SIR HOWARD DAVIES, the outgoing chairman of the Financial Services Authority yesterday condemned the rise of a compensation culture in financial services, claiming it would lead to “madness”.

Speaking at his last annual meeting of the FSA, the City’s chief watchdog, Sir Howard criticised consumers who lodge spurious claims against financial services companies, condemning “those who appear to believe that every loss to investors, whatever the cause, should be compensated”.

“That way madness lies,” he said.

Sir Howard also used the opportunity to criticise the industry for continuing to mis-sell products. Since Sir Howard became head of the FSA at its birth in 1997, the regulator has had to tackle a series of highprofile mis-selling scandals, including the sales of split capital investment and mortgage endowment policies.

The chief regulator, who steps down in September, singled out consumers caught up in the mortgage endowment mis-selling scandal. “Some firms’ complaints systems are currently snowed under by indiscriminate claims for compensation by endowment mortgage policyholders,” he said. “Many have little prospect for success and merely delay the resolution of other, worthier claims.”

Financial services firms have looked at about 250,000 individual complaints from mortgage endowment policyholders, but more than half the compensation claims were rejected. About 45 per cent were upheld, resulting in payouts totalling £225 million.

The FSA has made 23 firms pay blanket compensation worth £672 million to policyholders. The firms include Royal & SunAlliance, Abbey Life, Winterthur Life and Royal Scottish Assurance.

Sir Howard hit out at the industry for failing to learn from previous mis-selling scandals. “Though the pensions misselling debacle, which cost the industry over £11 billion in compensation, should have been a stark lesson of the dangers of uncontrolled and unsuitable selling, it is hard to see evidence that the lesson has been widely understood.”

But he also raised doubts over whether the wave of mis-selling scandals would come to an end in the wake of a new suite of simple, low-cost investment products — referred to as stakeholder products — unveiled by the Treasury this week.

Under the Treasury’s proposals, which are based on Ron Sandler’s review of retail savings, the stakeholder plans will be subject to a lighter degree of regulation. Staff without authorisation will be able to recommend the products with the aid of a series of generic questions designed to ensure there is no mis-selling.

The FSA is to design the simplified regime. But Sir Howard said consumer groups and product providers were equally concerned that the new products could be mis-sold. He said: “Is it possible to devise a pension or investment product that is unmis-sellable? I don’t know the answer to that question.”

Sir Howard’s comments came after the annual meeting was picketed by Equitable Life policyholders, who demanded that the FSA accept greater responsibility for the collapse of the life insurer. Their action followed a report by the parliamentary ombudsman that exonerated the FSA from any wrongdoing in its regulation of Equitable. The Equitable Members’ Action Group yesterday called the report a “transparent whitewash”.

Sir Howard said: “There was nothing the FSA could have done which would have fundamentally affected the outcome for the society.”