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Moore&#39s code

There is no question about it – the FSA had a very bad year in 2001. The collapse of Independent Insurance and the deepening crisis at Equitable Life, which resulted in the damning Baird report, rocked the regulator&#39s reputation before it had even officially assumed its powers. Now it is faced with a new challenge – how to respond and repair its battered image.

So far, the signs have been encouraging. The early evidence suggests that Howard Davies may have struck it lucky in appointing John Tiner as one of the three managing directors beneath him, with particular responsibility for retail financial services.

Tiner, as we are well aware, is conducting an inquiry into the with-profits industry and just before the end of last year took it upon himself to write to life offices with a warning not to overpay bonuses this year. He also told them they would be called upon to justify their decisions to the regulator, with a nod to the stronger offices which were told they must not use the warning, or cutbacks by weaker competitors, to shortchange policyholders.

The howls of outrage which MM reported in its last issue of 2001 were depressingly predictable and deeply wrong-headed. Yes, the regulator is interfering in commercial decisions and this may well be unpalatable. But there are close to a million policyholders at Equitable Life who, I am sure, would dearly have loved previous generations of regulators to have taken this unpalatable step several years ago. Instead, they chose to sit back while the whole deck of cards came crashing down.

So far, they have been allowed to get away with this and it is to be hoped that Lord Penrose will act to put this right when he reports later this year.

In the meantime, Tiner&#39s move is both timely and motivated by common sense. The actuarial profession may be seen as conservative, slightly dull individuals who spend their spare time on Liverpool Street station spotting trains but many of those among their number involved with running with-profits funds have played things fast and loose.

It is not only those who allowed Equitable to reach its current appalling situation who are beginning to look like Las Vegas chancers. There are still companies which are offering eye-popping guaranteed bonuses on with-profits bonds with seemingly little or no thought to where the money is coming from to pay them, given the awful state of the world&#39s stockmarkets at the moment.

Tiner should not be shy of cracking the whip – and cracking it publicly – if life companies seek to overpay at the expense of future policyholders or to underpay in a bid to fatten up their bottom lines. The with-profits industry is facing a severe challenge and, if stockmarkets fail to recover, there is a danger that Equitable may not be the only life office to find itself in trouble.

Recent research by independent analyst Ned Cazalet into the amount of spare capital in the with-profits industry, which shows around £100bn being wiped out over the last year or so, is deeply disturbing. Cazalet has plenty of critics in the life industry – that is because he is usually right. His research shows why Tiner&#39s warning letter is timely. It is to be hoped we see more of this type of common sense from Tiner at the culmination of his review of the with-profits industry.

It would be quite wrong if the FSA were to respond to the Equitable debacle by over-regulating and interfering where it is unnecessary but this time, at least, Tiner has done the right thing.

Looking at the array of failed life funds shows that the with-profits industry has been appallingly badly managed. If improving this situation means we have to suffer a little interference from the regulators, then, as unpleasant as that is, so be it.

The bonus cuts we see this month are going to be painful and are going to provoke widespread criticism – rightly in those cases where life offices or IFAs have sold with-profits as a no-lose investment. It is to be hoped that Tiner will use his powers to ensure they are both justified and proportionate.

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