FSA’s assets concerns could put Prudential deal at risk

At the centre of today's fiasco is the Insurance Groups Directive — European legislation governing the amount of surplus assets which insurers must hold above their potential claims and pay outs.

The IGD is enforced by the Financial Services Authority which told the Pru late last night it had not yet satisfied itself that the insurer would have sufficient headroom to satisfy the rules following its massive takeover of AIG's Asian business.

At the end of 2009, Prudential had £3.4 billion of surplus capital under the IGD, but when it presented the takeover in March the company said this would fall to £2.6 billion.

Prudential says that both it and AIA are more than adequately capitalised.

But the regulator may well be concerned that the deal will shift the Pru's scale of business, and notably liabilities, sharply away from the UK to Asia.

The FSA must assure itself that UK consumers — our pensions and savings — are fully safeguarded.

After the severe criticism it came under during the banking crisis when both Royal Bank of Scotland and HBOS's capital ratios shrank so badly they had to be bailed out by the taxpayer, the FSA is taking a particularly conservative approach to the Pru.

In particular it has to be convinced that regulators in places like Hong Kong will allow the Pru to repatriate adequate capital to the UK in the case of an emergency rather than demand it remains in Asia to protect local consumers.

The FSA could demand that the Pru raises more new capital through its rights issue, and that could ultimately threaten the whole deal.