The FSA's chagrin at Blair's slight

NOT FOR the first time in its turbulent eight-year existence, the Financial Services Authority is nursing its wounded pride. This time the injury comes from no less a figure than the Prime Minister himself.

In an address to the Institute for Public Policy Research, Tony Blair suggested that the FSA was 'seen as hugely inhibiting of efficient business'.

His remarks prompted Callum McCarthy, a hardbitten former electricity watchdog who now chairs the City regulator, to fire off a four page letter accusing the PM of 'damaging' the FSA.

The chagrin at the watchdog's Canary Wharf headquarters was compounded by subsequent reports that its creator, Chancellor Gordon Brown, stands behind Blair's comments.

Sources yesterday suggested that the affair was more cock-up than conspiracy, and attempted to pin the blame on a 'junior policy wonk'. Nonetheless, the row has touched a raw nerve. It also has broader resonance.

The FSA, under chief executive John Tiner, has unprecedented powers over the financial services industry and with a weighty responsibility to protect consumers.

Tiner, 48, a Porsche-driving Leeds United fan (currently absent through illness), took over at the helm of the FSA in 2003, at a time when the regulator was trying to claw back some credibility after a number of disasters, including the collapse of Equitable Life.

Before joining the regulator, Tiner was head of worldwide financial services at Arthur Andersen, the accounting firm that imploded because of its involvement in the Enron scandal in the US, though it has since been exonerated.

The previous supremo, Sir Howard Davies, and his cerebral lieutenant Michael Foot, took an approach that was academic, at times to the point of unworldliness, as seen in their laissez-faire attitude to Equitable Life's near bankruptcy.

But some believe Tiner has gone too far in the other direction - and the industry has begun to fight back.

The FSA has recently emerged from a bruising dispute with insurer Legal & General, which turned into a show trial over the fairness of the regulator.

The legal case, where L&G contested a £1.1m fine for the alleged mis-selling of endowment mortgages, gave rise to some strong criticism by the Financial Services and Markets tribunal of the watchdog.

L&G went where others in the industry fear - or cannot afford - to tread. One insurance company executive says: 'The scale and scope of the regulatory regime is just too much.

'It is involved in everything from the way business cards are printed to solvency. Where should they draw the line and back off? That is the question.'

Tiner has also disappointed 50,000 victims in the split capital investment trust scandal. His efforts on their behalf were launched with a great fanfare but ended in anticlimax as the FSA recovered around £194m from recalcitrant firms, instead of the £350m originally hoped for.

Despite its difficulties, the FSA continues to expand, taking on whole new areas such as mortgage advice. Again, this is proving controversial. Providers have been landed with a weighty new rule book, despite the fact that the market is highly competitive and there is little evidence that customers are being ill-served.

THE regulator is itself making efforts to reduce red tape, for instance by stripping out duplication from nine separate rule books from organisations it subsumed.

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For financial firms, particularly smaller ones, this cannot come soon enough. Jonathan Bloomer, the former boss of insurer the Prudential and head of the FSA practitioner panel, found in a survey published late last year that small companies in particular may be endangered by regulatory burdens.

Bloomer is now conducting a further study into the costs of regulation. It is in the nature of the FSA's task that it will receive more brickbats than bouquets.

Keeping the industry clean without burying it under a mountain of red tape is a difficult tightrope to walk. But if it is to get the balance right, it cannot afford to shut its ears to criticism.

The 'monster' some feel is out of control

WHEN he set up the FSA in 1997, shortly after New Labour assumed power, Chancellor Gordon Brown created a Frankenstein monster that critics believe is now running out of control.

Brown merged banking supervision - until then the responsibility of the Bank of England - with investment services regulation, which had been the province of the old Securities & Investments Board.

The move made Sir Eddie George, the respected former governor of the Old Lady, contemplate resigning. But the FSA's landgrab had only just begun. In May 2000, it took over from the London Stock Exchange as the listing authority for UK quoted companies.

A year later it took over the roles of six other watchdogs, with responsibility for activities ranging from futures broking to friendly societies.

At that stage, it also took on a number of new powers, including taking action to prevent market abuse. Just in case the FSA did not have enough to do, it last year took on responsibility for mortgage regulation, and this year began regulating general insurance business.

From its nerve centre in London's new financial district of Canary Wharf, it regulates 26,000 firms and no fewer than 140,000 individuals.

In total, it has levied nearly £44m of fines on the industry for various forms of wrongdoing. But it is in a delicate position vis-a-vis those it regulates, because its £266.6m budget comes from the financial services industry, and therefore ultimately from investors.

Some of that cash is used to pay an army of 2,300 staff, including chief executive John Tiner's £472,000 a year haul.