FSA questions insurers on contingency plans for bird flu outbreak

The Financial Services Authority is asking insurance companies about their financial ability to withstand a deluge of claims on life insurance policies if Britain were hit by a bird flu pandemic. The City regulator has also asked financial firms to prepare plans to continue operating in the event of their staff being struck by the flu, in the light of warnings that 10% of personnel could be off work for three months.

A high death rate among 30-to-50-year-olds would impact insurers more than deaths of the elderly or very young as these are the people most likely to have life insurance policies.

The FSA's contingency planning for Avian flu emerged in its submission to a Treasury select committee of MPs, which yesterday questioned Sir Callum McCarthy and John Tiner, chairman and chief executive of the watchdog, on issues from consumer credit to hedge funds.

Sir Callum told the committee he was concerned about the possibility of misselling of new self invested personal pensions (Sipps). He admitted there would be a "time gap" between their launch and the regulatory regime under which they would operate. Sipps are due to launch in April 2006 but any regulations are likely to take an extra year to draft.

On consumer credit, Sir Callum told John McFall, chairman of the committee, that the FSA did not want to be handed control of the sector as suggested by the Hampton report into regulation. If given control of consumer credit, the FSA would have to deal with at least 100,000 licences.

Sir Callum repeated his concerns about the sale of payment protection insurance, which is highly profitable for the banks but has been criticised for being unnecessary in many cases. He told the committee he hoped the Office of Fair Trading would deal with the issue of whether the insurance should be unbundled from the sale of other products, mainly loans and credit cards. The OFT has been urged by the consumer body Citizens Advice to examine how the insurance is sold and whether it is good value. This follows a warning from the FSA last week telling the banks they had until spring to "put their house in order" or face a full investigation on the issue. Mr McFall told the committee of his experience when a firm tried on eight separate occasions to sell him such insurance after he took out a loan.

Sir Callum told Mr McFall he was in "violent agreement" with him over his concerns about organisations that handled complaints about financial products on behalf of consumers.

On the subject of wholesale markets, Sir Callum discussed the work being conducted with 25 of the City's biggest hedge fund managers and admitted that "at least" one hedge fund is being investigated for market conduct.