How bad must a regulatory system be to allow a company like Equitable Life to fail?
If my memory serves me correctly, Equitable was being highlighted as a tad ropey on the free-asset ratio side of things as far back as 1988.
Whenever one of those massive and ever so slightly tedious surveys of life office financial strength was produced, there it was – Equitable Life, the seven-stone weakling surrounded by musclebound giants.
Then there was the small matter of Equitable's failure to honour its guaranteed pension contracts.
Even if the regulators could be forgiven for falling asleep halfway through the survey material, surely they must have twigged that something was wrong when the firm was dragged kicking and screaming to the House of Lords.
No doubt, the DTI and the Treasury will claim that it was too late by then to have saved Equitable but would they be right?
So far as I recall, the company was on TV virtually every other night during that two-year period urging us all to invest. That advertising campaign must have cost the company tens of millions of pounds, never mind the cost of underwriting all the new business that flooded on to its books as a result.
If the regulators knew the company was in trouble, should they not have stopped it advertising at the very least?
On the bright side, one unique aspect of the Equitable scandal is that IFAs had absolutely no part to play in it, probably because the company refused to pay commission to independent advisers.
To be fair, Sir Howard Davies and the FSA also appear to be innocent of blame in this particular cock-up. Regulation of life offices was the responsibility of the Treasury between January 1998 and January 1999 and before that the DTI took the lead role.
Since neither of these organisations has ever taken the protection of consumers seriously, the FSA would have had virtually no chance of detecting the problem and acting on it when the files were handed over 12 months ago.
If the FSA made a mistake, it was that it adopted the Treasury's “regulatory” personnel along with its files.
Not that everything is lost quite yet. Equitable is not insolvent but has simply closed its doors to new business. Its poor financial position means it is having to cut its exposure to the stockmarket, thereby cutting future returns for policyholders, but, with new capital, the company's position could still be turned round.
Initially, more than a dozen potential bidders expressed an interest in the company but none put a solid bid on the table, apparently because the final bill for the guaranteed pension contracts is still not known.
Last weekend, there were reports that this problem could be overcome if the company's policyholders were to accept reduced payouts on their “guaranteed” pension contracts. In short, the policyholders who successfully took the company to court for reducing their payouts initially now find themselves back at square one.
To my mind, this is unacceptable. It is a difficult call for policyholders who, if they fail to compromise, could see the company go bankrupt but if I were in their shoes I would take the battle to the Gov ernment.
It was the job of the Government to make sure the company was financially sound. Having failed to do that, it should be the Gov ernment that plugs the hole it has so irres ponsibly allowed to emerge.