The City's future as a respected financial centre rests on seeing off European Commission reforms which would weaken the grip of British financial regulators, chief watchdog Howard Davies has said.

Mr Davies, chairman of the Financial Services Authority, has attacked Commission efforts to impose maximum levels across Europe on the disciplines which can be imposed on stockmarket-listed firms.

We have one major chance of getting things right, and this is it

Howard Davies, Financial Services Authority

The move would weaken the UK's financial regulation regime at a time when investors were seeking tougher guidelines, following the collapse of US giant Enron amid accounting concerns.

"This is a very curious time to choose to dismantle a well-functioning feature of our regulation of corporate governance," Mr Davies said.

"In the aftermath of the Enron affair, it is remarkable to think that we may soon lose the basis on which many corporate governance and disclosure provisions rest."

He highlighted an FSA review, set to be launched next month, into UK regulatory standards, and ways of enforcing a tough regime despite the EU reform programme.

"If we want a modern, cost effective and market friendly environment for capital raising in London in the future, we have one major chance of getting things right, and this is it," Mr Davies said.

'Race to the bottom'

The Commission plans are designed to prevent EU countries introducing weak guidelines in a bid to attract custom, Mr Davies said.

"I am told we would see regulatory arbitrage and a 'race to the bottom'," he said.

But such an outcome looked "highly unlikely" when investors were prizing corporate transparency.

Indeed the UK's regime, which the FSA considers the toughest in Europe, "has attracted mobile capital, far from repelling it".

Rules under threat

Rules threatened by the EU directive include an obligation on firms to consult shareholders on major deals, and a limit on the periods in which directors can trade in shares in their own companies.

The implications of investor consultation rules were highlighted in February when shareholders in P&O Princess forced a delay in the cruise firm's plans to merge with US-based Royal Caribbean.

Director stock dealing laws hit the headlines last year when inspectors opened a probe into the sale of shares in Iceland by then chairman Malcolm Walker shortly before the retailer released a profits warning.

Mr Davies has proposed options including revising company law or upgrading stock exchange responsibilities for limiting the effect of EU reforms.

"Where a particular function which is identified as valuable may have to be dropped... we need to identify an alternative way in which that element of the rules could be preserved," he said.

Pay rise

The warning came as it emerged that Mr Davies' salary jumped by an inflation-busting 11%.

Mr Davies earned �315,000 in basic salary, plus performance-related bonuses of �37,800 and other benefits worth �26,940.

The package distanced him from the earnings reported by Bank of England chief, and Mr Davies' former boss, Sir Edward George, who received �250,567 following a 2.5% pay rise, in line with inflation.

The City's revered status is threatened by a European Commission attempt to reform financial regulation, watchdog Howard Davies warns.