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FCA on closed book blunder: ‘We’ll do everything possible to address harm caused’

FCA chairman John Griffith-Jones has responded to concerns expressed by the Chancellor over the regulator’s handling of its announcement of the review into closed book policies.

Yesterday Chancellor George Osborne wrote to Griffith-Jones to express “profound concern” over the FCA’s handling of the issue and set out expectations for the scope of its investigation into the matter.

Responding to Osborne, Griffith-Jones says: “I would like to assure you that at the meeting last Friday, the board of the FCA shared similar concerns to your own about the events themselves as well as the potential impact on the FCA’s and UK’s reputation in financial services.

“As we announced last week, we intend to do everything possible to address that harm by setting up an independent inquiry.”

He adds: “I am determined to understand the FCA’s role in the events of Thursday and Friday. I am already in discussion with your officials on the arrangements and terms of reference for the review, which will be done by an external legal firm and will be independent of the executive.

“We will ensure that all the issues raised in your letter are reflected in the terms of reference of the inquiry.”

The Daily Telegraph first reported on 28 March that the regulator is concerned legacy customers are locked into poor investments by steep exit fees, and insurers may be “exploiting” them by levying large fees to subsidise other parts of the business.

The report prompted several insurers’ share price to plummet, including Resolution, Legal & General, Aviva and Phoenix.

The regulator was forced to issue a clarification statement at 2.30pm explaining the scope of the review in more detail.

At 6.30pm, the FCA issued a further statement that it would carry out an investigation into its handling of the issue, with the involvement of an external law firm.

FCA chief executive Martin Wheatley admitted earlier this week that its handling of the announcement into the closed book probe was not the regulator’s “finest hour”.

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Perhaps the insurers should take a bit more responsibility too. I would just fine them all for failing TCF if the legacy accounts have been left abused for years. Insurers hardly doing there job properly either. I am sure the Pru could not be affected by thias given the £47million their exec’s have just pocketed.

  2. I posted this on another article on the same topic:

    If you are a conspiracy theorist or watch too many American films you might be excused for believing that ‘Big Business’ runs the country.

    I actually think in this case the Regulator is spot on.

    I have been a customer of the Insurance industry for over 40 years and have dealt with them as an intermediary for some 28 years and these is absolutely no doubt that when they think they can get away with it they do exploit their customers. The older contracts didn’t just have high fees – they were usurious. And service standards are not generally substandard – they are abysmal – with a few honourable exceptions. The worst culprits are the biggest companies.

    Moreover it is a bit rich for the directors of FTSE companies to be calling for Mr Wheatley’s head – most of them weren’t around in the 70’s and 80’s when the worst examples were perpetrated, so they probably have little idea of the shortcomings.

    We all have examples of huge exit penalties, high charges and lousy service – so all this bluster seems hugely disingenuous. It is certainly true that if you consider the two largest insurers, over the last 4 years you would have been a darn site better off investing IN them than WITH them. That in itself must tell a tale. Their share price seems to be historically inflated and we have yet to see the full effects of RDR, but while they are looking good the directors are no doubt salivating at the prospect of juicy bonuses – which may well be unforthcoming once the share prices subside to their long term mean.

    That many insurers now seek pastures new away from these shores is also unsurprising. In the main they are moving to less rigorous regulatory regimes where they can once again pick up their nefarious practices.

  3. As an IFA we have significant issues with many of the ‘closed book’ providers – many having ‘turn around’ times of weeks and if (when) they make a mistake, it’s another ‘turn around time’ to put it right.

    My concern, however, is that taking a broad brush to issues such as charges can result in unintended consequences.

    Furthermore, the exit charges could be administrative (early surrender penalties) or investment related (MVR) and whilst having everthying in ‘clean’ contracts would potentially be a utopia we unfortunately work in the real (ever changing!) world full of legacy decisions others have made.

    However, and I’m mindful this is controversial, providing the contracts were ‘sold’ compliantly and investors were made aware of the charges, I wonder on what grounds can providers be forced to change them. Whilst in our sanitised world they may now look non-TCF, at the time they may well have been effective.

    Looking at this from another angle, there are many suggesting that scrapping trail commission on pre-RDR contracts is immoral / illegal – but isn’t asking providers to re-write their charges on existing contracts broadly the equivalent?

  4. Anyone who sold their insurance company shares during the window between the Telegraph being printed and the clarification hours later should be contacted, and the FCA should make up the difference because that is what would be required if any firm messed up in this way. With over £150m traded in L&G and £200m in Aviva alone, we’re probably talking about £1bn of affected trades. If the loss is 7% one average, it’s only a mere £70m for them to find.

    A bit of cost cutting, and cancellation fo a few year’s bonsues might recoup that.

  5. Casual Observer 2nd April 2014 at 1:18 pm

    Don’t disagree with Bryan Jones except that I doubt regulated firms will be happy they find themselves paying the cost since the only way the FCA raise income is by charging the firms it regulates.

    So what we have is that both the public (as investors) and the industry will pick up th cost of the FCA’s initial mistake in terms of the impact of share pricing and potential loss.

    The industry will then pick up the cost of the independant inquiry in terms of increased fees (which eventually means it gets passed on to the consumers). If the FCA says it won’t raise fees because of this it means they are either inflating the budget to start with or having to cut work they intended to do – which means it will come through into charging eventually.

    Any outcome that means recompense is paid will likewise be passed on to the industry and therefore the consumer.

    So there is a potnetial tripple whammy for the industry and the consumer.

    This is, of course, all from a regulator that is supposed to be the champion of consumers and make sure firms provide better outcomes for consumers.

    Surely somebody must take the blame. If they were an approved person they would be fined and potentially banned. Since they have no such burden to bear as a result, that means their head must roll.

  6. Perhaps a starting point for any investigation would be the FCA’s own interpretation of market abuse?

    As in:

    MAR 1.4 Market abuse (improper disclosure)

    MAR 1.4.1 Table: section 118(3) of the Act

    “The second [type of behaviour] is where: an [insider] discloses [inside information] to another person otherwise than in the proper course of the exercise of his employment, profession or duties.”

    Descriptions of behaviour that amount to market abuse (improper disclosure)

    MAR 1.4.2

    The following behaviours are, in the opinion of the FCA, market abuse (improper disclosure):

    (1) disclosure of inside information by the director of an issuer to another in a social context; and

    (2) selective briefing of analysts by directors of issuers or others who are persons discharging managerial responsibilities.

    Or do those who write the rules ever deem them to apply internally as well as externally?

  7. Julian Stevens 4th April 2014 at 8:23 pm

    An investigation after the event won’t put the genie back in the bottle. And anyway, the investigation will be paid for by the FCA, as usual with OPM, so what kind of outcome can we expect? Should the conclusion be that the FCA screwed up mightily and that no excuses or apologies can change that, it’s pretty likely that the appointed law firm can kiss goodbye to any further commissions from the FCA.

  8. Would Mr Griffiths-Jones please explain in just what ways “setting up an independent inquiry” is likely to constitute doing “everything possible” to address the harm caused by the actions of Clive Adamson?

    All an investigation will do is articulate what everybody already knows. It won’t address it and, in any event, what’s done is done and cannot now be undone. The only action that the FCA could take that would mean anything to anyone would be for it to admit it screwed up, it damaged confidence in itself, it disrupted the market and it should announce that the individual responsible (assuming that Clive Adamson was actually the only person responsible) will be ejected without compensation for loss of office. Anything less will be nothing but a bit of token contrition and a whitewash. Adamson screwed up and Adamson should pay the price. That’s how it is for the rest of us. Why should it be any different for somebody who works for the FCA?

    Some have already predicted that, one way or another, Adamson WILL go before the year is out, as his position has already become untenable, though the real reasons will be papered over with something along the lines of “to spend more time with his family” or “to pursue fresh opportunities”.

  9. Bit of a problem here. The FCA were correct in supposing that very large numbers of “poor” contacts still exist . where they were wrong was in attempting to do something about this. If taken seriously not one Life office would have survived. The scale of the problem is simply immense.

    Institutional mis-selling has always been a far greater problem then individual mis-selling. A Pandora’s box that should never have been opened. Far better to focus on protecting the consumer in the future than trying to undo the mess from the past.

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