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Moore&#39s code

If MPs started suggesting that competitors should bail out a struggling company, they would be laughed out of Westminster.

If the Government started taking the suggestion seriously, it would find itself on the receiving end of a torrent of criticism and threats of court action from the companies that were being asked to cough up.

Ministers might also have to face up to the consequences of those companies evacuating their capital from the UK, potentially putting millions of jobs at risk.

Yet different rules operate if your business happens to be in financial services because this scenario appears to be under consideration at Westminster to deal with the problems at Equitable Life.

Those IFAs who may have felt a little smug at the ugly demise of an institution that used to gleefully do them down at every opportunity may not be feeling cheerful about the situation for much longer because the industry-funded Equitable lifeboat that is being mooted could involve a contribution from them.

The Financial Services Compensation Scheme has already suggested loans could be extended to Equitable to prevent it from going insolvent.

Treasury Financial Secretary Ruth Kelly has also pointed out the FSA&#39s power to impose such a lifeboat.

The mood music is not encouraging. To a certain extent, you can see where all this is coming from. Consumer confidence in the financial services industry is not high. The figures for sales of life insurance, pension and investment products tell their own story.

Plunging share prices are probably the biggest factor but scandals such as pension misselling, endowment policies and split-capital investment trusts, have contributed, plus the woes of Equitable Life.

As MPs have pointed out, there is an urgent need for confidence in financial services to be restored. The ABI may be over-egging it with talk of a £27bn savings gap but the point is well made.

The demographics of this country make it essential for people to save more and save earlier to mitigate the effects of an increasingly aged population having to rely on a diminishing working population.

If Equitable were allowed to stagger towards insolvency, the already fragile confidence in Britain&#39s financial institutions would take a nasty blow. Equitable&#39s competitors would suffer the effects. Sales would fall through the floor. But that is just as much a worry for the Government as it is for the industry. The Treasury is desperate to cut the cost of public pension provision because the demographic timebomb means costs could rise exponentially.

The problems of Equitable cannot be landed at the door of the financial services industry in general but there is a case for putting the blame on the Government.

Equitable followed its own course and was allowed to do this by its then regulator, the Department of Trade and Industry.

It was the Government, through the DTI, that was responsible for regulating Equitable throughout the 1990s when the problems started to surface. It was a Government regulator who wrote to life offices indicating that Equitable&#39s policy of cutting terminal bonuses for people opting to take up a guarantee on a guaranteed annuity policy was acceptable.

It was also Government regulators who did not take any action to force Equitable Life to increase its financial reserves to ensure that guarantees could be provided for when interest rates fell during the 1990s.

If anyone should provide a lifeboat for Equitable, it should be the Government, not the industry.

Ruth Kelly&#39s response to this suggestion, however, is to talk about the industry-funded Financial Services Compensation Scheme and suggest that everyone should wait for Lord Penrose&#39s “independent inquiry” into Equitable to report.

But no one has any idea when the report might be completed. In a recent letter to policyholders, Penrose said he would like to report by summer but there were so many caveats attached to the timetable that the letter was all but worthless.

The report could come too late to head off a crisis if the misselling claims against Equitable start to look more expensive than its provisions would suggest.

Ministers have acted in other cases where a company&#39s failure would create deep and far reaching problems. Look at the loans provided to British Energy. They have also compensated people where regulation has been ineffective such as in the case of those who lost money as a result of the activities of Barlow Clowes.

So far, the way that the Government has dealt with the Equitable affair has been cack-handed and cynical. But it is not too late to do something to improve its sorry record. Instead of trying to shift the cost on to other financially shaky institutions, ministers should temporarily guarantee the solvency of Equitable Life as they did with British Energy, at least until Penrose reports and a more permanent solution is recommended.

Over to you Ms Kelly.

James Moore is insurance reporter at The Times


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