Watchdog savages the Pru's 'culture of non-compliance'

The Prudential was yesterday given an unprecedented public censure by City regulators, who attacked its management failings and 'cultural disposition against compliance'. As Andrew Verity reports, it was the second serious reprimand in the space of two months for Britain's largest insurer.

In its first important public statement, the new super-regulator, the Financial Services Authority (FSA), attacked "a deep-seated and long-standing failure in management which prevented Prudential Assurance from recognising its own shortcomings".

The FSA said the Pru had failed to address and remedy grave defects in the operation of its direct sales force which it had already been warned about. There was, the FSA said, "a cultural disposition against compliance which filtered through Prudential Assurance's branch offices, their managers and advisers".

The Pru had been more concerned with the cost of complying with the Financial Services Act than it had with the interests of its customers, the regulator said.

Sales people at Prudential Assurance, the corporation's life insurance subsidiary, had conducted mis-selling while its management had failed to put in place procedures and controls designed to protect customers. The Pru had failed to keep important information about customers and their financial aims and failed to give customers all the right information. It had not acted with due skill, care and diligence and had failed to arrange its compliance properly.

"Prudential Assurance's conduct has fallen substantially below the standards that the public have a right to expect from a regulated firm," the FSA statement said.

The mis-selling referred not to personal pensions, for which the Pru has already been scolded, but to a further arrangement, a with-profits endowment plan called the Prudential Savings Account. Salespeople sold the product despite the fact that non-taxpaying customers would be taxed more heavily than with an alternative such as a PEP.

The revelation of fresh mis-selling by the Pru, which first surfaced in The Independent last May, followed a January compliance visit in which regulators complained they were shadowed by Pru compliance staff who gave hand signals to warn staff when not to speak.

The Pru, which in May insisted mis-selling of the Savings Account was confined to its Sheffield branch, is now understood to have been forced to extend an internal investigation of the mis-sold product to its entire sales force. Management consultants McKinsey have been brought in to shake up the company.

The then compliance director, David Linnell, was replaced by Martin Brownstein in March and later left the company in May - a departure which the company insisted was amicable and unconnected to mis-selling allegations.

Further casualties - viewed by some industry observers as fall guys - followed. Jim Sutcliffe, then chief executive of Prudential Assurance, left the company suddenly in September following a disagreement with the group chief executive Sir Peter Davis over a radical restructuring plan, thought to have been prompted by continuing regulatory attacks.

Soon after, the insurer was publicly attacked by Helen Liddell, the Economic Secretary to the Treasury, and the FSA's predecessor, the Securities and Investments Board, over its failure to compensate victims of pension mis-selling, many of whom were overlooked because they had died.

John Elbourne, Mr Sutcliffe's number two at Prudential Assurance since November 1996, yesterday offered a contrite acknowledgement of the Pru's failure in its duty to customers, saying the company was working "extremely hard to ensure problems can be put behind us". He said: "I still believe that the people at the Pru want to be compliant. I think they generally felt they were doing all the right things."

Mr Elbourne said that when he arrived at the Pru there was "confusion over who decided and who implemented compliance, which creates its own work. The data I expected to be available wasn't".

Outlook, page 21