U.K. Financial Markets Watchdog Under Fire for Insurance Leak

By Ben Moshinsky | April 3, 2014

The U.K.’s top financial conduct watchdog’s first birthday today was marred by complaints from the government and lawmakers about its handling of a leak that sent shares in insurance companies tumbling last week.

The Financial Conduct Authority’s private briefing to the press about an insurance-industry review was “damaging both to the FCA as an institution and to U.K.’s reputation for regulatory stability,” Chancellor of the Exchequer George Osborne said in a letter today.

The FCA is one of two regulators created last year out of the ashes of the scandal-plagued Financial Services Authority, which was widely criticized for failing to quell the 2008 financial crisis. The Bank of England, which assumed greater regulatory powers at the same time, faces its own internal probe into what it knew about potential manipulation of currency exchange rates.

“It wasn’t our finest hour,” Martin Wheatley, chief executive officer of the FCA, said in a speech in London yesterday. “I take responsibility for what happens in the organization.”

U.K. insurers, including Prudential Plc, Aviva Plc and Resolution Plc, had as much as $4.2 billion wiped off their market value on March 28 after the Daily Telegraph newspaper reported that the FCA would review 30 million life-insurance policies stretching back to the 1970s, citing Director of Supervision Clive Adamson.

Everything Possible

The regulator must “do everything possible to make good that damage,” Osborne said. “The starting point must be that the FCA holds itself to at least as high standards as it would expect of a listed company handling highly market-sensitive information.”

The FCA clarified later that day that it only intended to review a sample of firms, rather than each policy, and wouldn’t apply current standards retroactively.

Osborne’s letter adds to lawmaker pressure on the regulator. Andrew Tyrie, chairman of Parliament’s Treasury Committee, said in a March 29 statement that the FCA made an “extraordinary blunder.”

The FCA said last week that it would investigate its “handling of the issue involving an external law firm, and will share the outcome of this work in due course.”

The internal probe must address “why and with whose knowledge and authorization this briefing was given,” and “where senior accountability should lie and what disciplinary action should be taken,” Osborne said.

Regulator’s Conduct

“There may be merit in the proposed review but the immediate issue is not the conduct of the industry but of the regulator,” Tyrie said in his statement.

Resolution and Phoenix Group Holdings, which manage closed books of older insurance policies, led the selloff, falling 7 percent and 12 percent respectively.

Legal & General, Britain’s biggest manager of pension assets, lost 3.5 percent, while Aviva fell 2.8 percent. The company said it expects any impact on profit to be “minimal if at all,” affecting less than 2 percent of the company’s embedded value.

Shareholders in insurance firms had already lost around 3.6 billion pounds ($6 billion) on March 19, when Osborne scrapped rules that pushed retirees to buy an annuity.

–With assistance from Sarah Jones and Andrew Atkinson in London.

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