Newspaper article The Evening Standard (London, England)

Insurance Nonsense from FSA; CITY COMMMENT

Newspaper article The Evening Standard (London, England)

Insurance Nonsense from FSA; CITY COMMMENT

Article excerpt


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 billiondollar 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? …

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