The FRC's snail's-pace approach to Equity Red Star serves auditors and insurers badly

Here’s a quiz to get your grey cells working this morning.

What are the following words describing?

“An institution constructed in a different era – a rather ramshackle house, cobbled together with all sorts of extensions over time. The house is – just – serviceable, up to a point, but it leaks and creaks, sometimes badly.”

If you were thinking they were referring to an honourable and ancient London Market insurance institution, shame on you!

No , this is an extract from an UK government-commissioned independent review of the Financial Reporting Council (FRC) published in December.

The FRC is the non-statutory regulator of UK auditors and some actuaries, and is the body that yesterday announced the fine of KPMG and some of its staff in relation to failings around audits of Equity Syndicate Management Limited (ESML) and actuarial advice it gave going back to the 2007-09 period.

Yes, you are reading correctly.

We are talking about the Equity Red Star debacle that broke in 2010 and which The Insurance Insider stopped writing about with the Lloyd’s sanction of the managing agent, its CEO and other key staff in the 2012-13 period.

That was an awful long time ago.

Indeed, before then Equity had already been through one of the dreaded Section 166 governance probes from forerunner to the PRA and FCA, the FSA. That is how old this is.

It appears the statute of limitations for poor old auditors is almost unlimited.

This is crazy.

In insurance we often complain about regulatory overhang but the FRC makes insurance enforcers look positively superhuman by comparison.

 

Justice works best when two things happen: first, wrongdoing is highlighted as quickly as possible and second, wrongdoers are investigated, pursued and punished in a timely and public fashion.

If this happens the industry can learn from the mistakes of others in time to avoid costly repetition.

Proceeding so slowly serves no purpose. It is also grossly unfair for the wrongdoers.

ESML’s auditors clearly didn’t cover themselves in glory but why should their punishment include almost a decade of stress, worry and career blight with the investigation hanging over them?

In contrast, former Equity CEO Neil Utley was able to re-group and move swiftly on to new ventures. He had time to build and then IPO UK motor insurer Hastings long before his auditors knew their fate.

Back in 2010 a creative Insider editor dubbed Equity 218 “the car crash syndicate”.

It seemed fitting after the almost unprecedented value destruction that had occurred. Australian insurer IAG bought Equity in 2006 for £570mn ($740.6mn) and sold it to private equity firm Aquiline for £87mn six years later.

In the interim the syndicate had managed a staggering £499mn loss for 2010 on an annual accounting basis.

IAG has long moved on, as have ESML’s Names – indeed some of the latter will have moved on to the next world long before seeing justice served.

It seems the differences between UK’s insurance car crashes and its accounting ones is that Lloyd’s, the PRA and the FCA come to clear the debris in a timely fashion while the accounting regulator appears to let the wreckage lie for years before acting.

UK financial services deserve better than this.

It’s time to tear down this ramshackle construction and replace it with a solid, statutory edifice of which we can all be proud.