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Published by The Financial Times on 23 July 1997

Regulatory change required to meet blurred financial edges

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SIR - The development of credit derivatives has raised concerns over the legality of such structures when carried out by banks. Under the Insurance Companies Act 1982 only companies authorised by the Department of Trade and Industry can carry out "insurance business". But banks such as NatWest have been writing insurance policies on interest rates (Caps) for a decade.

Whilst such business may have caused banks a few problems, the business has been quite legal under the Financial Services Act 1986. It is regarded as "investment business" and not "insurance business". But most derivative marketers, when explaining Caps to clients, have quite correctly referred to them as interest rate insurance policies.

With the emergence of Scottish Widows Bank, Prudential Bank, Midland Life and Britannia Life, the distinction between insurance, banking and building society business has been blurred and should be abolished by the new Securities and Investment Board.

There should just be all-purpose financial institutions with supervision based on risk-adjusted capital base and shareholder approval with protection for retail clients.

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