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FSA sticks the boot in

Like Ned Cazalet and doubtless many others, I have been concerned about the possible return of MVRs on with-profits funds in the wake of the recent turbulence in world stock-markets, not to mention the untoward effects on bond valuations of a series of increases in the Bank of England base rate.

Five years ago, it became apparent that the FSA had set its sights on with-profits and was grimly tying its laces in preparation for its next campaign of sticking in its regulatory boot at the worst possible time.

Kick ’em ’til they go down, then keep on kicking seems to have become the familiar mantra of such reviews.

At the time, to those of us who grew up with with-profits from our earliest days in the industry, the pernicious demolition of such a venerable, albeit imperfect, investment medium seemed unthink-able and an irresponsible, heavy-handed misuse of power.

After all, millions of investors already had billions of pounds invested in the with-profits medium so bashing it into oblivion in as short a time as possible has hardly been good for anyone, has it?

Few could reasonably argue with the potential benefits to consumers of encouraging and, if necessary, even coercing providers to refine, improve and clarify the ways in which they operate their with-profits funds. But a carefully thought through five-year reform programme would almost certainly have been vastly better for everyone, not least for consumers, whose interests, let us not forget, are supposed to be the FSA’s highest priority (after its directors’ remuneration packages, that is).

When the stockmarket started to slide downwards after 9/11, the FSA imposed on life offices its solvency requirements for their with-profits funds so rigidly that the result was nearly a total implosion of the UK stock-market early in 2003. It really was that bad.

Only when these solvency requirements were relaxed a little did the market finally bottom out and then begin to recover.

Was nobody at Canary Wharf able to see what was happening and why? Apparently not.

As a result, the industry now has an assortment of largely crippled with-profits funds that are no longer able to do what they always had for decades past and probably never will again.

Adviser confidence in with-profits has effectively been killed off for good, except for a few fanatical apostles such as Terence O’Halloran, who continue fervently to believe that everything will come good at maturity with a hefty terminal bonus after years and years of feebly lowhorsepower reversionaries. I hope your risk warnings about terminal bonuses are up to snuff, Mr O’Halloran. They may turn out to be nothing at all on the day.

As for consumers who invested in with-profits funds, many justifiably feel they were sold a dud proposition (even though, at the time, it was not), not least as a medium for funding repayment of their mortgage (and we can visit the subject of Lautro-imposed, yet quite inaccurate, illustrations another day) or for accumulating a decent pension fund.

So, by having severely damaged consumer confidence in with-profits, the FSA can probably take its fair share of negative credit for having done its bit towards today’s endemic lack of savings. Well done, boys.

Before you pull out the hatchets and sledgehammers for your next regulatory onslaught, it might be an idea first to give some thought to the issue of potential collateral damage.

Julian Stevens
Partner
Harvest IFM Bristol

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