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FSA &#39could have done better&#39 on Equitable

The FSA&#39s inquiry into its own handling of Equitable Life claims the patient was dead on arrival. Nevertheless, the report is a candid account of the regulator, which FSA chairman Howard Davies accepts makes “pertinent criticisms” of its regulation of the troubled insurer.

The 260-page report was finally published last week – “flushed out” in the words of Conservative MP Richard Ottaway – only two hours before a Parliamentary debate on the country&#39s oldest life company.

The report was commissioned in December 2000, and was prepared by FSA director of quality assurance and internal audit Ronnie Baird, with the assistance of solicitors Norton Rose and accountants PricewaterhouseCoopers.

The report says by the time the FSA took control of the reins, “the die was cast and we have seen nothing which the FSA could have done thereafter which would have…made any material beneficial difference to the final outcome as far as Equitable Life was concerned”. But it also goes on to detail”a number of things the FSA could have done better”.

Baird paints a picture of the various parts of the FSA failing to communicate with each other and “a reluctance by the staff to get involved and take ownership” of the issues.

The regulator “did not spot issues to be addressed or having spotted them did not follow them up”.

It is scathing about the way in which the FSA allowed itself to be influenced by Equitable and not consider the implications of it losing its court case or that it would have difficulty in finding a buyer.

Baird does not say that Equitable is a unique case but concludes the case has industrywide implications. The FSA, he says, should adopt a more proactive, risk-based approach to regulation which should include an analysis of trends that could affect the industry in the future.

On the prudential side, Baird makes a number of detailed recommendations. He suggests a review of current practice, which allows future profits to be taken into account towards solvency.

He recommends a review of the practice of financial reinsurance which “undermines the margins of prudence in the current solvency framework and could pose a threat to the financial system”.

On disclosure, Baird finds it has “lagged behind developments in the industry” and should be the subject of comprehensive review. The report finds serious shortcomings in Equitable&#39s regulatory returns.

For instance, the regulator relied on an reinsurance agreement which had not yet been executed for the company to meet its solvency requirements. If the regulator had enquired more deeply into the wording and details of the returns it would have been able to recognise Equitable&#39s financial weakness more quickly.

Consumer advice and Equitable&#39s advertising should have been more closely monitored. It says the PIA never properly considered what advice should be given to non-GAR policyholders, nor did it contact the Equitable to see what advice it was giving.

Treasury Economic Secretary Ruth Kelly, Equitable Life, the FSA – and the Baird report itself – all bend over backwards to stress the limited ambit of the report, covering only the period after January 1, 1999, when the FSA assumed responsibility for the prudential regulation of the country&#39s oldest insurance company from the Government.

Kelly has made it clear that the FSA report would not restrict the findings of the independent inquiry of Lord Penrose, whose remit allows him “to look back as far as necessary”. But her letter to him says: “I am sure that the report will prove to be a valuable input into your inquiry.”

Kelly has also written to Davies, telling the regulator to review its workings by November 20 – 10 days before it assumes its full responsibilities – in particular, in the area of monitoring solvency, the disclosure of life office information and where its own internal communications broke down.

The Treasury has responded quickly to the recommendation that a life office&#39s appointed actuary should be subject to external review, issuing a consultation paper at the same time as publishing the FSA report.

The admission of mistakes by the regulator led both Ottaway and Shadow Economic Secretary Christopher Chope to renew calls for compensation for Equitable policyholders from the public purse.

This was not ruled out by Kelly, who said she would not prejudge the recommendations of Lord Penrose&#39s inquiry.

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