Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 240 - 251)



  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.
  (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 about it.

  247. Ergo somebody must have made an unwise, imprudent decision?
  (Mr Tiner) Maybe.

Mr Laws

  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 that judgment?
  (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.

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