Risk, rewards and the cost of safety

Anthony Hilton12 April 2012

ANOTHER milestone was passed in the Equitable Life saga on Tuesday when the Financial Services Authority submitted to the Treasury some ideas of what might be learned from the unhappy experience.

It will be a day or two before the Treasury shares these thoughts with the outside world, but the essence of what the FSA has to say is that traditional insurance regulation based on prudential supervision is too blunt an instrument for the modern world. Going forward the techniques that have been used in banking need to be adapted to insurance, with much closer attention paid to the risks actually being run by the business, and making sure these are properly measured, catered for, and understood by management.

The role of the regulator in such an environment is to ensure management has controls in place that allow it to monitor the business properly and take prompt remedial action when the early warning lights flash.

The report will say this, or something like it, because it is what the FSA has been preaching since its new insurance supremo John Tiner arrived from Arthur Andersen in June - and indeed before that in speeches by chairman Sir Howard Davies. Tiner got his appetite for this stuff when he carried out the Board of Banking Supervision's inquiry into the Barings collapse - which is where he got to know Davies, who was then Deputy Governor of the Bank of England - so he has been round the block a few times.

The moot point, though, is whether Tiner's eminent good sense will be enough to appease the baying hordes. The great paradox of this country is that everybody harps on about the punitive cost of excessive regulation but the moment something goes wrong they demand more of it. Then politicians, with their unceasing desire to pander to the consumer lobbies, fall over themselves to oblige - regardless of the long-term consequences for the industry, let alone the costs and benefits of the measures.

Thus the great challenge posed by Equitable Life - not just for the FSA but the entire financial community and those of us who are its customers and ultimately pay the bills - is to get through the endless inquiries and post mortems into the fiasco without Government panicking and bringing in yet more regulation 'so that it can never happen again'. The danger is that in its desire to be seen to be doing something we will get the insurance industry's version of the Dangerous Dogs Act.

Sometimes I think this country is not genuinely capitalist. We want its benefits in terms of economic growth, but we are not prepared to accept its risks. We want it sanitised regardless of cost.

They order these things much better in America. In that country when there is a financial disaster the Securities and Exchanges Commission goes after the people responsible and tries to get them banged up. That is the regulator's job. In this country, when something-goes wrong no one really bothers about the guilty men. They are too busy screaming at the regulator for not seeing trouble coming in advance and preventing it.

The essential difference is that in America accidents are accepted as part of the system, part of life and the price of progress. In this country we increasingly embrace the opposite. Any accident is too high a price to pay regardless of the benefits - be it fast rail travel or exciting and innovative financial products.

This is not to preach in favour of wanton recklessness. It is fair enough for society to want things to be safe, but it has to understand how much it costs, and therefore how much it is prepared to spend. The problem is that amid all the hue and cry about safety no one feels it is their job to point out how much it costs. But it is time our politicians did.

Clear as mud

WHEN a company offers to sell shares to the public it ought to be easy to decide whether or not the effort has been successful. You simply compare the number of shares on offer with the number of shares taken up.

Such simplicity seems to be beyond easyJet and its advisers CSFB and UBS Warburg. In a Press release that sets new standards in obfuscation, it declares that 'valid applications were received for 3,920,397 ordinary shares representing 70.8% of the open offer shares'.

Sounds clear enough. But now consider the following also dredged from the release: 'On 29 October the company announced a placing and open offer of 26,032,258 million shares. Of these 19,532,258 million were the subject of the open offer.'...the rest being separately sold to institutions.

Now it seems to me if you offer 19.5 million shares and you sell 3.9 million you have not got a 70.8% take-up and a relatively successful issue. What you have is a 20% take-up - a significantly less successful issue, notwithstanding the fact that the underwriter (easyJet's owner Stelios Haji-Ioannou wearing another hat) took up the balance. Still, two views make a market.

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