British financial regulators have fined insurer Prudential Group £30 million ($50.8 million) for failing to alert them that it was considering a bid for the Asian subsidiary of US insurance giant, American International Group (AIG), in the wake of the financial crisis.
The Financial Services Authority (FSA) said Wedneday that it has fined Prudential for failing to inform the FSA that it was seeking to acquire AIA, the Asian subsidiary of AIG, in early 2010. It says that the firm “failed to deal with the FSA in an open and cooperative manner” when it was seeking to acquire AIA in early 2010, because it did not inform the regulator of the proposed acquisition until after it had been leaked to the media.
The FSA says that Prudential should have informed the FSA at the earliest opportunity to allow it to decide whether to approve or reject the deal on regulatory grounds. It adds that the company failed to disclose the proposed transaction even when, at a meeting between the FSA and Prudential executives, it asked detailed questions about Prudential’s strategy for growth in the Asian market and its plans for raising equity and debt capital.
The proposed transaction would have transformed Prudential’s financial position, strategy and risk profile and involved a planned rights issue of £14.5 billion, which would have been the biggest ever in the UK, the FSA says. As a result, it says that the transaction had the potential to impact upon the stability and confidence of the financial system in the UK and abroad.
The failure to inform the FSA was significant, it says, because it resulted in the FSA having to consider highly complex issues within a compressed time frame; it narrowed the FSA’s options in scrutinising the transaction; risked delaying the publication of the rights issue prospectus; and hampered the FSA’s ability to assist overseas regulators with their enquiries in relation to the transaction, it says. Along with the fines, the firm’s CEO, Tidjane Thiam, was also censured.
“The FSA expects to have an open and frank relationship with the firms it supervises and with listed companies. It is essential that firms give due consideration to their regulatory obligations at all times. In particular, timely and proactive communication with the FSA is of fundamental importance to the functioning of the regulatory system and the integrity of the market,” said Tracey McDermott, FSA director of enforcement and financial crime.
The regulator found that Prudential was overly influenced by its concern about the risk of leaks, which meant it failed to give due weight to the importance of complying with its regulatory obligations. It accepts that Prudential did consider its obligations in forming its assessment of whether to inform the regulator, so while it found that the breach is serious, the FSA does not consider they were reckless or intentional.
“Prudential, led by Thiam as CEO, failed to give due consideration to its obligation to inform the FSA of this transaction, which would have had a huge impact on the group had it gone through. That was a serious error of judgement for which Prudential is paying the price. Firms should be in no doubt as to the importance of early communication with the regulator in respect of transformational transactions to avoid market and investor disruption,” McDermott added. “Thiam has also been censured in relation to his role in this matter. This case should send a clear message to all board members of their collective and individual responsibility for the decisions they make on behalf of their companies.”