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Insurers demand City watchdog’s head after ‘blunder’

UK insurance probe: What it means

The U.K.'s Financial Conduct Authority (FCA) was left reeling after a story last Friday on a massive life insurance investigation led to hundreds of millions of pounds being wiped off the shares of major insurance companies.

Many insurers are now calling for the FCA's head, Martin Wheatley, to step down for the way the authority handled the release of the information about the proposed review.

(Read more: UK watchdog to probe £150bn insurance policies)

A senior member of the U.K.'s City regulator outlined in a press interview Friday that the FCA was to investigate 30 million life insurance policies worth £150 billion ($249 billion) sold over the last four decades, to see whether so-called zombie funds were being responsibly managed.

Martin Wheatley, chief executive officer of the U.K. Financial Conduct Authority (FCA)
Simon Dawson | Bloomberg via Getty Images

While the FCA clarified at the time that it was not going to look into all 30 million documents, it did state it wanted to investigate whether firms were regularly reviewing older products to ensure they were fulfilling their intended purpose, as well as looking into firms' levying of high exit fees.

Following the news on Friday, insurance stocks in the U.K like Legal & General and Aviva fell by 3.5 and 2.75 percent respectively, closing the day off larger losses thanks to a clarification from the FCA.

(Read more: UK downplays talk of regulating Bitcoin)

A statement from the FCA later on Friday declared: "We are not planning to individually review 30 million policies, nor do we intend to look at removing exit fees from those policies providing they were compliant at the time. This is not a review of the sales practices for these legacy customers and we are not looking at applying current standards retrospectively – for example on exit charges."

They added: "The Board will conduct an investigation into the FCA's handling of the issue involving an external law firm, and will share the outcome of this work in due course."

Despite this, the Sunday Times newspaper reported that the Association of British Insurers (ABI) was most likely to write to U.K. Finance Minister George Osborne to complain about the FCA's conduct.

(Read more: Lloyds takes further hit on mis-sold insurance)

A spokesperson from the ABI told CNBC that they would be reviewing the FCA's latest Business Plan, which was released on Monday, and would be making an announcement later in the day. They did not offer comment on reports of whether they would be writing to Mr Osborne.

Furthermore, on Saturday, the head of the U.K. Parliament's Treasury Committee, Andrew Tyrie, was quoted assaying the FCA's actions on Friday were an "extraordinary blunder."

That opinion was shared by Ian Gordon, Investec's Head of Banks Research, who told CNBC via email: "I think the facts speak for themselves – a day of quite extreme market disruption attributed to comments apparently emanating from the FCA…eventually leading to the fairly unprecedented announcement of a formal investigation into the FCA's own conduct.

"Personally, I welcome the launch of such an investigation and trust that appropriate lessons will be learnt – hopefully to avoid any future repetition."

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