodies that worked on the "chaps regulating chaps" model until the late 1990s. It was cranked up to full power nearly three years ago, and further organisational changes have made it more effective. Andrew Procter, head of enforcement, now reports directly to John Tiner, the chief executive - a post split from the chairmanship last year.

Coherence and efficiency have sharpened the watchdog's teeth, which has been desirable in the wake of such scandals as Equitable Life, split capital trusts and the mis-selling of endowment mortgages.

The question is whether the FSA has become over-zealous. This is not borne out by the number of cases it pursues, which has fallen from 600 in 2000 to an estimated 170 this year. It is right to concentrate on the more serious incidents that undermine confidence in the markets. But in playing for higher stakes, the harm to its credibility will be greater if it is over-ruled.

Another strand is speed of action. Previous laggardliness has annoyed investors in such cases as Marconi's infamous profit warning. In the past two years the FSA has reduced average case time from 16 to 11 months, and it aims to cut that by another 30 per cent.

Is swift justice fair justice? That is clearly a legitimate question. But speed does help with both deterrence and delivery of compensation.

Transparency also aids effectiveness. Individuals are not named during investigations, but Sir Philip Watts contends that such targets can be inferred from action against a company. Here the speed with which a corporate settlement is reached may clash with the rights of an individual.

It would be better if it were clear whom the FSA was investigating for what. That would require a change in the law. And it would not go down well with those whose names are kept out of the public gaze unless guilt is proved.