FSA: We're not at fault for failure

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There's a tale of two Cities for the FSA enforcer who'd rather have Kevin's job

Sir Howard Davies, chairman of the Financial Services Authority (FSA), has defended the regulator's handling of the collapse of Independent Insurance but confessed that changes may have to be made at the City watchdog.

The FSA has come under fire on two counts over last month's failure of Independent. One accusation is that regulators were asleep at the wheel as Independent's problems with paying claims moved to the critical stage.

The other, voiced by a former director in this paper a week ago, was that the FSA was heavy-handed and impetuous in forcing Independent to close, a move that forced it into liquidation.

Sir Howard, in an exclusive interview with the Independent on Sunday, said: "The heavy-handed point isn't true. The argument that it was us who prevented them from trading is just not the case. The directors made the decision to close and call in the provisional liquidators."

He said that regulating insurers was a matter of looking at the figures produced by the appointed actuary – in Independent's case, Watson Wyatt – and checking that the group was solvent.

Independent sent its returns to the FSA in March but collapsed a little over two months later. Sir Howard admits that the argument that the FSA should have been able to see that Independent was running into trouble was "a fair point".

He added: "You are quite right. There is a problem why these figures, analysed by external analysts in some depth as of the end of March, revealed that with a recapitalisation the company would be OK; so how was it that by the end of May it turned out that it wasn't solvent?" he said. "That is the problem, and it is what the SFO is looking at."

But Sir Howard also admits that the FSA needs to fundamentally change the way it regulates insurance. The watchdog called in accountants PricewaterhouseCoopers and lawyers Norton Rose to look at this area after the collapse of the life assurer, Equitable Life. They are to report in the next few weeks.

Sir Howard did say he inherited scant resources when the FSA took over insurance regulation from the Treasury. There were just 80 regulators looking after 756 firms. When the FSA took over as watchdog for the 380 banks in the UK, 450 banking regulators came from the Bank of England .

The fall out from the collapse of Independent will be spelt out in a briefing by the liquidators, PwC, tomorrow. The Independent on Sunday has learned that the collapse led to a potentially disastrous situation on the construction of the £5bn Channel Tunnel Rail Link (CTRL). Part of the project was insured with Independent and when the firm collapsed the builders were left with no cover in those areas.

CTRL has been in a frantic trawl around insurance brokers to arrange cover in the last three weeks. A spokesman said: "Independent provided only a small proportion of the total insurance cover for the CTRL project. Our insurance brokers have replaced the majority of our insurance cover previously provided by Independent and will complete that process shortly."

The collapse of Independent is also expected to contribute to a hike of up to 20 per cent in insurance premiums for firms in areas such as accountancy and law seeking professional indemnity cover.

"I think rates will go up in general, part of the reason is Independent Insurance ," said Gary Head, the UK underwriting manager at professional indemnity specialists Hiscox Insurance. "In the next 12 months I think we'll see premiums increase by 10 per cent to 20 per cent on average and traditional firms will feel that the hardest."

The collapse of Independent Insurance has seen a rush by a number of the company's former clients looking for cover. "We have seen enquiries falling out of Independent Insurance," said Mr Head. "There has been a notable upturn in business enquiries for professional indemnity."