The people's friend is drowning: Clare Dobie on the near hopeless task of setting up a regulator for personal investment

Regulating the way City firms deal with each other is hard enough. Regulating the way they deal with ordinary men and women is far more difficult.

In an attempt to create a single regulatory body designed to protect individual investors from rogues and to provide compensation for them when things go wrong, a group of financial professionals has been brought together under the leadership of Sir Brian Hayes, a former civil servant.

But the task is proving almost too much for them. While they have agreed the name of the new body - the Personal Investment Authority - and a date for releasing a consultative document - 24 September - they have achieved little else of substance.

In public, those involved maintain that the PIA will be created as planned next year. But the starting date has already been put back by three months to 1 July.

In private some admit it is not certain the PIA will get off the ground. Whereas talks were once said to have a fifty-fifty chance of success, they now have only 'a good chance' of agreement.

Does it matter? If proof were needed, Barlow Clowes, Levitt and Dunsdale demonstrated conclusively that individuals are at risk when they buy financial products. More insidious than these headline-hitting scandals, however, are the hundreds of firms that have collapsed quietly, often leaving investors out of pocket but for the Investors Compensation Scheme, which pays up to pounds 48,000.

The Financial Services Act of 1986 provides a framework of regulation covering professional and individual investors. It is arguable whether professionals can look after themselves; what no one disputes is that individuals are not so well placed.

Retail regulation is a jungle. The insurance companies that provide life assurance tend to be regulated by the Life Assurance and Unit Trusts Regulatory Organisation (and the Department of Trade and Industry). Banks that sell the same products are mostly regulated by the Securities and Investments Board (and the Bank of England).

Stockbrokers, including those who advise private clients, are regulated by the Securities and Futures Authority. Fund management groups that produce unit trusts are regulated by the Investment Management Regulatory Organisation and Lautro. Financial advisers are regulated by the Financial Intermediaries, Managers and Brokers Regulatory Association.

'The biggest complaint that we get is that for investors the regulatory system is an absolute jungle,' says Kit Jebens, Lautro's chief executive.

'Knowing who to complain to is, for the average investor, impenetrable. This is going to go a long way to sort that problem out.'

Fragmented responsibility is only part of the problem creation of the PIA is designed to solve. The other part is money.

Fimbra, which regulates a large number of small firms, has been plagued by financial insecurity almost since its conception. Its members, which include one-man bands on high streets up and down the country, cause more claims on the compensation scheme than any other group. Yet, because they are tiny, few Fimbra members can afford to pay any more into the compensation fund.

Life insurers, many of which sell their products through Fimbra members, have in the past had to dig into their pockets to bail out Fimbra. They have done so because they have a commercial interest in keeping financial advisers in business.

They say they cannot be relied on to pick up any more unexpected bills. They remain keen, however, to see financial advisers - who account for 40 per cent of life insurance sales - continue in business.

Some also argue that there is a public interest in keeping independent financial advisers afloat. Without them, individuals would only be able to go to tied agents, appointed representatives and their like, all of whom sell only a limited range of products.

A few go as far as suggesting that the Government might consider funding the PIA, though this seems unlikely.

Under current plans, Fimbra and Lautro are set to merge into the PIA, which will be a self-regulatory organisation alongside Imro and the SFA, assuming it wins approval from SIB. But the plan is subject to a tortuous round of negotiations between groups with vested interests.

John Morgan, the chief executive of Imro, doubts whether this is the right way to approach investor protection. 'I do not think there should be any negotiations when you are setting up a self-regulatory organisation,' he says.

Life insurers have set a price for their support. They want all financial firms selling 'packaged products' to individual investors to join the PIA. The implicit threat is that they will not pick up the bill if the banks and others fail to join.

But banks and building societies - who sell growing volumes of life insurance, unit trusts and other packaged products - have been reluctant to join, partly because they do not want to be regulated alongside what they see as tin-pot firms.

Some banks are showing signs of a change of heart, however. But a recent survey of Imro members found that the majority of fund managers are opposed to joining; they would rather stay with Imro, despite its blighted reputation, post-Maxwell.

Similarly, stockbrokers are adamant that they will not transfer to the PIA. This does not worry the life insurers, as stockbrokers tend to handle shares rather than packaged products such as unit trusts, but it does concern Fimbra.

These may well be negotiating positions. The life companies could cave in on their demand that other types of financial firm join. Banks might decide that the effort to move from one regulator to another is worthwhile.

SIB has stood aside from these negotiations because it will have the job of approving the PIA, if and when it is formed.

But what happens if the talks fail to reach agreement?

One suggestion being canvassed across lunch tables in the City is that the effort to merge Fimbra and Lautro should be abandoned and they should continue as separate bodies, subject to an agreement on funding a Fimbra compensation scheme.

Another is that instead of forming a new body, Lautro should take over Fimbra.

SIB, which has so far kept a low profile, should knock heads together.

The Treasury, which recently inherited responsibility for FSA regulation, should do the same.

SIB could in theory regulate financial advisers directly.

The challenge for the regulators is to keep the goal of improving investor protection in sight while securing industry backing (and funding) for the PIA. The industry is currently being allowed to dictate terms.

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