Dubai is fighting to preserve the reputation of its embryonic international financial centre following the shock decision to dismiss the two men in charge of setting up its regulatory system.
Representatives of the developer, the Dubai International Financial Centre (DIFC), and of the two sacked executives, Ian Hay Davison and Phillip Thorpe ? respectively the former chairman and chief executives of the regulator, the Dubai Financial Services Authority (DFSA) ? are now embroiled in an increasingly acerbic dispute over the reasons for the dismissals.
The DIFC moved quickly to minimize disruption by appointing Habib Al-Mulla, a member of the DFSA board, as its new chairman, and David King, the managing director of supervision and a former chief executive of the London Metal Exchange, as Thorpe?s successor.
Reaction in Dubai is divided about the impact of the decisions, which could cast a shadow over the future of the multi-billion dollar financial centre.
One senior western banker describes it as a ?massive own goal?. But another says that the decision would accelerate the success of the DIFC.
But there is no doubt that Bahrain and Saudi Arabia, which also have ambitions to become the region?s leading international financial centre, will see it as an opportunity to court the banks that were considering taking out licences in the region.
More than 30 banks, including Deutsche Bank, Credit Suisse and Standard Chartered, had applied for licences to participate in the DIFC, whose activities will include the trading of debt, equities and derivatives, as well as reinsurance, Islamic banking and asset management.
These institutions are now asking themselves whether serious damage has been done to the principle of independent regulation ? enforced by courts operating under a western legal structure ? which is presented by the DIFC as its major selling point as it tries to attract banks to set up wholesale operations.
The Dubai authorities must move quickly to state publicly that the independence of the regulators will be guaranteed when all the laws relating to the financial centre are in place. At present the regulatory authority cannot formally be established until there is a final decree from the UAE federal authorities.
Senior DIFC figures insist that once the decree is passed, the regulators will be fully independent and there will be no external intervention in their activities. And they say that the appointment of King is evidence of the continued commitment to tough regulation.
The response of the regulatory council will be equally important. It is the committee of senior international figures created to oversee the market?s development and underpin Dubai?s status as a properly regulated centre. Some of the figures are known to be very unhappy with the treatment that has been meted out to Thorpe and Hay Davison.
Bankers will also look to see whether any regulators leave in sympathy with Thorpe. One, Richard Pratt, has resigned but the DIFC says that he was in any case nearing the end of his contract.
Relations between the senior management of the DIFC and Thorpe (a former head of Britain?s Investment Management Regulatory Organization) and Hay Davison (a former chief executive of Lloyd?s of London) had become increasingly strained in recent months.
But matters reached a head at the end of June when Thorpe was escorted from his office and Hay Davison was sacked by phone while he was on holiday in France.
There are radically different views about what prompted the final decision to remove the two regulators.
Hay Davison and Thorpe insist that, although the DFSA can have no formal status until the regulatory process is complete, they were assured by the Dubai authorities that they would be treated as if this were the case.
That would mean that Dubai could dismiss Hay Davison but only the DFSA could remove Thorpe.
The DIFC?s view is that as the market has not been formally established, it has the right to dismiss all those working for it if wishes.
Hay Davison and Thorpe have for a number of months expressed concern about the award of contracts for the property development of the area in which the DIFC is being built.
Although they say they have not identified specific wrongdoing, they say that the process is insufficiently transparent and there are potential clashes of interest as some senior DIFC figures are involved in companies that have won contracts.
The DIFC insists that the tendering process has been transparent and overseen by independent consultants. They also point out that the regulators are responsible only for the financial sector and have no remit to interfere in decisions made on the property development side.
However the issue is finally resolved, Thorpe and Hay Davison have left behind a legacy of financial regulations and a legal structure that gives Dubai the opportunity to create a viable centre.The coming months will tell whether their departure has damaged these ambitions.