Regulators can reduce the possibility of a repeat of last year's near meltdown of the global financial system by working more closely with auditors.

That is the view of Brendan Nelson, global chairman of KPMG's Financial Services Practice and also vice-chairman of KPMG LLP UK, who believes that auditors have the breadth and depth of knowledge of how financial institutions operate to assist regulators in their work.

"The auditing profession is in a unique place," Mr. Nelson told The Royal Gazette during a visit to Bermuda this week.

"We dive really deep into these businesses and have a good understanding of what's going on. We employ really talented people who are extremely thorough and regulators would benefit from a closer relationship with them.

"In some countries, there is a close relationship, but not in the US or the UK — unless something goes wrong. Only then does the regulator call us in to see what has gone wrong and who is responsible."

Mr. Nelson, who has expressed similar views in testimony to the UK Treasury Select Committee and the House of Lord Economic Committee, said auditors could be used preventatively in the complex world of financial services.

Auditors could be used to support the regulatory process, he said, particularly as rules tighten in the wake of one of the worst banking crises in history.

"One of the biggest challenges faced by regulators is that they don't have the people in their organisations with the necessary expertise and the experience," Mr. Nelson said.

"It's OK having more rules, but you have to have the people of calibre to ensure that these rules are effective."

In the UK, auditors used to work more closely with regulators before 2000, he said. Although some might suggest that his comments are self-serving, in that they support regulators hiring auditors, Mr. Nelson suggests it would be a wise use of resources.

"When you look at what's happened over the past year, it's clear that prevention is much cheaper than cure," Mr. Nelson said.

The failings of the system highlighted by the events of last autumn were clear with hindsight, he said. Before the crash, people had seemed content to believe that no asset value ever went down.

"Everybody was happy because everybody was making money," Mr. Nelson said. "The regulators, the shareholders and the depositors were all happy.

"There were a few problems by the start of 2008, but even in the second-quarter results did not prepare us for what was coming."

The collapse of New York-based investment Lehman Brothers last September "changed the whole dynamic overnight", he said, and introduced an unprecedented level of government involvement with banks.

Injections of capital from the public coffers and governments taking equity stakes in financial institutions had thrown up many questions. Taxpayers' money did not come cheap to the banks and all who had taken it would want to repay it as soon as was realistically possible, he added.

KPMG's Global Financial Services Practice has many clients in Bermuda and Mr. Nelson is a frequent visitor to the Island. Keeping up with rising standards of regulation set to be applied in the European Union by 2012 is one of the major challenges facing the Island's insurance industry, he said.

"The whole financial services industry is weathering the storm of the credit crisis and the recession," Mr. Nelson said. "I think the next storm to hit the insurance industry will be Solvency II.

"You can't opt out. The regulators control the amount of capital you need to have and if you're not properly prepared then you have a problem.

"But Solvency II is much more than a compliance issue. It's so fundamental that it has to be looked at in terms of strategy. It has to be a business-led approach.

"Companies in Bermuda are sophisticated and are aware of what's coming. The issue is how to prepare to make sure you can get the best out of it, because it does present opportunities.

"The winners will be those who approach it as a business-led project, rather than a compliance or an IT project."

Mr. Nelson admitted he was "pretty worried" about the prospects for economic recovery, particularly because of unemployment levels approaching nine percent in the US and Europe.

He is also concerned about the possibility of social discontent, as the free-flowing credit of the past that had allowed many people to live beyond their means was no longer available, while others would continue to be able to live affluent lives. The split is likely to cause increased social friction.

"I'm more optimistic about the financial services industry," Mr. Nelson said. "It has an incredible amount of intellectual capital — the collective brainpower in the industry is phenomenal.

"What I think will happen is that investors who are holding all their money in cash, which is yielding nothing, their risk appetite will return. The industry will be ready to provide them with new products with a better return and there will be a better understanding of the risk-return relationship."