View from City Road: So easy to browbeat the regulators

When does a formal investigation become informal? When you have Mick Newmarch, chief executive of Prudential, on the phone.

Mr Newmarch is a forceful character but it is unnerving to discover how easily he can browbeat his industry's regulators. The leaked Lautro memo concerning the insurance regulator's investigation of the Pru makes it clear that one acrimonious call was all it took to persuade Kit Jebens, Lautro's chief executive, to convert an 'official' investigation into an 'unofficial' one.

What, in any case, is an informal investigation? One that, to use secret service parlance, is 'deniable'? That certainly seems to have been Mr Newmarch's view when rumours of an investigation surfaced in May. Even now the Pru is saying it was unaware that meetings with Lautro formed part of an investigation, something difficult to credit.

Lautro can on occasion act tough - witness its treatment of Nationwide (this time described as 'routine') which yesterday resulted in the suspension of 1,300 salespeople. That move makes its attitude to the Pru look doubly lax. But if Lautro's behaviour is spineless enough as far as the Pru is concerned, that of Mr Newmarch is equally unedifying.

As soon as his company came under scrutiny for the way it had sold pensions to people coming out of the state scheme, Mr Newmarch began to behave like a school bully. He now wants us to take on faith his assertion that the Pru has never mis-sold any pensions. The implication is that because the Pru, the industry leader in this field, thinks its hands are clean, the appointed regulator has no business checking them.

Nevertheless, Mr Newmarch has made a telling point. He argued that a formal investigation by Lautro was a price-sensitive matter which should be announced to the Stock Exchange - hence his eagerness to have it reclassified as an informal inquiry which supposedly did not.

In the past Lautro has declined to announce investigations on the grounds that they sometimes fail to turn up anything of consequence. Perhaps surprisingly, the Stock Exchange has been happy to go along with this view.

But in the real world everyone knows that Mr Newmarch is right: markets react to investigations and the chances are the share price of the company concerned will fall.

This is simply one price of regulation. Trying to avoid it by fudging the issue with such nebulous concepts as an 'informal' investigation is no solution. The answer is to bite the bullet and announce investigations when they arise even though it risks causing a share price fall. For that to happen, however, regulators will need more backbone and the regulated will have to stop trying to bend the rules by throwing their weight around.