(Adds FCA comment, context)
By Huw Jones
LONDON, Dec 10 (Reuters) - Britain's markets regulator waswrong to brief a reporter about an insurance sector review and"seriously inadequate" in how it reacted to the ensuing sell-offin insurance shares, an independent inquiry said on Wednesday.
Panicking investors dumped shares in Aviva, Legal &General, Prudential on March 28 after theFinancial Conduct Authority's head of supervision Clive Adamsonwas quoted in The Daily Telegraph as saying the regulator wouldinvestigate if those locked in pension pots had been treatedfairly.
Investors feared insurers would face huge compensationbills, but the FCA clarified the terms of the review six hoursafter the stock market open, saying that sales practices wouldnot be looked at, signalling a more benign undertaking by theregulator.
Simon Davis, a lawyer at Clifford Chance, was asked to lookinto how the FCA handled its announcement of the insurancereview, said in his report that the strategy and the manner inwhich the Telegraph journalist was briefed was "high risk,poorly supervised and inadequately controlled".
The report, ordered by UK Finance Minister George Osborne,singled out Adamson, communications chief Zitah McMillan andhead of markets David Lawton for failing to tell the watchdog'schief executive Martin Wheatley about the insurance marketselloff in a timely way.
Adamson and McMillan are leaving the watchdog, while Lawtonwill stay on, the FCA said on Monday.
Wheatley's position appeared safe as the inquiry found hewas "disadvantaged by the failures" of Adamson, Lawton andMcMillan, and he should take credit for coordinating a publicresponse, although this should have been faster.
The FCA said its has improved how it identifies, controlsand releases price-sensitive information.
"The board fully accepts Mr Davis' criticisms and on behalfof the FCA we apologise for the mistakes that were made", saidFCA Chairman John Griffith-Jones.
The findings are a severe embarrassment for Wheatley and theregulator, which was only launched 18 months ago as a freshstart after its predecessor failed to spot the 2007-09 financialcrisis.
The FCA said Adamson, Lawton, McMillan and Wheatley will notbe paid a bonus for the 2013-14 financial year. The remainingfive members of the regulator's board will see their bonuses cutby a quarter. (Reporting by Huw Jones, editing by Louise Heavens)