Insurance nonsense from FSA

A SPLENDID row is bubbling up about a recent publication by the Financial Services Authority in which it proposes to ban firms from taking out insurance that would pay any fines imposed by the regulator.

It is not difficult to see why the regulator might be wound up about this. When the Wall Street investment houses reached their billion-dollar settlement with New York State attorney Eliot Spitzer, most of them passed the cost on to their insurers, rendering meaningless the punitive effect of the sanction.

The parallel is not quite exact because the American firms point out that under the terms of the settlement with Spitzer they had not admitted guilt, so what they were reclaiming was an unforeseen business cost, not a fine.

There is a broader issue here, however. Surely if the senior management of a firm wants to take out insurance to protect the business from risk, it is to be commended because it increases the likelihood of the firm surviving an unforeseen hit. Moreover, even if the FSA does not like the arranged insurance cover, what business has it to say firms cannot take it out? Are there not civil liberty issues here? Surely people have a right to protect themselves within the law against untoward events.

This is something of a departure. For example, the FSA remains relaxed about the insurance cover organised by the Securities Institute, which offers individuals protection against the legal costs of mounting a defence against an FSA action. It is true that this cover does stop short of paying any fines, but the reality is that legal costs and fines from the individual's perspective come to the same thing - and indeed legal costs are normally the greater part.

The FSA's argument seems to be that a fine will only have to be paid if there has been wrongdoing and the guilty party should not be able to escape the financial penalty for having committed a wrongful act. That is probably the moral high ground but it is not the reality of everyday life.

Would the FSA have us all drive our cars with only third-party insurance on the basis that if an accident was our fault we should be obliged to pay the full cost? The FSA rule applied to motoring would deny anyone protection for trying to take a bend rather too fast - a stance that is more purist than realistic.

But the main charge must be inconsistency. One of the FSA's rules is that those advising the public should have professional indemnity insurance - and indeed this requirement has been something of a problem in recent times because of the alleged scarcity of such cover. But the logic of the FSA position is that if an adviser screws up, the client can have a reasonable hope of getting some money back through the insurance policy. The adviser equally likes professional indemnity cover because it is a defence against a cock-up.

But if the FSA encourages - nay, insists - advisers insure against a mistake that results in a claim from a client, how can it do an about-face and insist a firm does not insure against a mistake that results in a fine?

If all FSA fines were the result of deliberate law-breaking, one might be able to see a point. But the vast majority of fines are imposed simply because the firm, or an individual within the firm got it wrong. It is a rare case where there is deliberate intent to flout the rules. So the FSA proposal really does not make sense.

Red light

TALKING of the FSA, there appears to be a mismatch between what it thinks and what fund managers think about prospects. Following the rise in the FTSE 100 to the relative highs of 4000, some money managers are saying that investors should get their wallets out. Perhaps they should, but before they take the plunge they should also ponder on the bluntest of warnings delivered a few days ago by Philip Robinson of the FSA.

'The rate of increase in household debt is in our view unsustainable,' he said. 'Personal bankruptcies are on the increase, the number of people claiming benefit has risen, albeit slightly, and Citizens Advice Bureaux are reporting increases in debt problems...The UK economy looks vulnerable to a downturn in consumer spending.'

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