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Clamour is growing in compensation culture

Last week was a poor one for the financial services and the Government. At the same time as former Aberdeen Asset Management head of investments Chris Fishwick was giving evidence to the Treasury select committee, all seven Equitable policyholder action groups were assembling outside the Houses of Parliament, demanding £4bn in compensation from the Government.

For some, both are clear-cut examples of a burgeoning compensation culture in the UK. Litigation on behalf of split-cap investors will shortly start while Equitable Life has been quagmired in the courts and continues to be so after the landmark House of Lords case that resulted in its closing to new business.

Compensation can come from a variety of sources – professional indemnity insurance cover, the Financial Services Compensation Scheme in the event of companies going bust, straight out of the businesses&#39 pockets, after cases are lost in front of the courts or ombudsman, from the regulator and the Government.

Aifa director general Paul Smee attributes the growth of compensation culture to the end of the age of deference. He points out that in the days before wider share ownership, assets were generally in the hands of a few people and a club mentality prevailed. As more people entered the arena who were no longer part of that club, the possibility of complaints and disputes grew.

The Consumers&#39 Association senior policy adviser Mick McAteer takes a slightly different view, saying the paternalistic state has been replaced by Government privatisation and a regulator obsessed by free market ideology. He rejects the idea of “compensation culture”, suggesting it is a notion put about by the industry for reasons of self-protection.

Any compensation, says McAteer, serves two important purposes. First, it provides consumers with redress for wrongs they have suffered and second, it is an important factor in enforcing corporate accountability. According to the FSA, there has already been almost £12bn paid out in pension misselling compensation – the biggest exercise of its kind – and it says the process will soon be complete.

Few from the life offices are willing to stick their head above the parapet and risk incurring the wrath of regulator or Government by speaking out about pension misselling compensation.

However, there is a widely-held belief among the companies that they were unfairly made to foot the bill in its entirety for a flagship policy in which the Government actively encouraged people to take out a personal pension.

Syndaxi principal Robert Reid says the whole question of what purpose compensation should serve needs to be subjected to more scrutiny. He refers to legal action being brought against American fast food giant McDonalds by litigants who want recompense for their own obesity, which they say is a result of the chain&#39s food. Like many, he feels that some element of caveat emptor needs to be reintroduced.

For IFAs, the most obvious manifestation of compensation culture is soaring or even unobtainable professional indemnity cover, a situation acknowledged by the FSA in its recent relaxation of the rules. Whether rule tinkering will entice insurers back into the market remains to be seen.

Some IFAs are becoming much more circumspect about the clients they have. Reid says: “If someone looks like trouble, I won&#39t take him on.” Others are being prevented from taking proactive action to minimise issues such as endowment shortfalls as PI insurers are fearful that they might be admitting liability.

Once it is agreed that compensation or fines are payable, that is not the end of the controversy. McAteer criticises the FSA rules that allow compensation to come from with-profits funds while costs must be paid from shareholder funds.

Reid points out that the loophole is that the compensation is not ringfenced and can be recouped by means of an MVA, as has been the case with Equitable Life. He also asks if agreed compensation is inflated to incorporate the fees of lawyers.

But compensation can have wider ramifications. Conservative Party chairman Theresa May believes people&#39s willingness to provide for themselves could be affected until the Equitable issue is settled. She says: “There are important questions to be answered. I am worried that this may affect people&#39s propensity to save.”

Then there is Equitable&#39s case against former auditors Ernst & Young, seeking £2.6bn in damages. If successful, it would threaten another famous name. Beyond that, there is the question of what havoc a £4bn compensation bill would cause to the Treasury&#39s coffers.

Sir Gordon Downey, an Equitable annuitant, former Fimbra and PIA chairman and Parliamentary commissioner for standards, has endorsed the claims for compensation to come from the Government.

While the Tories line up to promise that they want to hold the Government accountable for the failures that led to the Equitable fiasco, they will not commit themselves to taxpayers footing the bill.

The CA, while backing Government compensation in principle if it should it be found to be culpable, also shies away from supporting any-thing like the £4bn that the action groups are asking for.

But there is a precedent for Government compensation – the Barlow Clowes affair in the late 1980s which left thousands of investors out of pocket.

Citywire chairman Lawrence Lever, who wrote a book about the affair, says the Government paid out £100m from the public purse – an unprecedented and as yet unrepeated move. It followed clamour from MPs and a critical report from the Parliamentary Ombudsman, which blamed the DTI. The 15,000 people affected received around 90 per cent of their money back.

While the present Parliamentary Ombudsman&#39s Office has rejected the latest appeals to widen its examination of Equitable, the pressure on it to do so is unlikely to go away.

Meanwhile writs are about to land on the mats of IFAs who sold split caps. Others will be worrying about future action on issues from endowments to income drawdown.

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