FINAL NOTICE

To:

The Prudential Assurance Company Limited

TAKE NOTICE: The FSA of 25 The North Colonnade, Canary Wharf, London E14
5HS has decided to take the following action:

1.
ACTION

1.1.
For the reasons set out in this notice and pursuant to section 206 of the Act, the
FSA hereby imposes a financial penalty of £16 million on The Prudential
Assurance Company Limited for failing to deal with the FSA in an open and co-
operative manner and for failing to disclose appropriately information of which
the FSA would reasonably expect notice in breach of Principle 11 of the FSA’s
Principles for Businesses (Relations with regulators).

1.2.
Following written and oral representations, the FSA issued a decision notice to
PAC which notified PAC that it had decided to take the above action. PAC
referred the matter to the Tribunal but has withdrawn its reference.

2.
REASONS FOR THE ACTION

2.1.
On Monday 1 March 2010, Prudential announced its intention to acquire AIA, a
wholly owned subsidiary company of AIG. The original consideration proposed
was $35.5 billion, including $20 billion cash, to be funded via a rights issue.
Given AIA’s size, the transaction would have been transformative for Prudential.
The proposed rights issue was planned to raise £14.5 billion and would have been
the biggest ever in the UK. Subsequently, facing significant doubts about the
extent to which it had secured the requisite shareholder support, Prudential sought
to renegotiate the terms of the transaction. AIG refused to accept a lower price,
and on 3 June 2010 Prudential withdrew from the deal, shortly before its
shareholders were due to vote on the proposed rights issue.

2.2.
Supervision has supervisory responsibilities for Prudential’s UK regulated
subsidiaries. In addition, Prudential, though not itself authorised by the FSA, is a
controller of FSA-authorised entities and is an Insurance Holding Company for
the purposes of supplementary supervision under the IGD. Supervision is
responsible under the IGD for undertaking supplementary supervision of PAC,
and is also lead global supervisor for the Prudential Group, responsible for
coordinating supervisory college activities and information sharing amongst
international regulators. Therefore Supervision’s role included responsibility for
understanding the Group’s solvency, risk profile, intra-Group exposures and
transactional issues, and liaising with overseas regulators. Where it is necessary
to require the Prudential Group to take action, the FSA imposes requirements on
PAC.

2.3.
If the transaction had proceeded it could have led to a change in corporate
controller of PAC, a UK regulated insurance company with £130bn in UK
liabilities and 7 million UK customers. As Supervision has supervisory
responsibilities for the Prudential Group’s UK regulated subsidiaries including
PAC (Prudential is not itself authorised by the FSA), PAC was (amongst other
things) required to notify the FSA of the proposed change of control and the FSA
would have to decide whether to consent, or reject it on regulatory grounds.

2.4.
Irrespective of the possible change in control, the proposed transaction involved
substantial changes to the financial position, strategy and risk profile of the
Prudential Group as a whole, including potential impacts on the UK regulated
entities within the group. The transaction’s size and scale was of particular
regulatory significance when viewed against the background of the financial crisis
in late 2008, in which certain major financial institutions had required
Government intervention and recapitalisation following similarly transformative
transactions. Further, the impact and significance to Prudential, PAC, AIG
(which itself had had to obtain financial assistance from the US Treasury and the
Federal Reserve Bank of New York during the financial crisis) and AIA meant
that the transaction had the potential to impact upon the stability and confidence
of the financial system in the UK and abroad. In the circumstances the FSA’s

3

regulatory responsibility was to undertake intensive, detailed and thorough
scrutiny of the proposed transaction.

2.5.
PAC failed to inform the FSA that Prudential was seeking to acquire AIA from
AIG in early 2010, until after the proposed transaction had been leaked to the
media on 27 February 2010. Accordingly, PAC breached Principle 11 by failing
to deal with the FSA in an open and co-operative way and by failing to disclose
appropriately information of which the FSA would reasonably expect notice. In
particular, PAC failed to:

(1)
discuss with the FSA, at the earliest opportunity (and by 11 February 2010
at the latest) the proposed transaction which could have led to a change in
corporate controller of PAC; and

(2)
disclose the proposed transaction at the meeting with Supervision on 12
February 2010. The express purpose of that meeting was to discuss the
Prudential Group’s strategy. At the meeting, the FSA asked detailed
questions about Prudential’s strategy for growth in the Asian market and its
plans for raising equity and debt capital, and PAC discussed the strategy for
expansion in Asia at length, but PAC omitted to mention the proposed
acquisition.

2.6.
The FSA expects to have an open and frank relationship with the firms it
supervises. It is essential that firms give due consideration to their regulatory
obligations at all times. In particular, timely and proactive communication with
the FSA is of fundamental importance to the functioning of the regulatory system.

2.7.
PAC’s conduct resulted in a significant risk that the wrong regulatory decision
would be made and hampered the FSA’s ability to assist overseas regulators with
their enquiries in relation to the transaction.

3.
DEFINITIONS

3.1.
The following definitions are used in this notice:

“the Act”

means the Financial Services and Markets Act 2000.

“AIA”

means AIA Group Limited.

“AIG”

means American International Group Incorporated.

“Credit Suisse”
means Credit Suisse Securities (Europe) Limited, who were
appointed by Prudential to act as lead Sponsor. This
required Credit Suisse to advise Prudential in relation to
compliance with the FSA’s Listing Rules, including
interaction with the UKLA. Credit Suisse was authorised
by the FSA to act in that capacity. Credit Suisse had no

mandate or duty to advise PAC in relation to its obligations
as an FSA authorised firm.

“DEPP”
means the FSA’s Decision Procedure and Penalties
Manual.

“EG”
means the FSA’s Enforcement Guide.

“the FSA”

means the Financial Services Authority.

“the IGD”

means the EC Directive on Insurance Groups –98/78/EC.

“IPO”

means Initial Public Offering.

“Newco”

means a newly incorporated holding company.

“PAC”

means The Prudential Assurance Company Limited.

“Principle 11”
means Principle 11 of the FSA’s Principles for Businesses
(Relations with regulators).

“Prudential”
means Prudential plc, a FTSE 100 UK listed company and
one of the UK’s largest insurance companies. At the end of
February 2010 it had a market capitalisation of £15.2
billion.

“Prudential Group”
means Prudential and the group of companies of which
Prudential was the parent company.

“the SPA”
means the Share Purchase Agreement relating to the sale
and purchase of all of the issued share capital of AIA
Group Limited between AIA Aurora LLC, American
International Group Inc, Petrohue (UK) Investments
Limited and Prudential agreed on 1 March 2010 including
previous drafts.

“Supervision”
means the Insurance Division of the FSA who supervised
the Prudential Group through PAC.

“the Tribunal”
means the Upper Tribunal (Tax and Chancery Chamber).

“the UKLA”
means the United Kingdom Listing Authority. The FSA,
when acting as the competent authority under Part VI of the
Act, is referred to as the UKLA. The UKLA has
responsibility for monitoring and enforcing compliance
with the UKLA Listing Rules.

“the US Treasury”
means the United States Department of the Treasury.

4.
FACTS AND MATTERS

Early stages of the transaction

4.1.
During 2009, AIG began preparations to dispose of AIA by way of an IPO or
third party sale. The disposal was to take place as part of a restructuring
programme, intended to enable AIG to repay the US governmental financial
assistance it had received during the liquidity crisis of 2008.

4.2.
In October 2009, Prudential set up an insider list regarding a possible purchase of
AIA, to which Prudential’s non-executive directors were added on 5 November
2009.

4.3.
In December 2009 the CEO of AIG asked the Chief Executive of Prudential, Mr
Cheick Tidjane Thiam, whether Prudential would be interested in putting forward
an offer for AIA. Mr Thiam was also the Chairman of PAC and an approved
person holding Controlled Function 1 at PAC. This led to formal discussions
between AIG and Prudential. In early January 2010, Prudential commenced due
diligence and on 12 January 2010 the parties signed a confidentiality agreement.

4.4.
On 31 January 2010, the directors of Prudential met to be briefed on the proposed
transaction by Credit Suisse. There was a consensus among the directors of
Prudential at this meeting that:

(1)
a leak was the key risk to the transaction;

(2)
the FSA was one of a number of parties which might be the cause of a
leak; and

(3)
Prudential wished to fulfil their obligations to inform the FSA in such a
way that leak risk was kept to a minimum.

4.5.
Prudential remained highly sensitive to the possibility of a leak of the proposed
transaction during February 2010. This materially influenced its judgment about
when to inform the regulator about the proposed transaction.

4.6.
On 1 February 2010, Prudential was advised by Credit Suisse of the need to
inform UKLA and Supervision of the proposed transaction well in advance of its
execution. At that stage, with an announcement timetabled for 15 February 2010,
Credit Suisse’s advice was to approach the FSA by 3 February 2010. Credit
Suisse’s advice around early contact with the FSA was reflected in timetables
repeatedly prepared and provided to Prudential in the weeks leading up to the
announcement of the transaction. Prudential considered that the transaction’s
prospects at this stage lacked sufficient certainty, such that an approach to the
FSA would be premature.

Leak strategy and the decision to approach the FSA

4.7.
In early February 2010, Prudential decided that if there were to be a leak it would,
in order to protect the share price and avoid any chance of a protracted
suspension, abandon the deal and issue a ‘no discussions’ announcement.
Prudential understood that as and when it adopted a ‘discussions happening’
announcement strategy that would necessitate informing the FSA.

4.8.
In this case, the reason why a change in leak strategy from ‘no discussions’ to
‘discussions happening’ would necessitate an approach to the FSA was that a
willingness to admit and continue discussions in the face of a leak would serve as
a strong indicator that Prudential was in serious, advanced discussions which it
regarded as likely to come to fruition.

4.9.
At a Prudential Board meeting on 3 February 2010, the Prudential Board
considered a timetable which identified 17 February 2010 as the date on which the
FSA was to be informed of the proposed transaction. Additionally, the minutes of
the meeting state the Board’s intention that, “[w]ith an announcement date of 26
February [2010] currently being targeted, a further Board meeting would be
scheduled for 17 February [2010]. The intention was that the Board should have
sufficient information at that stage to be able to confirm, should a talks
announcement be required, its interest in proceeding.”

4.10. The minutes of Prudential’s Board meeting of 3 February 2010 suggest that the
prospects of a deal between Prudential and AIG had improved markedly by this
stage, owing to the fact that, among other reasons, “[i]t was becoming
increasingly clear that the AIA IPO was running into difficulties, which gave
Prudential a strong negotiating hand”.

Development of the transaction

4.11. On 5 February 2010, Mr Thiam and the then Chairman of Prudential held a
meeting in London with the CEO of AIG and gave him a letter signed by Mr
Thiam that had been approved by the Prudential Board which set out a detailed
indicative non-binding proposal. The letter set out, among other things: a
preliminary price range of $30-34 billion in the absence of up to date financial
information; a proposed debt and equity financing structure; a proposed
transaction structure in which Prudential and AIA would be acquired by a Newco;
and a proposed timetable according to which the transaction would be announced
on 26 February 2010.

4.12. By 8 February 2010, timetables prepared by Credit Suisse and provided to
Prudential reflected that the announcement date was now scheduled for 26
February 2010. The approach to the FSA was nevertheless scheduled to take
place on 15 February 2010, thereby permitting 11 days’ advance notice.

7

4.13. On 9 February 2010, Mr Thiam and the then Chairman of Prudential travelled to
Washington to meet with the US Treasury and AIG. Mr Thiam reported to the
Prudential Board on 11 February 2010 that:

(1)
the US Treasury, which controlled 80% of AIG’s shares, and which the
Prudential Board thought would be ‘very influential’ in the final decision
were ‘much more supportive’ than previously;

(2)
the AIG special committee, which was managing the process and which had
previously been hostile to the Prudential bid and favoured the IPO, had
voted to keep negotiations ongoing. The AIG special committee recognised
that a sale to the Prudential would be ‘an attractive option’ (although it was
still supportive of the IPO); and

(3)
the Prudential Board meeting initially scheduled for 17 February 2010 was
cancelled as progress had been “at a slower pace than initially expected”.
(The meeting was however reinstated shortly afterwards and did take place.)

4.14. By 12 February 2010, negotiations had progressed sufficiently for Prudential to
send a revised indicative non-binding proposal to AIG. A key revision to the
proposal was the inclusion of a specific price of $35.5 billion, albeit that the
proposal remained subject to a number of caveats, including some relating to the
provision of financial information.

4.15. Also on 12 February 2010, Mr Thiam and another director of Prudential and PAC
met with Supervision. The meeting was one of a series of regular meetings in the
supervisory process, and was the annual meeting focused on allowing Supervision
to gain an understanding of the Prudential Group’s strategy. The FSA asked
detailed questions about Prudential’s strategy for growth in the Asian market and
its intentions to raise equity and debt capital, but Prudential did not disclose the
proposed acquisition of AIA, the potential change in control that was in prospect,
or the rights issue and debt issuance that were proposed to fund the acquisition.

4.16. On 15 February 2010 AIG provided a draft of the SPA to Prudential.

4.17. The progress of the transaction was reported to the Prudential Board at a meeting
of 17 February 2010 as follows:

(1)
the US Treasury had recognised Prudential as a “credible buyer”;

(2)
AIG’s Special Committee had agreed to take Prudential’s proposal to the
AIG Board;

(3)
the AIG Board had asked for the CEO of AIA to be informed of the
proposal;

(4)
a draft SPA was being negotiated between the parties; and

(5)
Prudential’s largest shareholder had agreed to be made an insider to the
transaction (meaning that it could not trade in Prudential’s shares until the
transaction had been announced or abandoned). The shareholder had been
informed of the details of the transaction and had indicated its support.

Change in leak strategy

4.18. At the same meeting, Mr Thiam reported to the Prudential Board that the CEO of
AIG had agreed with Mr Thiam that in the event of a leak, a ‘discussions
happening’ announcement would be issued confirming that the parties were in
talks around the transaction. The Prudential Board agreed that the transaction was
sufficiently advanced whereby, if necessary, Prudential would confirm that
discussions with AIG were ongoing.

Events leading up to the approach to the FSA

4.19. Work around the transaction continued to progress, and Mr Thiam, with the
knowledge and approval of the Prudential Board, met with the CEO of AIA on 19
and 21 February 2010. During that period, the CEO of AIG confirmed to Mr
Thiam that he favoured Prudential’s bid over the IPO. Additionally, AIG
imposed on Prudential a deadline of 25 February 2010 for agreement of the SPA.

4.20. On 23 February 2010, Prudential considered a timetable which scheduled an
approach to the FSA to take place on 24 February 2010. During the meeting, it
was agreed that that approach should be postponed to 26 February 2010, to
coincide with the timing of the AIG Board’s decision whether to accept
Prudential’s offer in place of an IPO.

4.21. The Prudential Board met on 24 February 2010. The minutes of the meeting
record that, “…the due diligence work continued with good progress being made
and no ‘showstoppers’ have been identified. Further progress had been made on
the SPA”.

4.22. The timetable which the Prudential Board considered at the meeting on 24
February 2010 scheduled the approach to the FSA to take place on 26 February
2010.

4.23. On 25 February 2010, Mr Thiam sent a letter that had been approved by the
Prudential Board to his counterpart at AIG, reconfirming the previous price
proposal of $35.5 billion. Mr Thiam also set out the progress that had been made
in respect of the transaction, including:

(1)
“Substantial progress towards agreeing an SPA … we are confident that
this brings us meaningfully closer to an announceable transaction”;

(2)
“The draft SPA contains only necessary conditions … we believe that these
… will be seen as representing a low risk to consummation of the
transaction”;

(3)
“We have now been able to consult with our two top shareholders,
representing together in excess of 16% of our share register, who have both
expressed support for the proposed transaction. Our willingness to
approach them should be an indication to you of the seriousness and
determination with which we approach this transaction”;

(4)
“With respect to financing … we expect to be able tomorrow to provide you
with agreed drafts of the definitive underwriting commitments that will be
signed at the time we sign the sale and purchase agreement.”

4.24. A timetable accompanying the correspondence to AIG proposed the execution of
the SPA on 1 March 2010, with an announcement of the transaction on 2 March
2010.

4.25. The same timetable was included in a document prepared by Credit Suisse on the
morning of 26 February 2010. That document scheduled the approach to the FSA
to take place on 1 March 2010. The SPA was timetabled to be signed on the same
day, with announcement of the transaction to take place on 2 March 2010.

4.26. During the evening of 26 February 2010, it became apparent to Prudential that a
leak of the deal was likely. Notwithstanding this, no approach was made to the
FSA.

4.27. On the morning of 27 February 2010, a report of a rumour about the transaction
was published in the media. Prudential informed the FSA in the afternoon...

4.28. In the morning of Sunday 28 February 2010 Prudential was informed that the AIG
Board had agreed to enter into a transaction with Prudential for the sale of AIA..

The announcement of the transaction

4.29. The SPA had not been signed by the start of trading on 1 March 2010, and a
holding announcement was issued at 7:52am. Prudential’s shares were
temporarily suspended until the SPA was signed and the full transaction
announcement was issued.

4.30. The full transaction announcement was issued at 10:09am, following which the
suspension was lifted.

Supervisory issues and the end of the transaction

4.31. Numerous supervisory issues arose out of the transaction announced by
Prudential, completion of which was conditional on regulatory approval. Those

issues therefore had to be considered over the weeks following the announcement.
In particular, Supervision had to consider the size and complexity of the
transaction, its transformative nature for group strategy, the solvency and risk
profile of the proposed enlarged group, the proposed internal controls, and the
geographic scope of the deal (including the legitimate interests of overseas
authorities). It was therefore agreed that Prudential would not publish its rights
issue prospectus until it had received confirmation that the FSA would not be
minded to object to the transfer on supervisory grounds.

4.32. In the event, by 5 May 2010 (the date scheduled for publication of the
prospectus), Prudential was unable to satisfy Supervision that the enlarged group
would have a sufficiently resilient financial position, including whether it would
have a robust regulatory capital position and whether regulatory capital surpluses
held in certain jurisdictions could be applied to meet potential capital demands
which might arise in other areas of the group. As a consequence, Prudential was
unable to publish its prospectus by the scheduled date. The delay contributed to
the considerable speculation surrounding the deal. The prospectus was ultimately
published on 18 May 2010.

4.33. On 1 June 2010, Prudential issued an announcement to the market, noting a prior
announcement by AIG to the effect that it would not consider a revision of the
terms of the sale of AIA. Prudential’s announcement explained that it had
proposed revised terms that would have reduced the price of acquiring AIA to
$30.375 billion. On 3 June 2010, Prudential announced the termination of its
agreement with AIG in respect of the transaction.

5.
REGULATORY PROVISIONS AND GUIDANCE

5.1.
The regulatory provisions and guidance relevant to this notice are set out in the
Appendix.

6.
REPRESENTATIONS AND FINDINGS

6.1.
Below is a brief summary of the key written and oral representations made by
PAC and how they have been dealt with. In making the decision which gave rise
to the obligation to give this notice, the FSA has taken into account all of PAC’s
representations, whether or not set out below.

6.2.
PAC denied the allegation that it was in breach of Principle 11. PAC submitted
that the allegation is wrong in law, and in any event not established by reference
to the actions of PAC and the events which occurred. PAC asserted that the FSA
has misunderstood and mis-stated the events which occurred. PAC also submitted
that the proposed penalty is grossly disproportionate and premised on a basis
which is on its face erroneous in law.

PAC’s threshold legal objection to the allegation that it breached Principle 11

6.3.
PAC made representations that the allegation that it breached Principle 11 is
wrong in law.

6.4.
PAC submitted that:

(1)
Principle 11 is a statement of obligations of a very broad and general nature
which carries with it the threat of regulatory sanction. Therefore, the FSA
could and should construe Principle 11 narrowly. The ambit of the
obligation imposed by Principle 11 (considered in the light of relevant FSA
guidance) must be assessed with proper regard to the requirements of legal
certainty and the legal principle against doubtful penalisation. Any
ambiguity in the ambit of Principle 11 must be resolved in favour of PAC.
Further, where FSA guidance provides or suggests that an action does not
breach Principle 11, then it would not be consistent with the requirements of
legal certainty and the legal principle against doubtful penalisation for the
FSA to find a breach. In essence, PAC must be able to reasonably predict,
at the time of the act or omission concerned, whether its conduct would
breach the relevant regulatory principle(s)/obligation(s) under Principle 11.
That is, there must be violation of a clear, foreseeable and unambiguous
application of Principle 11 by PAC

(2)
the FSA’s formulation of PAC’s obligations under Principle 11: (i)
contradicts the relevant FSA guidance in force at the material time; and (ii)
seeks to create liability by reference to vague and unpredictable standards
(such as the “earliest opportunity”) which would make it impossible for a
firm to regulate its conduct by reference to its terms. In the circumstances it
is simply not open to the FSA to allege that PAC has breached Principle 11.
The FSA relies upon specific guidance - SUP 11.4.8G - relating to proposed
transactions which will or may lead to a relevant change of control, for
which notification to the FSA is required by virtue of Part XII of the Act.
SUP 11.4.8G states inter alia that “[a] firm should discuss with the FSA, at
the earliest opportunity, any prospective changes of which it is aware, ...”.
SUP 11.4.8G goes on to state that as a minimum, the FSA considers that
such discussions should take place before: (i) a formal agreement is
concluded; or (ii) the relevant shares or other instruments are purchased.
SUP 11.4.8G gives explicit guidance as to the minimum requirements for
compliance with Principle 11 in the particular situation of a prospective
change of control. SUP 11.4.8G is consistent with the more general
guidance applicable to Principle 11 set out at SUP 15.3.9G (which the FSA
also seeks to rely on to the extent that it is relevant). SUP 15.3.9G refers to
notification to the FSA “at an early stage, before making any internal or
external commitments”. Accordingly, the requirements of Principle 11 in a
change of control situation have been encapsulated in guidance which the
FSA has chosen to issue, which sets clear minimum standards for

notification. As a result, it is PAC’s contention that the obligation to
disclose information to the FSA under Principle 11, as applicable to the
facts of this case, is triggered by PAC entering into internal or external
commitments. There is no allegation on the facts that PAC failed to
comply, or ever intended to act in a way which failed to comply, with this
obligation.

6.5.
The FSA has found that:

(1)
Principle 11 does not offend against the requirement of legal certainty or the
legal principle against doubtful penalisation. Principle 11 has two elements:
the requirement to deal with the FSA (and other regulators) in an open and
co-operative way and the requirement to disclose to the FSA appropriately
anything relating to a firm of which the FSA would reasonably expect
notice. The requirement to be “open and co-operative” is clear and
unambiguous albeit necessarily broad in nature. This is because Principle
11 is a fundamental obligation applicable to all FSA regulated firms and
covers all of their dealings with the FSA. The FSA considers that the
second element of Principle 11 is relevant in the context of the on-going
dialogue and continuous contact between the FSA and authorised firms.
That is, if PAC is aware of information of which, objectively, the FSA
would
reasonably
expect
notice
(in
this
instance,
the
substantial/transformative transaction), PAC will breach Principle 11 if it
fails to disclose that information appropriately. For the reasons given, the
obligation on PAC under Principle 11 is clear and unambiguous and the
FSA does not consider it necessary for Principle 11 to be construed
narrowly. In all the circumstances, PAC should have appreciated that
disclosure of the transaction was required to the FSA. PAC failed to do so
appropriately, particularly when considered in light of the size of the
transaction as well as its potential regulatory and market impact.
Notwithstanding the foregoing, where FSA guidance provides or suggests
that an action does not breach Principle 11, the FSA accepts that it would
not be consistent with the requirements of legal certainty and the legal
principle against doubtful penalisation for the FSA to find a breach.

(2)
PAC’s obligations under Principle 11: (i) are consistent with FSA guidance;
and (ii) do not seek to create liability by reference to vague and
unpredictable standards. PAC’s obligations to the FSA under Principle 11,
as applicable to the facts of this case, are not limited to a situation or
situations which will or may lead to a relevant change of control for which
notification to the FSA is required by virtue of Part XII of the Act. Such a
situation is only one example of PAC’s obligation to disclose information to
the FSA under Principle 11. The guidance at SUP 11.4.8G is illustrative of
the requirements under Principle 11 for PAC to “deal with its regulators in
an open and co-operative way, and … disclose to the FSA appropriately”
anything relating to PAC of which the FSA would reasonably expect notice.

This includes by way of example, a possible change of control.
Accordingly, although the FSA does accept that SUP 11.4.8G expressly
states a minimum standard for notification to the FSA of any relevant
change of control, for the reasons given herein, it is unnecessary to consider
whether the minimum standard stipulated in SUP 11.4.8G is met on the
facts of this case. Similarly, SUP 15.3.9G (which refers to notification to
the FSA “at an early stage, before making any internal or external
commitments”) is also merely illustrative of PAC’s obligation to disclose
information to the FSA under Principle 11. As already set out above, PAC’s
obligation to disclose information to the FSA under Principle 11 is triggered
by the existence of anything relating to PAC of which the FSA would
reasonably expect notice. This includes, by way of example, the possible
change in control. The proposed transaction was vast in scale, with a
potentially huge regulatory and market impact. The proposed rights issue
(planned to raise £14.5 billion) would have been the biggest ever in the UK.
As a result, irrespective of the possible change of control, the proposed
transaction involved substantial changes to the financial position, strategy
and risk profile of the Prudential Group as a whole, including significant
potential impacts on the UK regulated entities within the Prudential Group
which necessitated appropriate communication with the FSA under
Principle 11. PAC failed to communicate the transaction to the FSA at the
appropriate time . Because the transaction had the potential to impact upon
the stability and confidence of the financial system in the UK (and abroad),
PAC should have appropriately disclosed the transaction to the FSA at the
earliest opportunity to enable the FSA (and other regulators) as much time
as possible to undertake the intensive, detailed and thorough scrutiny
required of the proposed transaction.

No breach of Principle 11 by PAC, even if PAC’s threshold legal objection is
not accepted

6.6.
In the alternative (and without prejudice to PAC’s primary submissions above),
PAC made representations that the correct approach to Principle 11 involves
consideration of when it should have been apparent to PAC that disclosure of the
transaction to the FSA was reasonably necessary for the FSA properly to
discharge a regulatory function. Such an analysis necessarily involves issues of
fact. Accordingly, in making its alternative argument PAC also made
representations as to what it asserted is the correct factual matrix against which its
regulatory obligations under Principle 11 should be considered. That is,
Prudential asserted that the allegation that it was in breach of Principle 11 is also
wrong on the facts.

6.7.
PAC submitted that:

(1)
the proper approach to Principle 11 is that notification can only be required
in respect of that which the FSA can “reasonably expect notice” (if the

obligations under Principle 11 are not limited in the circumstances of this
case to the entering into of an agreement or other internal or external
commitments). Having regard to the requirements of legal certainty and the
legal principle against doubtful penalisation, the FSA can only “reasonably
expect notice” if: (a) it has made it clear by way of guidance in the FSA
Handbook that notification of an event is required at a particular time; or (b)
it is otherwise clear to the firm that such notification is required: in other
words, if it should have been clearly apparent to the firm that the
information was reasonably necessary at a specified point in time for the
FSA properly to discharge a regulatory function. In the absence of any clear
guidance mandating notification at a particular point, the FSA must
establish a clear reasonable necessity for notification for regulatory
purposes. PAC contended that there can have been no possible reasonable
necessity in advance of a stage before the transaction was highly likely.
Until that stage there was no conceivable regulatory function (as opposed to,
at most, some administratively desirable pre-planning) which could or
should have been undertaken by the FSA and therefore PAC is not at fault.
It is necessary for the FSA to show “fault” on the part of PAC (DEPP
6.2.15) and because the allegations against PAC are that it neither
deliberately nor recklessly breached Principle 11, the FSA must necessarily
establish that PAC’s conduct was at least negligent.

(2)
the FSA’s reliance on an unqualified duty of notification at the “earliest
opportunity” is not coherent. The correct approach to Principle 11 involves
consideration of what information it should have been clearly apparent to
the regulated firm that it was reasonably necessary for the FSA to be given,
and when it should have been apparent that it was reasonably necessary for
the FSA to receive it (for the reasons set out at 6.7(1) above). PAC’s
approach, based on the likelihood of the transaction, should be preferred.
Any intelligible test must incorporate reference to likelihood. There is no
basis for a finding that a “highly unlikely” transaction must be notified to
the FSA. PAC did not dispute that the fact Prudential was entering into a
substantial transaction involving AIA would be information which
Supervision would “reasonably expect notice of”. PAC contended that the
issue is at what stage (if any) prior to the point where the transaction was
sufficiently advanced was PAC required to inform Supervision that the
transaction may occur (in order to fulfil its obligation under Principle 11 to
“disclose appropriately”). On the facts, there is no credible reason why
PAC should have assessed the prospects of the proposed transaction as
being more than possible – let alone likely – until the FSA was in fact
approached following the leak. The FSA’s case to the contrary rests on a
number of misconceptions as to the true factual position including an
incorrect understanding of decisions taken by Prudential’s Board and a
failure to recognise the significance of other matters (including):

(a)
a misunderstanding of the likelihood of the transaction and the
resultant failure to give proper weight to the fact that an IPO was the
established and favoured mechanism for disposing of AIA until a very
late stage. Therefore, the pre-arranged meeting with Supervision on
12 February 2010 does not assist the FSA’s case because, although it
presented an opportunity to discuss matters with the FSA, it was not
opportunity that was lacking; it was obligation (on the facts). The
FSA relies on an alleged crystallisation of PAC’s awareness that the
transaction was “significantly advanced” by virtue of Mr Thiam’s
update to the Prudential Board on 11 February 2010. In fact, matters
were moving at a slower pace than expected. In light of this, PAC
asserted that the PAC executives were justified in taking the view that
a pre-arranged discussion of Prudential’s settled strategy with the FSA
did not require discussion of a speculative possible transaction, even a
“transformational” one, which the Prudential Board had resolved
would not yet be disclosed by way of approach.

(b)
the FSA’s distinct lack of concern that it had not been informed of the
offer which Prudential had made to acquire AIA in 2009. This is an
important factor in considering the reasonableness of PAC’s approach
to its regulatory obligations. An equally important factor is that the
FSA did not request that Prudential and/or PAC inform it at an earlier
stage if such matters were in contemplation in the future.

(c)
the FSA wrongly downplayed Prudential’s consistent intention for the
transaction to be announced on 09 March 2010, rather than the 02
March 2010 date which the FSA relies on to assert late notification.
There can be no legitimate criticism of delay in notification between
the first occasion on which the possibility of the leak arose (on 26
February 2010) and the approach to the FSA (on 27 February 2010),
the next day.

(d)
the perceived risk of a transaction leak emanating from the FSA is
irrelevant to the issue of whether PAC properly complied with its
obligations or not. PAC contended that it did not allow the perceived
risk of a transaction leak emanating from the FSA to affect its
judgment as to when regulatory obligation required an approach to the
FSA. It was always understood not to be a relevant factor in that
decision. It was only relevant to whether Prudential should make an
earlier approach than was required.

6.8.
The FSA has found that:

(1)
Principle 11 required PAC to disclose the potential transaction to the FSA
because it is information of which, objectively, the FSA would reasonably
expect notice, appropriately in all the circumstances (for the reasons set out

in the FSA’s findings above). The FSA’s approach to Principle 11 is based
on the clear, objective language of Principle 11 itself and the FSA accepts
PAC’s submission that this is the proper approach to Principle 11.
However, the FSA does not accept PAC’s additional submission that in the
absence of any clear guidance mandating notification at a particular point,
the FSA must establish a clear reasonable necessity for notification for
regulatory purposes. Such a restrictive approach to the obligations under
Principle 11 is both unnecessary and incorrect. Principle 11 does not offend
against the requirement of legal certainty or the legal principle against
doubtful penalisation (for the reasons already set out in the FSA’s findings
above). Notwithstanding the foregoing, PAC can (and should) only be
liable for breaching Principle 11 in circumstances where PAC should
reasonably have appreciated that disclosure to the FSA was required – i.e.
where PAC was “at fault”. Although the FSA accepts that PAC neither
deliberately nor recklessly breached Principle 11, it considers that PAC’s
conduct fell below that required by Principle 11 in its failure to disclose the
proposed transaction to the FSA appropriately. Whilst PAC did appreciate
that the proposed transaction was something of which the FSA would
reasonably have expected notice, it failed to disclose it to the FSA at the
earliest opportunity. Put another way (and without prejudice to the above),
the FSA considers that under the objective approach to Principle 11
disclosure, it should have been apparent to PAC that the information about
the transaction was reasonably necessary at the earliest opportunity in order
for the FSA properly to discharge its regulatory functions. The failure to
inform the FSA at the earliest opportunity created a serious risk of
regulatory failure in that a sub-optimal regulatory decision could have been
made by Supervision. The regulatory system relies on early communication
since a firm cannot know exactly how and within what timescales the FSA
will deal with any issue, or what steps the FSA may take in response to
being notified, which may include requests for further information from the
firm or elsewhere.

(2)
Principle 11: (i) is consistent with FSA guidance; and (ii) does not seek to
create liability by reference to vague and unpredictable standards (for the
reasons already set out in the FSA’s findings above) and the FSA rejects
PAC’s submission that it relies on an unqualified duty of notification at the
“earliest opportunity”. PAC’s obligation to disclose information to the FSA
under Principle 11 is triggered by the existence of anything relating to PAC
of which the FSA would reasonably expect notice. Further, the FSA’s
analysis of the obligations under Principle 11 is consistent with the FSA’s
supervisory approach which places the appropriate degree of reliance on
firms and their senior management to ensure timely and proactive
communication with the FSA, which is of fundamental importance to the
effective functioning of the regulatory system. The FSA considers that the
likelihood of the transaction is simply one consideration as to when

Principle 11 is triggered (by the existence of anything relating to PAC of
which the FSA would reasonably expect notice). The other equally
important consideration is the impact of the transaction on the financial
system. In this instance, because the transaction had the potential to impact
upon the stability and confidence of the financial system in the UK (and
abroad), PAC should have appropriately disclosed the transaction to the
FSA at the earliest opportunity to enable the FSA (and other regulators) as
much time as possible to undertake the intensive, detailed and thorough
scrutiny required of the proposed transaction. In relation to PAC’s
assertions as to the “true” factual position and the FSA’s alleged failure to
recognise the significance of other matters, the FSA has found that:

(a)
it has not misunderstood the likelihood of the transaction on the facts
or failed to give proper weight to the fact that an IPO was the
established and favoured mechanism for disposing of AIA. As
already noted, the likelihood of the transaction is simply one
consideration when Principle 11 is triggered. Other equally important
considerations are: (i) the size and impact of the transaction on the
financial system; and (ii) its transformative effect on the Prudential
Group. When PAC’s obligations under Principle 11 are considered in
light of the size and impact of the transaction and its transformative
effect on the Prudential Group, it is clear (by way of example only),
that it would have been open and co-operative to notify the FSA, and
the FSA could reasonably have expected to be notified, of the
transaction at the strategy meeting on 12 February 2010 at which
Prudential’s strategy in Asia was discussed.

(b)
it was not aware of the details regarding Prudential’s actions to
acquire AIA in February 2009 until late in 2011. At the time of the
events, neither Prudential nor AIG made any announcements about an
offer, or the fact that they were or had been in discussions. The details
of the attempted earlier acquisition were raised for the first time on 30
December 2011, in Prudential’s response to the preliminary
investigation report. Further, at the time of the events in 2009,
Prudential informed the FSA that it had made no bid for AIA (when in
fact a bid was made – a fact which Prudential has now sought to rely
on). As a result, the assertion that its acts or omissions in relation to
its regulatory obligations in the circumstances of this case were
reasonable by reference to its previous attempt to acquire AIA in 2009
is not sustainable.

(c)
it has not “downplayed” Prudential’s alleged consistent intention for
the transaction to be announced on 09 March 2010, rather than the 02
March 2010 date which the FSA relies on to assert late notification.
As already noted, the FSA’s assertion that PAC failed to appropriately
disclose the transaction to the FSA relies on the clear, objective

language found in the wording of Principle 11 itself (for the reasons
already set out above). Principle 11 required PAC to disclose to the
FSA anything relating to PAC of which the FSA would reasonably
expect notice. Accordingly, the FSA’s case is not that the transaction
was “highly likely” as characterised by PAC, nor that that is the
appropriate test. Rather, the FSA’s case is that by 11 February 2010,
the transaction had reached a stage, in all of the circumstances,
whereby the FSA (in the language of Principle 11) would reasonably
have expected to be notified of it. Prudential’s alleged subjective
intention for the transaction to be announced on 09 March 2010 is
irrelevant for the purposes of the objective approach to PAC’s
obligations set out in Principle 11. In the circumstances, it is
unnecessary for the FSA to consider whether or not there was a delay
in notification between the first occasion on which the possibility of
the leak arose (on 26 February 2010) and the approach to the FSA (on
27 February 2010), the next day.

(d)
PAC has acknowledged in its submissions that the perceived risk of a
transaction leak emanating from the FSA was relevant to whether
PAC “should make an earlier approach than was required”. The FSA
considers that PAC’s acknowledgement supports its finding that the
perceived leak risk materially influenced Prudential’s judgment about
when to inform the FSA about the transaction pursuant to Principle
11. As already set out above, Principle 11 requires firms to deal with
the FSA in an open and co-operative way and to disclose to the FSA
anything relating to the firm of which the FSA would reasonably
expect notice. The associated FSA guidance in the FSA Handbook
makes reference to these requirements being interpreted by reference
to communication with the FSA “at the earliest opportunity”, “at an
early stage” and “as soon as possible” in the context of reverse
takeover transactions. The need for early communication is
understandable and necessary since a firm cannot know exactly how
or within what timescale the FSA will deal with any issue, or what
steps it may take in response to being notified. Such early
communication is especially important if the subject matter to be
raised with the FSA is a transaction of very significant size with
potential wide impact. PAC was cognisant, or should reasonably have
been aware, that it would assist the FSA to be contacted earlier but
wrongly convinced itself not to.

Standard of proof

6.9.
PAC made representations as to the applicable standard of proof. PAC submitted
that in light of the penal nature of the matter, and the very significant financial,
reputational and personal consequences of a finding of a breach, the FSA should

apply the criminal standard of proof in these circumstances. In support of this
submission, PAC asserted that:

(1)
the House of Lords has stated that the “sliding scale” civil standard of proof
previously applied by the Financial Services and Markets Tribunal is not
part of English law and that, where the consequences of the proceedings are
serious, notwithstanding the proceedings are civil, the particular issue
involved made it appropriate to apply the criminal standard; and

(2)
the Privy Council has made it clear that the criminal standard of proof is the
correct standard of proof to be applied in all disciplinary proceedings
concerning the legal profession (and it is hard to see any principled reason
why the position should be different in relation to financial services).

6.10. The FSA has found that the FSA’s administrative decision making process is not
subject to the criminal standard of proof. The FSA has made its decision having
regard to the following:

(1)
the FSA, in accordance with section 206 of the Act, may impose a penalty if
it considers that PAC has contravened a requirement imposed on it by or
under the Act; and

(2)
the Tribunal, in regulatory cases, applies the civil standard of proof i.e. the
balance of probabilities (is it ‘more likely than not’ that what is alleged
actually occurred?).

6.11. PAC made representations that the financial penalty is premised on a basis which
is misconceived and wrong in law. Further (and in any event), PAC asserted that
the financial penalty is unprecedented and grossly disproportionate. PAC also
contended that the FSA should have regard to the totality of the financial penalty
to be levied upon the Prudential Group in assessing fairness and proportionality.

6.12. PAC submitted that:

(1)
the financial penalty to be imposed on it is flawed as a matter of law, since
its size is principally justified by a need to deter behaviour which is not
alleged against PAC. That is, PAC asserted that the FSA’s primary basis for
imposing the financial penalty is to deter other firms from deliberately
refraining to contact the FSA. However, the FSA does not allege, and never
has alleged, that PAC acted deliberately or recklessly in breaching Principle
11. PAC submitted that it cannot lawfully be fined a “very substantial”
amount on the basis that it is necessary to deter firms other than itself from
committing a different and far more serious type of breach than has ever
been alleged against it. The FSA’s own guidance emphasises deterrence is

only a legitimate objective in respect of “similar breaches”. However, the
conduct which the FSA seeks to deter is not remotely similar to the
misconduct alleged against PAC. Accordingly, the FSA’s primary
justification for the scale of fine imposed is misconceived and unlawful.

(2)
the alleged breach by PAC did not have any actual effect on markets, nor
did it result in a serious risk of substantial market disruption. Even on the
facts of the alleged breach, the time which was available to the FSA was not
such as to create any risk of market disruption caused by a wrong or “sub-
optimal” regulatory decision. PAC also asserted that the timing of its
approach to the regulator had nothing to do with the postponement of the
rights issue prospectus.

(3)
the financial penalty is inconsistent with the FSA’s acceptance that PAC did
not act deliberately or recklessly in breaching Principle 11 and is therefore
unfair. That is, the financial penalty is disproportionate for what is (even on
the FSA’s “best case”) a non-reckless breach over a relatively short time
period. Further, the size of the transaction is only sensibly of substance in
relation to penalty if a firm has been reckless as to its obligations: in that
situation the size of the transaction makes the recklessness more culpable
because of its wider impact. But where, as in the present case, it is common
ground that any breach was at worst the result of an honestly held and
considered opinion which turns out to be wrong, the size of the transaction
can hardly be decisive or even of great significance.

(4)
the financial penalty is out of line with any previous FSA decisions. In
making this submission, PAC noted that there are no equivalent/similar FSA
decisions with which to compare this case. PAC contended that in light of
the dearth of comparator cases, the financial penalty should be dramatically
reduced in order to be in any way justifiable.

(5)
the FSA should have regard to the totality of the financial penalty to be
imposed on the Prudential Group in assessing whether it is fair and
proportional to the alleged misconduct because whilst Prudential and PAC
are separate entities and their alleged breaches are of different regulatory
obligations, there is a very considerable measure of common conduct. This
is particularly important because the proposed total financial penalty to be
imposed on the Prudential Group is unprecedented and implies that the
present case is one of the most serious breaches of regulatory obligations
ever dealt with by the FSA. That is unjustifiable on the facts. PAC also
contended that it should not receive a large financial penalty simply because
the Prudential Group is large. The FSA’s assessment of the financial
penalty as a proportion of market capitalisation does not do justice to the
complexity of the facts of an individual case.

6.13. The FSA has found that:

(1)
it accepts PAC’s submission that the main purpose for which the FSA has
imposed the financial penalty in this case is deterrence. However, it does
not accept that the imposition of the financial penalty is based on a desire to
deter other firms from doing something which PAC did not do. Instead, the
imposition of the financial penalty is intended “to promote high standards of
regulatory and/or market conduct by deterring persons who have committed
breaches from committing further breaches and helping to deter other
persons from committing similar breaches, as well as demonstrating
generally the benefits of compliant business”. Deterrence is a particularly
significant factor in this case, given the fundamental importance to the
regulatory system of firms being “open and co-operative” and engaging in
timely and proactive communication with the FSA. It is essential for the
FSA to impose a punishment which is seen as a credible deterrent to firms
of PAC’s size and financial position. The FSA accepts that PAC’s conduct
was not “deliberate”, in the sense that it did not knowingly breach its
regulatory obligations. However, the FSA considers that PAC failed to give
due weight to the importance of complying with its regulatory obligations
under Principle 11 and allowed inappropriate considerations around leak
risk to materially affect its judgment. The size of regulatory fines is
relevant to the weight firms put on compliance with their regulatory
obligations. Accordingly (and contrary to PAC’s assertions), the deterrence
aspect of the financial penalty to be imposed on Prudential is based on the
need to deter (i) PAC from failing to deal openly and co-operatively with
the FSA in the future and from failing to disclose appropriately information
of which the FSA would reasonably expect notice; and (ii) other firms who
might fail to deal openly and co-operatively with the FSA in similar
circumstances to PAC. This is in accordance with the guidance in DEPP
6.1.2 and therefore the FSA considers that its primary justification for the
scale of fine imposed is entirely appropriate and lawful.

(2)
it accepts PAC’s submission that its conduct did not have any actual effect
on markets in this instance. However, it does not accept PAC’s assertion
that its conduct did not result in a serious risk of substantial market
disruption. The FSA considers that the lateness of the notification created a
significant risk that the wrong regulatory decisions could have been made,
due to a lack of proper information and/or time to properly consider it.
Whilst the FSA considers that the correct decisions were made in the time
available in this instance, the FSA notes that it is not for a firm or issuer to
determine how much time Supervision would require in addressing any
concerns it may have. The FSA also considers that there is a clear link
between the postponement of the rights issue prospectus and the timing of
PAC’s approach. That is, if PAC had approached the regulator earlier, the
supervisory decisions that had to be made could have been taken in less

time-pressured circumstances and Prudential would have likely avoided
having to postpone the rights issue prospectus. The FSA also notes that the
longer the period between announcement of the transaction and publication
of the rights issue prospectus, the more likelihood there was of on-going
uncertainty concerning the transaction and significant market disruption as a
result.

(3)
the financial penalty is not inconsistent with its acceptance that PAC did not
act deliberately or recklessly in breaching Principle 11. Whilst the FSA
accepts that PAC has committed a non-reckless breach over a relatively
short time period, the FSA considers that had PAC acted recklessly or
deliberately in breaching Principle 11, a larger financial penalty would have
been imposed. Further, the FSA considers that the size of transaction is
highly relevant to deterrence (which is the principal purpose for the
imposition of the financial penalty in this case). If the level of financial
penalty bore no relationship to the size of the transaction, it is unlikely that
the required deterrent effect would be achieved and the penalty risks being
inconsequential. It is essential for the FSA to impose a punishment which is
seen as a credible deterrent to firms of PAC’s size and financial position.

(4)
The FSA accepts PAC’s submission that there are no previous relevant FSA
decisions with which to compare this case. However, the FSA has properly
considered its policies regarding the imposition of financial penalties and
past decisions, to the limited extent that they offer assistance. Accordingly,
the FSA considers the financial penalty to be both fair and proportionate in
all the circumstances of this case.

(5)
it had proper regard to the totality of the financial penalty to be imposed on
the Prudential Group in assessing whether Prudential’s financial penalty is
fair and proportional to Prudential’s misconduct. The FSA accepts that
whilst Prudential and PAC are separate entities and their breaches are of
different regulatory obligations, there is a very considerable measure of
common conduct. However, the FSA does not accept PAC’s assertion that
the proposed total financial penalty to be imposed on the Prudential Group
is unprecedented and implies that the present case is one of the most serious
breaches of regulatory obligations ever dealt with by the FSA. The FSA
considers that a number of factors other than the innate seriousness of the
breach are reflected in the financial penalty (as set out in DEPP 6.5).
Further, the FSA considers that the size and financial resources of the
Prudential Group is highly relevant to deterrence (which is the principal
purpose for the imposition of the financial penalty in this case). If the level
of financial penalty bore no relationship to the size and financial resources
of the firm, it is unlikely that the required deterrent effect would be achieved
and the penalty risks being inconsequential. It is essential for the FSA to
impose a punishment which is seen as a credible deterrent to firms of PAC’s
size and financial position.

6.14. For the foregoing reasons, the FSA considers that the financial penalty to be
imposed on PAC and on the Prudential Group as a whole, is appropriate and
proportionate. It properly takes into account the facts and matters (as set out
herein) and the relevant FSA policies and past cases, to the limited extent that
they offer assistance. Accordingly, the FSA rejects PAC’s submission that the
financial penalty is unlawful.

7.
THIRD PARTY

7.1.
Below is a brief summary of the key written representations made by Credit
Suisse (as third party) and how they have been dealt with. In making the decision
which gave rise to the obligation to give this notice, the FSA has taken into
account all of Credit Suisse’s representations, whether or not explicitly set out
below.

7.2.
Credit Suisse made representations that:

(1)
it was inaccurate for it to be described as “lead sponsor”. Although it
initially acted as the sole sponsor to the proposed transaction, from 20
February 2010 it was communicating the collective advice of all the
sponsors. Further, the concept of “lead sponsor” is not referred to in the
Listing Rules; and

(2)
references to it in the context of PAC’s obligations under Principle 11 risk
suggesting that Credit Suisse had a mandate or duty to advise PAC in
relation to its obligations as an authorised firm under Principle 11. Credit
Suisse stated that it had no mandate or duty to advise PAC.

7.3.
The FSA has found that:

(1)
whilst it accepts Credit Suisse’s submission that the concept of “lead
sponsor” is not referred to in the Listing Rules, that is not a reason for this
notice not to reflect the factual reality that: (1) between 31 January 2010 and
20 February 2010, Credit Suisse was the sole sponsor; and (2) from 20
February 2010, it was taking the lead as between the sponsors in
communicating advice to Prudential (i.e. Credit Suisse continued to act as
the primary interface with the client);

(2)
it does not accept that references to Credit Suisse in the context of PAC’s
obligations under Principle 11 (in this notice) risk suggesting that Credit
Suisse had a mandate or duty to advise PAC in relation to its obligations as
an authorised firm under Principle 11 because, in this notice, the FSA has
used an amended definition of Credit Suisse to make an explicit statement
that Credit Suisse had no mandate or duty to advise PAC in relation to its
obligations as an FSA authorised firm.

8.
FAILINGS

8.1.
Between 11 February 2010 (at the latest) and 27 February 2010, PAC was in
breach of Principle 11 by failing to deal with the FSA in an open and co-operative
way and by failing to disclose appropriately information of which the FSA would
reasonably expect notice. Specifically:

(1)
PAC failed to discuss with the FSA, at the earliest opportunity, the
prospective transaction which could have led to a change in corporate
controller of PAC. In the circumstances of the proposed transaction,
waiting to inform the FSA until there was a formal agreement in respect of
the proposed transaction (i.e. when the SPA was signed) would not fulfil
PAC’s obligations under Principle 11 to: (i) be open and co-operative with
the FSA; and (ii) disclose appropriately information of which the FSA
would reasonably expect notice. PAC failed to inform the FSA of the
proposed transaction at any time prior to news of the transaction having
been leaked to the media on 27 February 2010. In any event, PAC should
have informed the FSA at the earliest opportunity (and by 11 February 2010
at the latest) of the proposed transaction which could have led to the change
in corporate controller of PAC. As a result of the developments referred to
in Mr Thiam’s update to the Prudential Board on that date, PAC was aware
that the transaction was significantly advanced. In the circumstances of the
proposed transaction, PAC’s omission was contrary to PAC’s obligations
under Principle 11 to be open and co-operative with the FSA and to disclose
appropriately information of which the FSA would reasonably expect
notice.

(2)
PAC failed to disclose the proposed transaction at the meeting with the FSA
on 12 February 2010. The express purpose of that meeting was to discuss
the Prudential Group’s strategy, the FSA asked detailed questions about
Prudential’s strategy for growth in the Asian market and its plans for raising
equity and debt capital, and PAC discussed the strategy for expansion in
Asia at length, but PAC omitted to mention the transaction. In the
circumstances of the proposed transaction, PAC’s omission was contrary to
PAC’s obligation under Principle 11 to be open and co-operative with the
FSA.

9.
SANCTION

9.1.
The FSA’s policy on the imposition of financial penalties and public censures is
set out in DEPP and EG. In determining the financial penalty, the FSA has had
regard to this guidance. The FSA considers the following factors to be
particularly important.

Deterrence (DEPP 6.5.2G(1))

9.2.
Given the circumstances of this case, the FSA considers it necessary to send a
robust message to firms as to the fundamental importance of behaving openly and
co-operatively towards the FSA.

Seriousness and impact of the breach (DEPP 6.5.2(2))

9.3.
The FSA considers the breach in this case to be particularly serious for the
following reasons:

(1)
Timely and proactive communication with the FSA is of fundamental
importance to the functioning of the regulatory system. It is vital that the
FSA be appropriately informed about transactions with potentially
significant market and regulatory implications. That importance is
heightened in the context of transformative transactions with global
implications. The transaction in this case was so significant that it had
potentially far-reaching consequences for tens of thousands of investors and
for the stability and confidence of the financial system in the UK and
abroad.

(2)
At the meeting on 12 February 2010, PAC failed to mention the proposed
transaction in the face of detailed questions from the FSA about aspects of
Prudential Group strategy to which the transaction was clearly highly
relevant.

(3)
PAC had numerous opportunities to inform the FSA of the transaction, but
did not do so. PAC remained highly concerned about leak risk throughout
the transaction, and this sensitivity clearly affected its judgment about when
to inform the FSA. Because of this, PAC failed to give due weight to the
importance of complying with its regulatory obligations. PAC should not
have allowed its unwarranted fear that the FSA would leak the transaction to
play a material part in its decision making.

(4)
As a consequence of the delay in informing the FSA, Supervision was
required to make far-reaching decisions regarding complex issues within
compressed timescales. The FSA is satisfied that appropriate decisions
were made. However, PAC’s failure to appropriately inform the FSA on a
timely basis:

(a)
hampered the FSA’s ability to meet its obligations by responding
adequately to overseas’ supervisors’ enquiries and requests for
assistance when news of the deal broke; and

(b)
the lateness of the notification created a significant risk that the wrong
regulatory decisions could be made, due to lack of proper information

and/or time to properly consider it. This was especially important
given the size and significance of the transaction, its implications in
the UK and abroad, and heightened regulatory and market concerns
around prudential and capital adequacy issues following the financial
crisis in 2008.

The extent to which the breach was deliberate or reckless (DEPP 6.5.2(3))

9.4.
PAC’s failure to approach the FSA was based on inappropriate considerations and
on an assessment by PAC of its regulatory obligations which the FSA views as
misconceived and incorrect. However, the FSA accepts that PAC did consider its
obligations in forming its assessment. Although the FSA considers that the
circumstances of PAC’s breach are serious, the FSA does not consider that this
breach was deliberate or reckless.

The size, financial resources and other circumstances of the firm (DEPP

6.5.2(5))

9.5.
In deciding on the level of penalty, the FSA has had regard to the size of the
financial resources of PAC. PAC, a member of the Prudential Group, has
approximately 7 million UK customers with £130 billion in insurance liabilities.
PAC’s 2010 results reported net profits of £1,063 million.

The amount of profits accrued or the loss avoided (DEPP 6.5.2(6))

9.6.
PAC did not profit from its breach.

Conduct following the breach (DEPP 6.5.2(8))

9.7.
PAC was obliged by the FSA under section 166 of the Act to commission a
Skilled Person’s Report into aspects of its conduct in relation to the transaction.
The FSA recognises that PAC has committed significant resources in this regard.

Disciplinary record and compliance history (DEPP 6.5.2(9))

9.8.
PAC has not been the subject of previous disciplinary action.

Other action taken by the FSA (DEPP 6.5.2(10))

9.9.
In determining the level of financial penalty, the FSA has taken into account
penalties imposed by the FSA on other authorised persons for similar behaviour.
The FSA has also had regard to the principal purpose for which it imposes
sanctions, namely to promote high standards of regulatory conduct.

9.10. The FSA considers in all the circumstances that:

(1)
the seriousness of the breach merits a substantial financial penalty; and

(2)
a financial penalty of £16 million is appropriate.

10.
PROCEDURAL MATTERS

Decision Maker

10.1. The decision which gave rise to the obligation to give this notice was made by the
Settlement Decision Makers.

10.2. This Final Notice is given under and in accordance with section 390 of the Act.

Manner of and time for payment

10.3. The financial penalty must be paid in full by PAC to the FSA by no later than 10
April 2013, 14 days from the date of the Final Notice.

If the financial penalty is not paid

10.4. If all or any of the financial penalty is outstanding on 11 April 2013, the FSA may
recover the outstanding amount as a debt owed by PAC and due to the FSA.

10.5. Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this notice relates. Under those provisions,
the FSA must publish such information about the matter to which this notice
relates as it considers appropriate. The information may be published in such
manner as the FSA considers appropriate. However, the FSA may not publish
such information if such publication would, in the opinion of the FSA, be unfair
to the recipient or prejudicial to the interests of consumers.

FSA contacts

10.6. For more information concerning this matter generally, PAC should contact Celyn
Armstrong (020 7066 2818) or Charles Hastie (020 7066 6836) at the FSA.

Jamie Symington
Head of Department
FSA Enforcement and Financial Crime Division

APPENDIX

RELEVANT LEGISLATION, REGULATORY REQUIREMENTS,

GUIDANCE AND COMMENTARY

1.
The FSA is authorised, pursuant to section 206 of the Act, if it considers that an
authorised person has contravened a requirement imposed on him by or under the
Act, to impose on such person a penalty in respect of the contravention of such
amount as it considers appropriate in the circumstances.

Regulatory requirements and guidance

2.
Principle 11 of the Principles provides that:

“A firm must deal with its regulators in an open and co-operative way, and must
disclose to the FSA appropriately anything relating to the firm of which the FSA
would reasonably expect notice.”

3.
SUP 15.3 contains guidance on firms’ requirement to communicate with the FSA
in accordance with Principle 11. SUP 15.3.8 G states that compliance with
Principle 11 includes, but is not limited to, giving the FSA notice of any proposed
restructuring, reorganisation or business expansion which could have a significant
impact on the firm's risk profile or resources, and any action which a firm
proposes to take which would result in a material change in its capital adequacy or
solvency.

4.
SUP 15.3.10 G states that:

“The period of notice given to the FSA will depend on the event, although the FSA
expects a firm to discuss relevant matters with it at an early stage, before making
any internal or external commitments.”

Content and timing of notification regarding a change of control

5.
SUP 11.4.2R provides as follows:

“A UK domestic firm, other than a non-directive firm, must notify the FSA of any
of the following events concerning the firm:

(i)
a person acquiring control;

(ii)
an existing controller increasing control;

(iii)
an existing controller reducing control;

(iv)
an existing controller ceasing to have control.

6.
SUP 11.4.8G provides as follows:

“Principle 11 requires firms to be open and co-operative with the FSA. A firm
should discuss with the FSA at the earliest opportunity, any prospective
changes of which it is aware, in a controllers or proposed controllers
shareholdings or voting power (if the change is material). These discussions
may take place before the formal notification requirement in SUP 11.4.2R or
SUP 11.4.4R arises. (See also SUP 11.3.2G). As a minimum, the FSA
considers that such discussions should take place before a person:

(1)
enters into any formal agreement in respect of the purchase of shares or a
proposed acquisition or merger which would result in a change in control
(whether or not the agreement is conditional upon any matter, including
the FSA's approval); or

(2)
purchases any share options, warrants or other financial instruments, the
exercise of which would result in the person acquiring control or any
other change in control.