In the wake of the UKPI collapse in the early 1980s it was suggested that
IFAs should seek copies of the provider's DTI return before placing
business with it.
Just for fun (I didn't get out much then) I obtained a return and
proceeded to try and glean some information.
The provider which supplied it confirmed that all the companies reported
their financial strength in the same manner with the exception of a few,
one of which was the Equitable.
This deviation from the norm should have kept the company firmly on the
DTI's radar and when the DTI handed over supervision to the Treasury en
route to the FSA, the key staff followed with their files and a wealth of
If this is correct, how can the FSA claim that it was less informed than
those who were previously responsible for supervision?
The discussion as to the application of the recently announced reduction
has demonstrated to me that many otherwise competent individuals remained
ignorant to the detailed workings of with-profits. How else can you explain
the constant restatement: “Reversionary bonusesonce added cannot be taken
away”. Therefore, the reduction must be to terminal bonus only.
The simple fact is that until maturity or death, the declared bonus is
merely a promise and in this case a broken promise. The Advertising
Standards Authority should review the open letter which caused this
confusion as it was ambiguous and did not set out the effect of the
reduction in a way that could have avoided the confusion which followed the
Can I suggest or, better still, implore the FSA to vet any further open
letters to avoid the problems that we have recently encountered. The FSA
has had a difficult summer but then that is the difference between
regulating in theory and regulating in practice.
Personally, I do not see the resolution of the Equitable problem at first
pass. I think it will take much longer and this will test the resolve of Mr
Treves and, more importantly, the Halifax. In the last eight months, I have
met many Equitable policyholders, some have been grateful of any
clarification but the majority resented the concept of paying for advice. I
cannot envisage those same individuals giving up their guaranteed annuity
rates for less than full value without a struggle.
What we need as a matter of urgency is a framework to enable IFAs to
advise the Equitable policyholders in a balanced manner.
This advice has to come from the FSA and soon. But there is the rub. As
the FSA also wants to avoid Equitable going into meltdown, this clearly
shows that the concept of a single regulator has its drawbacks.
The current enquiry on the opaqueness of with-profits is long overdue. The
public want a low-risk low-volatility investment option but not one where
the actuary has total discretion over the eventual outcome.
Where contracts, plans or funds are based on any form of guarantee, they
should have to be pre-approved before they are made available. The grounds
for an approval must include reserving to avoid a repeat of the Equitable
A few years ago I spoke at a conference on the topic of asset allocation
and I made the statement: “With-profits. I have never liked it since I
first understood it.” It may have been somewhat opaque but then is that not
the very problem we have with the with-profits investment option?
Given the concern surrounding with-profits in general, why is the
with-profits bond so popular given its complexity? I just hope we are not
storing up problems for the future.
Robert Reid is principal of Syndaxi Financial Planning