Profile: Sir David Walker: Man you can bank on for better regulation

Published on Sunday 22 November 2009 21:03

IN THE aftermath of the near collapse of the UK banking industry, two schools of thought have emerged. One is led by a vengeance-driven desire to pillory the fat cats whose recklessness drove the economy to its crisis. The other, quieter school worries that if the fat cats are left to starve, the rest of us will follow.

Not all of the recommendations in Sir David Walker's review of the UK banking industry, the final draft of which is due to be published on Thursday, are to do with remuneration policies. But that is what most will be looking at. Already he has made a recommendation, published in an interim report in July, that argued for exposing pay structures for highly-paid staff in the City – extending scrutiny beyond just board members.

As well as a method of linking risk-taking with pay, he suggests bonuses be delayed for between three and five years and put under scrutiny by a beefed-up remuneration committee. The interim report was dismissed by politicians on the warpath as "inadequate" (Vince Cable) and "underwhelming" (John McFall). On the other side, the London Investment Banking Association – which has Goldman Sachs, Morgan Stanley and JPMorgan Chase Bank as members – warned that: "Public disclosures have the potential to threaten the privacy of individuals and create the potential for ill-informed and populist public commentary on reasonable remuneration practices."

Lobbying on Walker's more challenging suggestions has been fierce, but not very obvious. Most are resigned to the inevitability that something has to change. Public disquiet about bonuses in the face of a historic bailout of the banking industry will not be easily swept under the carpet.

"The industry is not happy about the remuneration issue, but the lobbying has been behind the scenes," says one policy analyst. "They don't want to be seen to be lobbying too overtly."

But if anyone thinks Walker will be a pushover, they underestimate the steel honed by his years of experience.

A good deal of the lobbying comes from the likes of the London Investment Banking Association – where Walker recently spent a four-year stint as chairman. This has led to criticism that Walker is too close to the City to be a true scourge of its worse practices.

Prem Sikka, a professor of accounting at the University of Essex, believes Walker's focus on stricter rules of non-executives and emphasis on shareholder vigilance are "tired and failed policies".

"Walker isn't keen on the introduction of legally enforceable rules," he said. "Apparently, chaps can continue to regulate chaps. There is no explanation of why the previous codes have failed and why employees, creditors, depositors, taxpayers and local communities continue to be excluded, even though they have all suffered from the follies of the current corporate governance arrangements."

If Walker's ideas seem tired and failed to some, it may be that the series of interventions he has been called upon to make throughout his 48-year career in the City return to the same themes: that of liberal markets ruled by light-touch regulation, but with the added caveat that with the privilege of self-government comes responsibility.

Before he was drafted in by Alastair Darling to undertake this latest review, he had spent more than 15 years in senior roles with Morgan Stanley, as well as acting as a deputy chairman of Lloyds TSB.

A Lloyd's of London chairman called Walker "so white that Snow White looks dirty". Few could lay claim to his breadth of understanding of how the City works. And the distinct lack of taint from the scandals he has been embroiled in sorting out in the past makes him a figure the Treasury could rely on to lead the UK financial services industry out of the darkness.

Walker has gained a reputation as a troubleshooter without compare. This latest crisis is certainly not the first he has dealt with – merely the biggest.

In his early days as head of the Bank of England's industrial finance division, he organised a number of the critical industrial rescues, including the "cesspit" of Johnson Matthey Bank – a bullion merchant with ties to a coup in Nigeria. Then it was deemed the "biggest crisis for the Bank of England since the bank failures of 1973 and 1974". Walker was parachuted in as chairman, along with a, then, unprecedented 130 million injection from the Bank.

Later, it would be Walker leading a report on the arcane system of risk among Lloyds of London "names" in the wake of near disastrous asbestosis claims.

While he may be one of the City's longest-standing insiders, his early career demonstrates a capacity for laying down the law, particularly a critical stint as head of the Securities and Investment Board. This precursor to the Financial Services Authority was the main regulator in town after the "Big Bang", the 1986 reforms that allowed City banks to engage in securities trading on a scale akin to Wall Street.

Previous to this, the City was the original cosy old boy's club, dominated by family-owned merchant banks and brokerage houses, names like Cazenove, Sebag, Hoare, Scrimgeour, Capel. Before the City began aping its thrusting cousins across the Atlantic on Wall Street, it was still commonplace for members of this moneyed elite to don top hats for their meetings with the head of the Bank of England in Threadneedle street.

But with the Big Bang came need for regulation, and the birth of SIB. It fell to Walker to recruit its first head, Sir Kenneth Berrill. But Berrill's approach was viewed dimly by the City as being too onerous and legalistic, and he only served a three-year term. The Bank and City agreed what was needed was a regulatory system based more on principles and less on rules. Although Walker was widely seen to be on his way to the top of the Bank of England, a successor to Robin Leigh-Pemberton, he reluctantly took on the SIB job.

He never did get the top job at the Bank of England. Instead, following the SIB, he left regulation to go into the more lucrative world of banking, first as a deputy chairman of Lloyds, then, when he did not become chairman, to Morgan Stanley.

After slipping on ice and breaking his hip at the World Economic Forum in 2000, Walker retired from his role as executive chairman for Europe of Morgan Stanley Dean Witter. But when that company faced angry shareholders over the collapse of Italian food company Parmalat, the investment bank called him out of retirement to be chairman of its international unit in 2004.

At the age of 66, he retired again in 2005, but two years later the British Venture Capital Association called upon him to set up a code of conduct for the private equity industry. At the time, the industry was under pressure and seen as a secretive cabal of ruthless, tax-evading asset-strippers. Walker's report drew up a voluntary code of practice that many in the industry subscribed to. But with the financial crisis putting an end to controversial leveraged takeovers, such codes now seem irrelevant.

But for some, Walker's latest report is the only way the City can save itself and maintain its global competitiveness.

Colin Melvin, chief executive of Hermes Equity Ownership Services, says: "I think he is a great choice for this work. I have been very impressed by the report and the clarity of thought and grasping very difficult problems. He is one of the few people within government and related circles who are taking leadership in this area."

Likewise, what Walker says on Thursday will likely become law, no matter who is running the country next spring.

"The government will take it seriously, I have no doubt about that," says Melvin. "Already we have had the Combined Code review delayed to incorporate the Walker conclusions. There is a clear sign this will be taken seriously.

"If the next administration is a Conservative one I would point out this sits well with Conservative philosophy. You would want a functioning capitalism, you want companies to be accountable, you want light-touch regulation. It fits very well."