The prohibition is a result of Mr Headdon's failure to disclose a side letter to the FSA that raised questions about the true value of a reinsurance contract entered into by Equitable Life Assurance Society ("Equitable").
Andrew Procter, FSA Director of Enforcement, said:
"Mr Headdon should have provided information to the FSA about the Side Letter to the reinsurance contract and as a result of his failure to do so the FSA has concluded that he is not fit and proper."The FSA sets high standards by which we judge senior management. This includes the requirement that individuals deal with the FSA in an open and co-operative way. Where behaviour falls below our high standards we will take the necessary action to make sure customers are protected and markets properly informed."
In 1999 Equitable agreed to bolster its reserves in respect of its Guaranteed Annuity Rate (GAR) exposure with a reinsurance arrangement valued at approximately £800 million. That reinsurance was ultimately provided through a Treaty between Equitable and the Irish European Reinsurance Company (“IRECO”).
The Treaty contained a clause that allowed for it to be renegotiated if withheld claims reached £100mn. Separately, IRECO and Mr Headdon, on behalf of Equitable, agreed to a Side Letter that recorded the parties’ intentions to cancel the Treaty if those renegotiations failed. Cancellation of the Treaty may have put Equitable in breach of the FSA's requirements and significantly weakened the regulatory balance sheet.
In meetings with Equitable the FSA expressed concern about the renegotiation clause. Mr Headdon told the FSA that there was no intention that reaching the £100 million limit should provide grounds for cancellation and that it was only intended that the limit should provide a right to review the terms of the treaty. Mr Headdon did not mention the proposed Side Letter.
The FSA should have been informed about the Side Letter and Mr Headdon's failure to do so was not a matter of inadvertence but followed from a decision on his part. Mr Headdon also prepared and signed the Annual Regulatory Returns for Equitable without any qualification in respect of the Side Letter. Mr Headdon has subsequently accepted that it was reasonable for the FSA to expect to be made aware of the full extent of any agreement reached between Equitable and IRECO, including any aspects of the agreement set out in a separate document.
Background
- The full text of the Final Notice implementing the decision taken by the Regulatory Decisions Committee (RDC) may be found here. This includes the facts of the case and the relevant statutory provisions and regulatory requirements that were contravened.
- The reinsurance agreement only impacted on the Annual Regulatory Returns, and not upon the Companies Act Accounts, nor did it have any impact on the value of the with-profits fund.
- The reinsurance treaty provided that the reinsurance claims by Equitable on IRECO would be withheld by IRECO and would be shown as an amount due from IRECO in Equitable's accounts.
- The RDC is established to ensure that FSA decisions regarding enforcement matters (among others) are taken by a body that is separate from the investigation and prosecution functions of the FSA. While the RDC is accountable to the FSA Board for its policies and procedures, this does not affect its independence in relation to its individual decisions.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
