A powerful new agency in London's City leads the way in regulating a growing and global financial industry

By SIMON ROBINSON /LONDON

lued to the end of Howard Davies' elegant blue pen is a silver centavo coin from Mexico. After the Mexican currency collapsed over Christmas 1994, the then director general of the Confederation of British Industry stuck it there as a reminder of how easily disaster can hit. Financial crises like Mexico's and, more recently, the one that has devastated Asia show how the increasing globalization of capital can bring problems as well as payoffs. Investment just as easily runs out of a market as it runs in; billions can be moved across borders with a few keystrokes. The finance industry is changing in other ways: old dividing lines between banks, insurance companies and stock brokers are blurring; countries are moving to privately-funded pensions, pushing personal savings into stocks and investment funds.

The regulators who try to enforce their country's financial rules and protect consumers must struggle just to stay afloat, weighed down by outmoded institutions and laws. "A regulatory system that was modeled on the old industrial structure has become completely inappropriate," Britain's Economic Secretary to the Treasury Helen Liddell told a conference in London recently.

To reassure investors and help cement London's position as the world's leading center of international finance, Britain has a new approach. The Labour government has set up a super-watchdog combining the duties of nine regulators and brandishing extra powers to enforce rules and to prosecute. The new body, called the Financial Services Authority, should be better placed to keep pace with the industry. Says Howard Davies, who left his job as deputy governor of the Bank of England to become the FSA's first chairman: "You have to integrate the skills of insurance regulation, of broking regulation and banking regulation, because as these large financial supermarkets develop, you need a regulatory supermarket to match."

The roots of Britain's experiment lie in domestic scandals like the fraudulent marketing of pension instruments in the late 1980s. A 1995 MORI poll found that buying financial services worried British consumers more than any other purchase. "There was a perception that the existing environment was not working," says John Board, a reader in finance at the London School of Economics and Political Science. But while the impetus for change came from home, the shape of the new regulatory authority has largely been decided by international trends. As the world's financial markets open up, traditionally separate groups are converging: banks and building societies now offer investment trusts and sell insurance, while insurance companies provide deposit accounts, legal advice and mortgages. Even stock exchanges are merging: recently Europe's two biggest markets, old rivals the London Stock Exchange and the Deutsche Borse, said they would join forces to list 300 major European companies--another step toward a possible single pan-European exchange. Says Davies: "You have a monster financial thing and you ask yourself, What is it? Is it a bird, a plane?"

Technology allows such financial conglomerates to conduct business around the globe with blinding speed. "Transactions cross boundaries so rapidly these days that it's often hard to know what's happening, let alone deal with it," says Alan Cameron, head of the Australian Securities and Investments Commission and chairman of the Joint Forum, a group of bank, insurance and securities regulators from 13 countries. Constrained by national borders, regulators are often left behind. At a recent Joint Forum meeting, news broke that Citicorp, America's second biggest bank, was merging with financial services giant Travelers Group in a deal worth $76 billion--the biggest ever. Says Cameron: "The marketplace is changing around us literally as we are meeting."

The FSA is an attempt to create a regulator to match those changes. When legislation is passed sometime in the next two years, the watchdog--based at London's Canary Wharf--will govern Britain's banks, building societies, credit unions, investment houses, financial markets and life insurance industry. In the future it may also supervise general insurers and mortgage providers. Whereas the nine old regulators were elected by the industries they governed--in practice a form of self regulation--the FSA will be run by Treasury appointees.

The one-stop shop approach means gaps and overlaps in the old regime will disappear and companies will be examined by one regulator rather than in sections by three or four. "It is hoped that individuals and firms can expect a clearer, more integrated and predictable approach to financial regulation," says John Peloso, a leading U.S. regulatory lawyer with Morgan, Lewis & Bockius. To spread its message the FSA is borrowing an idea from the U.S. Securities and Exchange Commission, and will hold a series of town meetings across the country. Says Davies: "Many consumers are not as knowledgeable as they should or could be."

As well as educating small-time investors, Davies must convince those who work in the City, London's financial district, that big can be beautiful. City workers have become used to light-handed regulation in the past 12 years and some fear the new approach may slow the wheels of finance and increase the costs of doing business. "The triumph of the City is that regulation has been less onerous than in other countries," says Tim Congdon, an economics specialist with Lombard Street Research. Striking a balance between the interests of small investors and multinationals is another challenge. "Working from a single rule book will make it hard," says Michael Taylor, a reader in financial regulation at the University of Reading's International Securities Market Association. "This is a simplistic response to a complicated problem." But Davies is convinced: "The idea that big equals slow, unresponsive, lumbering is simply not borne out." To make sure old factions don't reappear in the FSA, and to improve communication, Davies decided no one would have a private office--not even the chairman. "If one part of this organization makes a mistake it reflects on all of us," he says.

Other countries are also looking for ways to deal with an increasingly complex financial world. Denmark, Sweden and Norway already have single regulators, albeit in much smaller markets, and Australia is consolidating its supervisory functions. Stung by a string of bank failures and scandals, Japan recently announced it would reform its financial watchdog. In the U.S., multiple state and federal authorities still oversee the industry, though there is agitation for change.

The advent of single national regulators has stimulated a debate about the possible creation of a global watchdog. More likely in the short term is a set of international standards enforced by each national body. That should help companies like international investment bank Warburg Dillon Read, now subject to some 65 regulators. The overriding regulatory need for global firms, says Hans de Gier, head of the London-based bank, "is that regulators' outlook should be global."

They have little choice. Earlier this year a colleague of Davies on an International Monetary Fund trip to Asia looked for an Indonesian coin to replace the Mexican centavo. None was the right size. "Now the Mexican coin is there to remind me how things can get better," says Davies. But for one of the world's most powerful regulators, success will mean avoiding a crisis in the first place.

--With Reporting by Adam Zagorin In Washington D.C.