Leading article: Prudence with a purpose

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The Financial Services Authority (FSA) has put a hold on the Prudential's Asian adventure. Details of the insurer's £14bn fund-raising drive to buy an Asia-based rival were expected to be published yesterday morning. But the financial services sector regulator is reported to have forced a delay after raising concerns about how financially stable this deal would leave Prudential.

Some suspect an attempt by the FSA to prove its worth at a time when its powers are at risk of being transferred to the Bank of England. Perhaps there is an element of that in its calculation. But it does not really matter, since this is precisely the sort of potentially risky move by a large UK financial firm in which a competent regulator should to be taking a close interest anyway.

This deal would double Prudential's size and the bulk of the insurer's new operations would be in Asia. The Prudential says it is well capitalised. But so, on paper, was Lehman Brothers when it collapsed. The FSA is right to examine the quality of that capital cushion carefully.

Others will say that the FSA's intervention is necessary given that some important Prudential shareholders are concerned at the size of the rights issue, meaning the deal could be voted down later this month in any case. But we cannot rely on market discipline. The past decade has taught that shareholders do not always rein in managements when they take foolish risks.

Moreover, when large financial organisations fail, they have a special talent for pushing the costs on to taxpayers. The collapse of the giant American insurer, AIG, left US taxpayers on the hook for $180bn. Ironically, it is AIG's Asian arm that Prudential is now seeking to buy. We all have an interest in the safety of this deal. A failure by Prudential could leave British taxpayers even more exposed than our US counterparts. The FSA failed to do its job in the credit boom. Lax regulation and weak oversight of the British financial sector cleared the way for the 2008 banking meltdown. The nadir was the FSA's decision to wave through the Royal Bank of Scotland's disastrous purchase of the Dutch bank, ABN AMRO, in 2007. But not everyone seems to have learned the lessons from those errors. We still hear the old cry that rigorous regulation will prompt large financial firms to leave London and relocate to more amenable (meaning less regulated) jurisdictions. Such voices should be dismissed as the cynical special pleading that they are.

The role of regulation is, first and foremost, to protect the public interest. If the FSA is finally waking up to that, so much the better.

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