Commentary: Self-appraisal will not build confidence

Apologies to Plato, but who regulates the regulators? British Gas, British Telecom and the other utilities have been asking this question in relation to Ofgas, Oftel and the rest of the Ofgang without finding an answer. British Gas has taken its quest to the Monopolies Commission.

The same question should now also be asked in the City. In the wake of the Maxwell fiasco financial regulators are being allowed to review their own work rather than be reviewed by external scrutineers.

Imro, which regulates fund managers, conducted its own review of its work soon after the scale of the Maxwell fraud became apparent. To its credit, Imro was probably more critical than any outsider would have been.

Norman Lamont, the Chancellor, who recently inherited responsibility for investment regulation from the Department of Trade and Industry, perpetuated this system of self-appraisal by telling the Securities and Investments Board, the City's chief non-banking regulator, to review its own role. Though his instruction was phrased in the form of a 'request' the phrasing fooled no one.

Initially seen at the SIB as a welcome opportunity to address central issues such as the continued viability of self- regulation and the extent to which market professionals could become more involved in regulation, the reaction soon became muted. Reports from insiders suggested that Andrew Large, the new SIB chairman, was carrying out the review himself rather than letting old-timers take control.

Mr Large, who has spent much of the past few months learning the ropes, has now brought in Philip Thorpe, who works for the Securities and Futures Authority, to help him in the review.

However independently minded Mr Thorpe is, it is tremendously disappointing that Mr Large has not gone outside the existing regulatory system for assistance. If the review is to be of any use Mr Thorpe must be free to criticise the SIB. But it is a lot to ask of someone to run down his employer.

Contrast the approach used in respect of Maxwell with that applied to BCCI. In the latter case Lord Justice Bingham, shortly to be Master of the Rolls, was brought in to prepare a report on the Bank of England's supervisory role. The report is expected to be published later this month. Whether or not the report is sufficiently damning, at least the Bank did not review its own performance.

With the aftermath of the Maxwell affair putting more aspects of the regulatory system in doubt, it is time the Treasury took the issue more seriously. Unless regulators are subject to proper scrutiny the system will not regain public confidence.