Examination of Witnesses (Questions 240
THURSDAY 11 JULY 2002
240. But the thing is, Mr Tiner, if they are
going to be first in the queue the consequences for a lot of people
could be dire but they get their money, and the point I am making
to you is whether you feel there have been unwise decisions by
the banks in this sector? £4 billion is a lot of money.
(Mr Tiner) No, I do not. I think the responsibility,
if there has been irresponsible gearing, if that is the right
term, falls with the firms that have raised that gearing. I think
the banks need to look at whether they are able to judge the risk
from their perspective and it may well be that the banks will
be out of pocket as well, but I think it is those who are structuring
the fund that you have to look to to make sure that you are happy
that there is consideration of the interests of the different
groups of shareholders vis-a-vis the banks, and that the banks
need to make sure that they have got sufficient protection to
get their money back.
241. But should the banks not also have recognition
to the gearing when they make the risk assessment?
(Mr Tiner) I would have thought so.
242. We have heard this morning that the gearing
in a number of cases has been extremely high and very unwise,
so does it not follow that maybe some of the decisions that the
banks have made have been a bit unwise?
(Mr Tiner) I think as it turns out, if the banks lose
money because a fund has been over-geared with their borrowings,
then history will tell you it has been an unwise lending decision
but that is the same as
243. I am trying to make this simple so that
people like ourselves can understand. Some of the gearing has
been over 60 per cent and that is a heck of a lot of gearing.
Do you agree?
(Mr Tiner) I do agree.
244. But when an ordinary person goes in for
a bank loan do you think the bank makes a risk assessment for
the ordinary person? "Excuse me, I am unemployed but I want
to borrow", what does the bank say? You are dodging the question,
(Mr Tiner) No, I am not. This is an issue for the
banks. If the banks want to take that kind of risk with their
shareholders' money and we think from a prudential point of view,
going back to Mr Cousins' question
245. With some gearing being over 60 per cent,
do you think that is excessively high?
(Mr Tiner) I think it is.
246. If somebody came and asked you for money
when the gearing was 60 per cent, what would you say?
(Mr Tiner) If I was a banker, I would think twice
247. Ergo somebody must have made an unwise,
(Mr Tiner) Maybe.
248. Can I ask a couple of questions about a
different sector which there are concerns about, which is the
United Kingdom insurance sector? There was recently a relaxation
by you I think of the resilience test applied to this sector.
Can you tell us whether you think that was wise and why you took
(Mr Tiner) Yes. I would like to respond to that by
reading a note I have written because I think the precision of
words is rather important.
249. Perhaps before you do that I could ask
the other question I have, the answer to which I assume may be
in your statement but if not perhaps you could tack it on to the
end. The question is to find out from you whether, as of today,
with the recent falls in the equity market you are confident that
all of the United Kingdom insurers meet their solvency tests,
and should therefore be able to take on new business?
(Mr Tiner) On 28 June 2002 the Financial Services
Authority issued revised guidance to the life insurance industry
on the stress testing of their portfolios, generally referred
to as the resilience test. The resilience test is an important
element in the prudential framework which is designed to protect
policyholders as it helps to determine the appropriate mix in
risk assets to the term, size and nature of policyholder liabilities.
Recent events in the markets have revealed some problems with
the formula which tapers down the stress test from a maximum of
25 per cent to a minimum of 10 per cent. We have been considering
for some time possible changes to the resilience test which would
take into account recent stock market movements in anticipation
of the new Integrated Prudential Sourcebook that comes into effect
in 2004. In the light of market conditions and the problems identified
with the resilience test, we considered it appropriate to make
this amendment at an earlier stage such that there would not be
market distortions created by the problems that may be inherent
in the current test. Our research among life insurance firms suggests
that the significant majority were not close to being sellers
of equities at the FTSE 100 level on 28 June of 4,540, based purely
on the application of that resilience test. Of course there may
have been some sellers, and buyers, depending on their analysis
of the market. Hence the change to the resilience test was not
made with any immediate pressure to sell in mind. As we have said,
the suspension of the test on 24 September last year was under
very different circumstances and we have seen no need to further
suspend the test in recent market conditions. Based on stock market
movements over the last three months, the new test will require
firms to stress their equity portfolios as a decline in the FTSE
Actuaries All Share of approximately 15 per cent or a 650 point
fall. This new test will remain in force, as temporary guidance,
until 31 May 2003 when, having consulted, we anticipate that it
will become permanent. The financial returns of life insurance
firms show that their free asset ratios have fallen in each of
the last two years. However, as is suggested by my earlier remark
on firms' resilience to equity price movements, the insurance
sector continues to meet the minimum solvency requirements we
have set, and this is in the light of a 33 per cent fall in equity
markets over the last 22 months. This also takes into account
the guarantees made to policyholders in with-profits funds which
make up the majority of insurance company funds and which, of
course, are not provided within unit-linked products. It is also
useful to remember that whilst, of course, changes in asset prices
on a day-to-day basis must be monitored closely, the liabilities
of insurance firms are over the longer term. Of course, these
are nervous markets and we continue to monitor closely the impact
of market movements on the life insurance sector as a whole, and
on individual firms. Members of the Committee may recall that
the Financial Services Authority is rolling out its risk-based
approach to regulation across all sectors of the financial services
market, including insurance. We will perform risk assessments
on some 200 insurance firms, being the larger firms in both the
life and non-life sectors. These assessments are presently in
progress and we will write to firms with our findings and conclusions.
A recent report by the rating agency Fitch that the Financial
Services Authority has 200 insurance firms on its high-risk list
is wrong as the risk assessments have not even been completed.
It is true to say that the Financial Services Authority is engaging
in a much more intensive relationship with these 200 firms, as
this is part of the risk-based approach. We have taken the opportunity
during the last two or three months to meet with CEOs of the major
insurance firms to explain this new approach, to explain the proposed
policy reforms we propose in insurance regulation, and to discuss
matters of current interest. We have also written to CEOs of insurance
firms to remind them that they should be proactive in the management
of their firms' financial resources.
250. I respect your desire to answer that question
in written form, and perhaps we will come back to that at some
later stage. Lastly, Mr Tiner, and without going into any great
detail, looking at the evidence that has been provided to us this
morning from the beginning, do you have any concerns about that
evidence? Is there anything you will take away that will make
you think and reflect and, maybe, act?
(Mr Tiner) I think that we have been hungry for data,
information and market intelligence on this sector and, as Daniel
Godfrey said, he has given us some and we have had other types
of information from other sources and without, frankly, wanting
to go into specifics I have heard some information this morning
which is quite interesting.
251. Food for thought?
(Mr Tiner) If you like.
Chairman: Good. Thank you very much.