The Parliamentary Ombudsman has slammed regulators for their part in the failure of Equitable Life and says policyholders should be compensated. It won't happen in a hurry, if at all.
Many of those commenting on this result were not even around when Equitable Life was a dominant force in the UK's savings market in the 1970s and 1980s. I was, and like a few other commentators was warned off being critical of what was generally seen as a 'blue chip' concern.
With an annual advertising spend of over £1 million a year, mostly in the national newspapers, Equitable generally received glowing write-ups in the personal finance pages, especially for its with-profits pension plans.
Many lured by higher payouts
Its practice of distributing all its profits as bonuses meant its projected policy payouts were far higher than those of rivals, which encouraged people to sign up. And not just any old people.
Because it recruited salesmen from toffee-nosed families - often the thicker sons (never daughters!) who couldn't get into the law or the Navy - Equitable sold policies to judges, generals, bishops, barristers and politicians. Its client list partly explains why the campaign for redress has been so vociferous and, in the end, successful - at least in calling the regulators to account.
In the 1970s and 1980s Equitable suckered a lot of journalists by endlessly repeating: 'We don't pay commission to advisers'. This was true, but completely misleading: Equitable paid its salesmen several times the market average in salary and sales-related bonuses (commission by another name). They were so well-paid that if, like me, you only had small life policies, it was impossible to get an Equitable 'adviser' to talk to you - they were too busy collecting tens of thousands from fat cats. Pension policies from many companies that did pay commission to advisers turned out to be better value.
Numbers didn't add up
I wasn't the only one who couldn't make the Equitable's figures add up. I remember several times during the 1980s and 1990s discussing its numbers with Danby Bloch of Taxbriefs and Kean Seager of Whitechurch Securities, among others.
None of us ever recommended Equitable (except for its astoundingly cheap term assurance - I still have such a policy) because we didn't believe it could sustain its payouts at such high levels. The Ombudsman's report partly explains why the figures didn't add up - Equitable deliberately left out of its statutory filings some key data that would have made its financial position look far weaker.
This omission gave the illusion of financial strength; the regulators knew this but didn't force Equitable to publish corrections. The Ombudsman does not use the word 'fraud' in this context but I cannot see what other description fits the facts.
Regulatory failure
A similar thing happened again, only worse, when the regulators allowed Equitable to publish figures including hundreds of millions of pounds of capital which they knew didn't exist because they were based on a 'smoke and mirrors' reinsurance policy.
And then, when Equitable was either insolvent or teetering on the edge, the Financial Services Authority allowed it to continue in business - selling new policies to people who have lost out substantially as a result - and issued misleadingly reassuring statements on its position, when it should have been closing Equitable down.
The Ombudsman's conclusion is clear. The regulators were given specific powers by Parliament and the objectives set out by Parliament in legislation were also clear. The regulators failed to follow their own rules in achieving the objectives set out by legislation. In several cases there was muddle and pure incompetence. She cites ten counts of such regulatory failure, forming the basis of her recommendation that a compensation fund should be set up.
Some tough decisions ahead
The government's response - which won't be delivered for several months - is already forming, and in addition to fudge and delay on the compensation issue will run along these lines: if people can claim compensation every time a regulator fails to do what they should have done, regulation will have to become far tougher and more complex in order to avoid the very expensive consequences. More detailed and prescriptive rules would cause such horrendous management problems for regulators and those they're regulating that this will be pronounced impracticable.
Then politicians will discover - in fact they already have - that with a little legal chicanery they can get rid of the problem. The Parliamentary Ombudsman could investigate the Equitable affair because of the law as it stood at the time.
But under current financial services legislation, she could not investigate the Financial Services Authority (FSA) for similar failures. So a classic political fudge is what is likely to happen: legislation will remove regulators from the remit of the Parliamentary Ombudsman, making it far harder for anyone to receive redress when regulators fail.
FSA above the law
Many actions and decisions of the FSA, for example, can neither be challenged in court nor investigated by the Ombudsman. In many respects it is above the law. Like the barons of old, it is an 'over-mighty subject'. Having powerful organisations which cannot be held to account is a bad direction for public policy: this is the norm in a fascist state, not an open democracy.
The alternative is to admit that it is impossible to avoid regulatory failure and to restrict the scope of regulation as far as possible. Instead of regulating processes, as much financial legislation does, regulation should be simplified drastically and penalties for wrongdoing vastly escalated.
If people were sure they would end up bankrupt or in jail for doing wrong - something that almost never happens under the current system - we would not need nearly so many process-based rules. But we also wouldn't need nearly so many bureaucrats, and since turkeys don't vote for Christmas, a move in this direction is about as likely as Equitable policyholders receiving full compensation for their losses.
