The Financial Services Authority (FSA) has admitted to Insurance Times that it “cannot deal with serious fraud”. Not only that, it acts “on the back of audited accounts” and “is not there to correct all collapses”. Under the FSA world view, “if poor business decisions mean that companies go bust, that is part of the capitalist process”.
Leaving aside the capitalist process, let's look at the regulatory process. The regulator is paid by the public to protect the public. Independent Insurance collapsed despite the best (or worst) efforts of the FSA. That puts the FSA in the dock. What is the point of a regulator that relies on audited accounts and cannot deal with fraud?
Plainly, the FSA takes a limited view of its responsibilities: it's there to “monitor solvency”, but it did not realise Independent was insolvent. Surely it's time for the FSA to stop monitoring and start investigating.
If regulators rely on audited accounts, they are relying on auditors paid by the company. As is already clear, Independent's auditor, KPMG, made substantial sums from non-auditing work from Independent. There is a potential conflict of interest here. The regulator is genuinely independent. Unfortunately, it's also genuinely ineffectual.
The FSA strenuously denies this. It claims it was “on the case” back in 2000. It was “deeply uncomfortable” with Independent's plans for growth. The “proposition of very high growth” was “inconsistent with the financial position being exhibited”. The FSA, by its own account, held back Independent's plans for growth until further capital had been raised. It was only when “undisclosed reinsurance contracts” were discovered in the process of raising new capital that the FSA first had any reason to suspect malpractice.
That does not square with the statements made to Insurance Times by the French regulator, the Commission de Contrôle des Assurances (CCA).
In a detailed conversation with Insurance Times, the CCA said it had sent a dossier to the FSA in December 2000, raising concerns about claims at Independent's French subsidiary being entered at insignificant values or not at all, and raising concerns that the accounts of the subsidiary had been falsified.
The FSA says the concerns expressed were about under-reserving of claims and about business practices. It is adamant that malpractice was not mentioned as a possibility by the CCA. Insurance Times is equally confident that it was.
Regardless of which regulator is right, the question remains: what is the point of the FSA? Unless the FSA starts investigating, and stops relying on the word of good chaps at the company and the auditors, the same could happen again.