Parliamentary Connections

Noose tightens on ratings agencies

Tue, 24 Mar 2009 11:23:06 +0000

The threat of tough rules to bring the ratings agencies into a new pan-European regulatory framework took a step closer to reality last night as the European Parliament's economic and monetary affairs committee voted through a hard-hitting package of proposals.

The prospect of ratings agencies being subject to regulatory scrutiny was flagged up by the Larosiere report and has also been on the agenda of the UK's Treasury Select Committee enquiry into the banking crisis. Up to now, however, the proposals have been abit vague and have pointed to much of the detailed regulation being left to national regulators. The proposals put forward by the internal market commissioner, Charlie McCreevy, put the Euroepan Union firmly in the driving seat of that reform. Under the proposals which now go to the European Parliament next month, all ratings agencies will have register with the Committee of European Securities Regulators - itself earmarked for a greater role by Larosiere - or be subject to equivalent regulation if based outside the EU. Within the detail of the proposals is a requirement that all lead analysts should be rotated every five years.

This is yet another example of the EU pushing ahead in its determination to take control of the reform agenda.

Tax bomb has started ticking

Mon, 23 Mar 2009 09:41:57 +0000

While the very public rows about the causes and consequences of the economic crisis continue to grab the headlines, we can see one of the key battlegrounds for next year's General Election emerging: tax policy.

With government spending now so far beyond any previous targets as borrowing heads towards 11% of national income (the highest among the G7 countries) and the public finances deteriorating daily as tax receipts plummet, the tax timebomb is ticking. Fear of its potential damage to the economy has already tipped the Conservatives into state of public confusion. On Saturday, shadow chancellor George Osborne said that a 45% Income Tax band was inevitable, even though that would be little more than a flea bite on the bloated public sector deficit. Yesterday, Kenneth Clarke, recently restored to the Conservative front bench as shadow business secretary, suggested that the previous Tory commitment to raise the Inheritance Tax threshold to £1m could be jettisoned. This was clearly too much tax in one weekend for the Tories and Mr Clarke was busy "clarifying" his remarks this morning saying that the £1m threshold would be in the next manifesto.

The simple truth is that taxes will have to go up almost as soon as any recovery looks secure. The real questions are by how much, how fast and how can it be done in such a way that the government doesn't promptly push the UK economy back into reverse. The minor turbulence that has disturbed the Conservative revival this weekend will be nothing as the tax bomb ticks ever louder over the coming months.

Goodwin's pension is obscuring the issue

Wed, 18 Mar 2009 08:51:24 +0000

There is no coherent argument that can be offered for defending Sir Fred Goodwin's pension and it was disappointing to see yesterday's hearings of the Treasury Select Committee largely wasted in pursuing the City minister Lord (Paul) Myners over the Goodwin pension.

We all know what happened. In the eye of the crisis last October when the banking system was being swept towards an abyss, a morally bankrupt RBS board pulled a fast one when they knew the government wouldn't be looking. They thought Goodwin was been sacrificed to satisfy the government as it poured public money into their ailing company and so did everything they could to feather his nest. The decisions they made were deliberate, calculating and cynical. You cannot blame the government - in particular Lord Myners - for not noticing this at the time. Can you imagine the outrage if government ministers had become so distracted by arguing with the RBS board over Goodwin's pension that RBS or another bank had gone under. Re-arranging deckchairs on the Titanic would have been an under-statement of how that would have looked.

The real anger shouldn't be aimed at the government but at a board who acted so cynically, sadly showing what Barclays has just proved yet again with its gagging of The Guardian - that bankers simply do not understand how they are perceived by the rest of us. What is needed to steer us out of this crisis is a real partnership between government, regulators (here and elsewhere but especially the European Union) and financial institutions. Clearly, too many of the latter are still not working to the same agenda as everyone else. That is the real issue now.

Brown has lost the regulatory reform battle already - he just can't bring himself to admit it

Fri, 06 Mar 2009 08:54:11 +0000

As hard as he might try, it looks as if Gordon Brown has already lost control of the debate on the future regulation of the world's financial services industries. His pleas to President Obama and the US Congress for a co-ordinated global response sounded very fine but lacked substance and, crucially, lacked credibility. His hopes of pulling off a deal at the G20 Summit next month now look very slim.

Most of the rest of the world is not looking to the UK or the United States for a lead in reforming the way financial markets and the firms that play in them are regulated for the simple reason that they think the Anglo-US approach of the last 25 years has a lot to do with the mess the world's economies are currently in as many leading commentators are starting to point out. Europe, in particular, does not want a UK or US solution and is already busily working at its own. Last week's Larosiere report spells out a new approach that has quickly won approval in the European Commission and among key national governments in mainland Europe. The Larosiere Report? You haven't heard of it? You can be forgiven because the coverage in the UK of this key report for the European Commission by former International Monetary Fund managing director Jacques de Larosiere has been poorly covered here. Yet, it has set the EU on a course to create three new pan-national regulatory bodies - the European Banking Authority, the European Securities Authority and the European Insurance Authority.

These new regulators will be given wide powers to impose supervisory standards on national regulators, make binding decisions on technical issues (very likely to include powers over product design) and enforce adequate prudential supervision in conjunction with another new body, the European Systemic Risk Council. Certain pan-European organisations will find themselves closely regulated for the first time with credit ratings agencies at the top of the list - they are in for a very nasty shock if these recommendations go through. For the time-being, the EU envisages micro-level regulation of individual firms being left with national regulators but it sets out a course towards far greater control in the future, threatening to bring a range of other market and conduct of business issues under the remit of its new structure.

The report and the Commission make a nod in the direction of the world outside Europe's borders by urging a "deepening of the EU's bilateral financial relations with all its major partners" but here, in the very next line, is the key statement of intent "There is an opportunity for the EU to seize global leadership". This is where the battle lines will be drawn and it is hard to see Gordon Brown's voice being heard above the noise of that battle.

There are some scores to be settled with the UK among many regulators in Europe dating back to the creation of the Single Market in financial services in 1992 when the UK won a protracted argument over the balance between prudential regulation and product regulation, with the EU rules coming down firmly in favour of the former. At the time, many financial products in Germany, France, Italy and Spain were tightly regulated in terms of design and rates. All of that was replaced by a more UK orientated system of prudential supervision and it is that system that many in Europe believe has now failed, no more so that in the UK. Larosiere comes back time and again in his report to the need to regulate at much more detailed level, especially when it comes to hedge funds, over-the -counter derivatives and credit default swaps. It also has things to say on the need for greater risk retention by the issuers of securitised products and calls for common rules for what it rather vaguely refers to as "investment funds".

The UK has given a lukewarm welcome to the Larosiere report but merely praising it as a "good basis for further discussions" as Alistair Darling did this week is hardly going to win friends at the European Commission, especially as he goes on to dismiss the idea of given any new pan-European bodies powers over national regulators. Europe sees it as the agenda for those discussions and we can expect to see France and Germany pressing this at the G20 summit. They are not interested in the sort of wishy-washy talk of global co-operation that the Prime Minister peddled to the US Congress this week: they want firm action with tough new rules and see how to deliver that as the starting point for debate, not merely as an option for discussion.

If the UK financial services sector wants to engage in the real debate over the future of regulation it will be much better advised to look to Brussels rather than to Westminster.

Does the FSA really have the answers?

Thu, 26 Feb 2009 08:24:00 +0000

Macho posturing. Empty macho posturing. That could be the overwhelming feeling one is left with in the wake of the Financial Services Authority's appearance before the Treasury Select Committee. Certainly if you relied on the BBC's Robert Peston you would feel vindicated in that judgement. For once, the usually admirable Mr Peston has been too hasty in his condemnation of the relatively new regime being put in place at the FSA by Lord Turner and Hector Sants.

It is, of course, no more than one would expect of the FSA's bosses to own up to the mistakes of the past. After all, the wreckage of the financial system lies all around us, grim witness to the total failure of a light touch regulatory system bullishly promoted here and in the USA. Also, on the very day that the European Commission made its pitch to take over regulation you would expect the FSA to come out fighting.

A more detailed consideration of what Lord Turner said yesterday does suggest that there is much more going on behind the scenes than they are being given credit for. Whether it is enough to preserve the FSA's key position in the regulatory firmament is by no means clear but it does point the way to a fundamental shift in its approach to financial regulation and, crucially, aligns it more closely with European thinking and the consumer lobby in the UK.

The commitment to embrace product regulation is a rejection of the last 25 years of financial regulation in this country. Ever since the unfettered free market regime of Margaret Thatcher in the 1980s and the battle with the European Union in the run-up to the creation of the single market in 1992, product regulation has been dismissed in this country as the great inhibitor of dynamism and growth in financial services. We won that battle in Europe and Solvency II is one of the products of that regime where all the emphasis is on capital adequacy and balance sheets, ignoring the products. The European Commission wants Solvency II fully implemented by May. Why? So that it can clear the decks for an assault on the products of financial institutions. The FSA is foreshadowing this.

Don't run away with the idea that the FSA is just looking at the high risk financial instruments of the investment banks when it talks about product regulation. The example it offered yesterday was mortgages where Lord Turner suggested that capping loan-to-value at 80% or 85% might be something the FSA should do.

The other clue as to the FSA's thinking was the promise to increase "by several times" the amount of capital that banks must hold to cover the riskier end of their trading books. This seems to be a way of separating retail and investment banking by stealth. The FSA seems to saying that if it can't move quickly - because the Prime Minister doesn't accept the case - to separate retail and investment banking, then it will do it by imposing tough capital rules that will make it attractive for some institutions to back away from investment banking. This is probably the route that Royal Bank of Scotland will go down later today.

Europe draws up the battle lines on financial regulation

Wed, 25 Feb 2009 09:46:06 +0000

It should come as no surprise that the European Commission will launch a bid to create a pan-European financial regulator. The abject failure of national regulators to prevent, predict or plan for the successive crises that have swamped the financial services sector over the past 18 months is an open invitation to a highly interventionist organisation like the Commission to step in.

It will be an interesting battle. Gordon Brown shows few signs of admitting that the system of regulation he put in place in the early days of the Labour government was deeply flawed. I have seen reports suggesting that the Prime Minister has "relaxed" his opposition to more Europe-wide regulation but I don't see that reflected in anything he says. At the weekend, he was critical of proposals - gathering pace on both sides of the Atlantic - to restore the split between retail and investment banking. It does seem that he just cannot bring himself to admit that anything he has done or supported in the past has been wrong.

He will oppose the creation of any pan-European regulator once it becomes clear that it wants to approach regulation in a different way to that he put in place in the UK. This will leave the UK very isolated as the rest of Europe sees our system as being the most deeply flawed which is why we have the most serious problems.

Credit crunch confidence crisis

Tue, 17 Feb 2009 14:10:46 +0000

There is no shock value in the current crisis-ridden climate when a consumer group says the financial services sector has a mountain to climb to restore consumer confidence. Which? - once the Consumers Association - set out this case with admirably clarity when it spoke to the All Party Parliamentary Group on Insurance & Financial Services recently. More of a shock was its critique of a regulatory system that we all know has failed but which few have yet pointed so clearly at where they believe the fundamental fault lines lie. More of that later.

Which? used a recent survey to illustrate how far consumer confidence had been rocked over the last few months. Here are a few figures from that survey:

• 84% think the banking system needs to be reformed to avoid another crisis.

• 21% do not trust banks to keep their money safe.

• 72% of pension holders are worried about the value of their pension.

• 35% of current mortgage holders are worried about having their home repossessed.

There are plenty more in the full presentationWhich APPG presentation.ppt

Consumers need to be confident that their money is safe, said Which?, as the current situation is bad for consumers and bad for the financial services industry. The whole system cannot function without trust and the focus has to be on restoring that lost trust starting with getting the banks - especially those relying on taxpayer support - to treat customers fairly. Which? was particularly critical of the failure of banks to manage the contraction of credit which it attacked as going "from feast to famine".

It also called for a stronger voice for consumers in the running of the nationalised and part-nationalised banks, starting with representation on UK Financial Investments which has been set-up by the Chancellor of the Exchequer to oversee these unwanted - at least unsought-after - state holdings.

All predictable stuff, as was the assertion that regulation needs to be stronger, more probing and much more consumer-focussed. Which?, went further than this, however, spelling out where it thought the fundamental faults with the current regime lay.

Firstly, it called for a separation of retail and investment banking, a call for a return to the days of the US Glass-Steagall Act which kept the riskier end of wholesale and investment banking away from what we used to call the clearing banks: cross-ownership was prohibited in the US which effectively put a block on it elsewhere in the world. When this Act, passed in the wake of the Great Crash of 1929, was swept away in 1999 the seeds of the current crisis were sown, argued Which?. The high risk addiction of the investment banks replaced the innate caution of the very traditional retail banking sector.

The second fault line Which? drew to the attention of MPs contains the irreconcilable conflict between prudential supervision and consumer protection. The thrust of Which's argument as it emerged in discussion with the Parliamentarians at the meeting was that if the number one priority is solvency then decisions will be made that will not be in the interest of consumers, essentially where we are today with the brutal shut-down of credit destroying the mortgage market and other lines of consumer and business credit. This would require a total reform of the regulatory regime put in place after Labour came to power in 1997 and which has the broadly based Financial Services Authority at it heart. Which? would like to see prudential regulation handed to a freshly empowered Bank of England with the FSA left to concentrate on a more consumer orientated role.

This is an interesting analysis and one that will, I am sure, emerge from elsewhere as the debate about what happened, why it happened and how the current system of regulation allowed it to happen gathers momentum. Whether it is entirely right I have some doubts. As unpalatable as it is to most in the UK financial services sector I still think that we will find ourselves looking at some form of product regulation more along mainstream European lines as the most direct and effective way of convincing consumers that regulators have really taken control of the problem. The irony of this is that we in the UK have fought hard over the last 20 years - ever since the run-up to the creation of the Single Market in 1992 - to convince the rest of Europe that prudential regulation was the way forward and that product regulation was not in the interests of consumers. It is an argument that now looks threadbare.

Banks: it is all about control

Thu, 12 Feb 2009 09:23:51 +0000

When the government first stepped in to re-capitalise the banks as the financial system teetered on the brink of disaster in the autumn, I highlighted the failure to assert political control of the banks. Nothing was done, or seems to be contemplated, to back the huge public ownership of the banks with public control. This failure to connect ownership and control has come back to haunt the government in the row over the payment of bonuses.

The Prime Minister has looked weak and ineffectual in his increasingly pathetic pleas to the banks to abandon bonuses. The public believes it owns several of the banks - it does - and it thinks that with ownership should come a degree of control. Unfortunately, the government didn't make the same connection when it threw billions of pounds of taxpayers' money at the crisis-ridden sector and shows no sign of grasping the credibility gap that yawns ever wider as public anger over bonuses grows.

The banks that are now dependent on public money for survival should be answerable to Parliament. I stick to my view that the best mechanism for this would be a new select committee chaired by Vince Cable with real powers to hold the banks to account. Alongside side this there should be government-appointed directors on the banks' boards, not former bankers tainted by the years of mis-management that led up to the near collapse of the sector but genuinely independent directors empowered to hold the professionals to account.

PPI Clampdown hits the mark

Wed, 04 Feb 2009 10:59:07 +0000

If you need any confirmation of the low regard in which banks are now held by MPs just listen to the deafening silence that greeted the Competition Commission's draconian action on payment protection insurance. In any normal climate, there would have been some sharply divided views on the blanket ban on the sale of single premium PPI with new loans and the clampdown on point-of-sale promotion of regular premium policies. Now, there is silence.

It is no good the Association of British Insurers bleating that some people who need this cover may now not bother with it. Its members connived with the banks and building society to miss-sell the product for years so that people paid far too much, often for policies that wouldn't cover them anyway as they might be self-employed or have a pre-existing medical condition.

PPI was, at best, over-sold by the banks. I have sat through meetings between MPs of all parties and the trade unions in the finance sector where the unions complained bitterly that the only way counter staff in banks could meet the targets set for them on the sale of PPI policies was to sell them to people who would never be entitled to make a claim. Insurers must have been as aware of this as the banks, yet they let it go on.

Clearly, the Competition Commission has taken the view that banks and insurers - with 20 years of miss-selling products between them - simply can't be trusted to clean up their own act so they have done it for them. It will cost banks a tidy sum in lost commissions.

This may turn out to be the first of many regulatory clampdowns on financial products as the government and regulators battle to regain public confidence in their ability to control the institutions that are blamed for the financial and economic crisis that now engulfs us. It is essentially a battle for hearts and minds - and a very political battle as the next General Election is now no more than 15 months away - but it may take us in the direction of an over-regulated industry that finds its scope for innovation gravely restricted as the economy recovers.

No justice for Equitable Life policyholders

Mon, 19 Jan 2009 09:22:46 +0000

It almost seems as if there is never going to be an end to the Equitable Life saga. Last week’s announcement by Treasury minister Yvette Cooper just prolongs the agony and reinforces the feeling of “justice delayed is justice denied”. Appointing yet another judge who knows little of the background and nothing of the detail of the decade of woes that have afflicted Equitable Life and its policyholders makes no sense when so many other routes were available. To hand him such a poisoned chalice is just reprehensible. Why is it a poisoned chalice? The brief that Sir John Chadwick has taken on has no logic, no sense of natural justice and looks doomed to generate ill-feeling, discontent and, probably, legal review. He has, in effect, been given a hardship fund to administer, although he has been given no money to distribute. Ms Cooper’s outlining of a scheme that will help only those who have been “disproportionately affected” without any clear guidance and any money being put on the table will dismay those policyholders out of pocket. You do have to admire the bare-faced hypocrisy of the minister in standing up and apologising for the well-documented failings of government and regulators and then effectively sticking two fingers up at the policyholders.

More Equitable delay?

Wed, 14 Jan 2009 13:16:56 +0000

As anticipation grows that the government will be announcing a compensation package for Equitable Life tomorrow (Thursday), so does the fear that we will be looking well into 2011 before a line is finally drawn under this sorry affair. The trailing of the government's announcement suggests that it will confirm the recommendation of the Parliamentary Ombudsman, Ann Abraham, that an independent tribunal should be set up to deal with this. Why? Ms Abraham estimated that it would take six months to set and I have heard enough to make me believe that it will take this long and that it will be a fraught process as there is endless scope for argument about who should be on it. I hope the government is more sensible than this and uses the obvious existing mechanism - the Financial Services Compensation Scheme. It is already there, it works and it works a good deal faster than the estimated two years it would take a newly constituted compensation tribunal to complete the task once it has been set up.

Equality Bill stirs travel insurance anger

Tue, 06 Jan 2009 12:00:14 +0000

The insurance industry could get roughed up abit as The Equality Bill makes its way through Parliament if a meeting of the All Party Group on the topic just before the Christmas break is any guide. The Bill will extend anti-discrimination laws to cover age discrimination “where it has negative consequences” and, for the most part, MPs and the industry seem fairly comfortable with this. There is, however, one huge dark cloud hovering over the insurance industry and, yet again, it is the travel insurance sector. MPs and Peers of all parties were united in their hostility to the travel market and its arbitrary age limits. As one Labour Peer eloquently put it: “There is a concept of citizenship and pooled risk which insurers are ignoring by saying over 70s and 75s should go to specialist insurers”. This view was echoed by Tory and Labour MPs and no amount of reassurance by the ABI’s Nick Startling was able to deflect the Parliamentarians from the belief that the travel insurance market practises a rigid and unjustifiable level of age discrimination. While the ABI will not have found this hostility welcome, it will no doubt be grateful that it is out in the open before the Bill starts being debated in earnest. It gives it time to tackle the problem and that is where its response should be directed, not on producing briefings pretending the problem doesn’t exist. There is a problem with the travel insurance sector and the way it acts as well as the way it is perceived. I cannot see any number of surveys on the availability of affordable, good quality travel insurance (largely from specialist insurers) for the over 70s satisfying many MPs. They will want to see hard evidence that the arbitrary age limits we all know are widespread in the travel insurance market have been dropped. If they don’t see this, they may well turn over a few more insurance stones. Once that starts happening the industry will lose control of the debate and could find Parliament reaching some uncomfortable conclusions. This would be regrettable as far as other classes of business are concerned as most MPs seem satisfied that the data exists to justify different premium rates, although they would like to see more sharing of that data to give greater authority to discriminatory ratings.

Government reneges on Equitable Life promise

Tue, 16 Dec 2008 12:18:12 +0000

So, autumn really has turned to winter for Equitable Life policyholders as any hopes they had that 2008 might see the final pages of the saga of their quest for compensation turned were dashed. The government has reneged on its commitment to respond during the autumn to the Parliamentary Ombudsman’s report and its damming findings of maladministration on the government’s part. It has used as its excuse the subsequent investigation of the Public Administration Select Committee which published its report on Monday and wholly backed the Ombudsman’s stance. The PASC may have added weight to the calls for compensation and an apology but it hardly added any new thinking so it is difficult to see how it can be used as an excuse by the government to delay any further. There seem to be two plausible explanations for deferring a response until after Parliament returns on 12 January The first is that it is going to respond with a rejection of the Ombudsman’s report and that it felt it couldn’t do this until the PASC had reported and then not with undue haste once it had the select committee verdict. It has to at least give the appearance of taking the PASC into account and an announcement this week might have been judged unduly hasty. The second explanation is that the Treasury will offer some compensation but that it wants to nail down the mechanism for distributing it first. There is huge potential for extended arguments over how individual amounts will be calculated and how this will be overseen. The Treasury will be very aware of the pitfalls that await if it doesn’t get the distribution method sorted out, having seen ambulance chasing lawyers stealing money from miners, compensation scheme. It will want to close off the scope for claimant lawyers to get involved as much as possible. This brings us back to the possibility that the Financial Services Compensation Scheme could have a role to play. It would certainly deal with the first problem by bypassing the need to set up a one-off compensation authority. It might not entirely head off the claimant lawyers but the FSCS does have considerable experience of dealing with them and of creating claims systems that limit the need fro people to seek legal advice and thereby forgo some of the compensation. Even though to most observers it does look rather boxed in it is almost impossible to call which way the Treasury will go on this. In the current financial climate an outright rejection is by no means beyond the range of possibilities.

Financial services beware: the Equality Bill has got your name on it

Thu, 04 Dec 2008 15:29:46 +0000

Confirmation in the Queen’s Speech that the government will be going ahead with Harriet Harman’s brainchild, the Equality Bill, ensures this will be an interesting session for the insurance and financial services sectors. Ms Harman has made it clear that the new Equality Bill will include provisions to end age discrimination in financial services unless “actuarially justifiable”. This should send shivers down underwriting and actuarial spines. The last time legislation went down this route – with gender discrimination laws in the early 1980s – the industry found itself literally in the dock as the Equal Opportunities Commission took insurers to court to get them to prove that they had the actuarial data to justify the higher rates women are asked to pay for health insurance and what we now call income protection products. It looks as if we are set for a replay of the arguments played out then. Just as it was then, the onus will again be on the industry and its actuaries to justify what the government sees as the downside of age-related underwriting decisions: the upside will be fine. For instance, nobody challenged the right of the industry to charge women drivers less for their motor insurance but they queried every penny extra women were asked to pay on the premiums for other classes of cover. This time around, the Equalities Office has made it clear that it is all in favour of premiums that discriminate in favour of older people: “We want to make sure we only outlaw unjustified discrimination without unintentionally stopping things that are beneficial to particular age groups”, it says. This all raises a lot of questions, such as what data can be used? Will companies be allowed to rely on their own data or will they have to refer to industry-wide data, in which case what happens to competition? I have already heard grumbles from insurers who want to use good quality social and economic data to help them underwrite, not just a very narrow selection of actuarial data. Others are concerned that the depth of data simply won’t exist as the aging population is a new phenomenon: do we really know enough about the risk profile of an 80 year old who commutes to work everyday – a rare beast now but likely to be much more common in the future? Old assumptions will be challenged and altered. These are points that both the Association of British Insurers and the Institute of Actuaries have made in submissions during the consulattion on the drafting of the Bill. All that said, the insurance industry has brought some of this on itself through its sheer lack of imagination. Making it almost impossible for many over 75s to get affordable travel insurance is not a clever move. The industry should be looking at much more flexible lifestyle packages that wrap up a wider range of covers in a single policy. It does need to take the sting out of this debate by looking hard at is current conventional wisdom. It does seem as if the government is setting out its stall for a long run at this issue, however. It is promising lots of consultation and the ABI boss Stephen Haddrill is on a special “Senior Stakeholders Group” advising on the bill. Another financial services cage the Bill will rattle is labelled equal pay, or rather lack of equal pay. In the consultation paper, the Equalities Office highlights the financial sector as having a dreadful record of gender discrimination (along with the more predictable bad boys of construction). It says the financial service industry employs over one million people, with the pay gap between men and women now 41.5%, compared to a national average figure of 12.6%. It wants to know why and is proposing to give itself some tough new powers in the Equality Bill to find that out and fix it.

FSCS could play Equitable Life role

Tue, 02 Dec 2008 09:44:38 +0000

The next phase of the Equitable Life saga will be initiated by the government in the next couple of weeks when it announces its response to the Parliamentary Ombudsman's investigation and the report the ombudsman, Ann Abraham, submitted back in July. There was a 90 minute debate in Parliament last week, initiated by the Liberal Democrat MP Jo Swinson. Amid the predictable complaints about the long delay in the government's response – originally promised for the "autumn"– there were repeated calls for any compensation scheme the government agrees to to have a "clear, transparent and independent process". The ombudsman's report suggested that it could take six months from the announcement of any compensation package by the government to get such a process agreed and operational. Putting aside the arguments about how much compensation would be appropriate, I am surprised that no-one has so far suggested using an established mechanism to deal with this – the Financial Services Compensation Scheme. The FSCS has already been pressed into action to administer the compensation for UK depositors of the collapsed Icelandic banks, creating an obviously precedent for asking it to act outside of its strict terms of reference. Using the FSCS would also by-pass the looming arguments about who would sit in judgement on any new compensation authority established especially for the purpose of sorting out payments the policyholders of Equitable Life. Those of us at the All Party Parliamentary Group on Insurance & Financial Services' recent meetings on Equitable Life were given a flavour of the arguments that might arise if a new body has to be set up. Of course, it is not only the process that will be open to dispute but the amount of money offered. You can be certain that the government will not want to write a blank cheque (if, indeed, it writes any sort of cheque for this) which is why a process that attempts a case-by-case assessment of loss without a final figure in mind is probably a non-starter. Much more likely is an announcement of a sum available for compensation almost on a take it or leave it a basis. If this is the case then it makes the argument for giving it to the FSCS to distribute even more compelling. As to the sum the government is likely to put on the table? My bet is on £1bn. It is about a quarter of what the Equitable Members Action Group is looking for but a nice, round figure that might be enough to buy off many of the policyholders anxious for some money in their retirement and before they die.