The Financial Services Authority (FSA) recently that it was urging the life insurance market to undergo another series of rigorous stress tests. However, experts are warning that the higher the safety bar is set, the more difficult it will be for these funds to invest in equities.

Many believe that the tests will only make equity investment harder for the funds and it is thought that it will bring additional constrain on the availability of long-term capital for the growth industries.

Trade and Industry Minister Lord Mandelson is keen to encourage life insurance companies to take the tests. He recently outlined the need for ‘a new industrial activism’. According to Mandelson, the government needs to understand better how some of its decisions and policies affect the way pension funds are invested.

Pension funds have been known to act as providers of long-term capital to businesses.

Insurers outraged over FSA test

The life insurance industry is angry at the FSA demand because, many feel that it breaks the fundamental rule of good regulation. Market sources say that in effect, the industry is being used as to test what would happen should, markets decline again. The results of which would show whether firms would have adequate capital in such circumstances.

However, insurance companies believe that the FSA test fails to adjust for the complexity of life assurance. Additionally, it ignores the fact that capital is tied up in areas such as life funds and non-life businesses.

In another controversy surrounding the new FSA demands, investment firm JP Morgan recently published a report raising doubts about Standard Life’s prospects, after Money Marketing’s leak of the FSA’s review of pension switching.

According to JP Morgan, the FSA’s briefing on pension switching advice, which was due to be published on Tuesday and which was later rushed out following the Money Marketing leak, will reduce demand for Sipps and have a big impact on Standard Life.

However, Standard Life, the main player in the Sipp marketplace hit back claiming it is fully complying with FSA regulation and that the Sipp market will remain strong despite the regulator’s review.

What the new demands mean

Market sources say that the regulator view is that life insurance companies have the same business model and capital requirements as banks, when they could barely be more different.

The concern is that there is always a danger the FSA could look at the results of these rigorous tests and unnecessarily demand that the market raise more equity capital not because the industry needs it, or that the capital is not desperately required elsewhere, but so the regulator can relax knowing that they have ‘ticked a box’ for “reckless prudence”.

Several companies that offer pensions transfer advice will face enforcement investigations following a FSA review that revealed “significant levels” of improper advice in some quarters.

The review covered the transfer of all types of pension funds into personal pension and self-invested personal pension schemes since changes to the pension tax regime came into force in April 2006.