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Outside Edge

In the wake of the UKPI collapse in the early 1980s it was suggested that

IFAs should seek copies of the provider&#39s DTI return before placing

business with it.

Just for fun (I didn&#39t 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&#39s 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

experience.

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

announcement.

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

situation.

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

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