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Outside edge

I am not overly impressed with the performance of regulators over the past 15 years.

In the early days of so-called self-regulation, they did not tell us that endowment mortgages, stripped of the tax breaks that made them good advice, were questionable. Nor did they identify the problems with pension transfers, opt-outs and non-joiners.

They did not know, or could not make Handbag Helen understand, that there are no guarantees associated with defined-benefit pension schemes and that the only time you can calculate whether someone has lost out is when they retire or shuffle off this mortal coil.

They did not spot the gearing risks in some investment trusts and only started to tut-tut about precipice bonds in the third minute of injury time.

They delivered a deeply flawed CP121, have not admitted that their approach to regulation caused the PI crisis and took ages to summon up the courage to tell their masters that the Sandler suite is potty.

But I cannot help having sympathy for their predicament over life company solvency. This chalice came to them after residing on and off in HM Treasury and the DTI, and there was no reason to believe it was poisoned.

After all, the whole idea is Micawber rather than Einstein. You have assets and you have liabilities. To be technically solvent, you have to have a bit more of the former than the latter. Actuaries had been fooling around with all this for hundreds of years and there had been very few accidents.

Then Equitable Life lost a court case that a lot of well-informed insiders, including in all probability the Government Actuary, thought it would win. Its liabilities were now a lot bigger although it was impossible to know precisely how much bigger. Most other life companies had similar problems although not of the same size.

The real cost of the guaranteed annuity rate chickens will depend on how many of them come home to roost – and on interest rates on the day they turn up at the coop. Better safe than sorry, said the FSA, as it told the industry to reserve for the whole flock.

Then equities went into a tailspin. Life companies had no choice but to sell. By doing so, they helped the market to keep falling, which meant they would have to sell more equities, etc.

The FSA relaxed the rules and it is backing off again with the current series of waivers. We take the mickey out of the French and Germans for signing up to the stability pact and then demanding a relaxation of the rules. Should we not be extracting the proverbial out of the life companies and regulator for the same reason?

On the face of it, the FSA cannot win. If it points the finger at a company, there will be panic followed by failure. If it has concerns about a company but is reluctant for the aforementioned reason to point the finger and the company gets into trouble, there will be failure followed by panic.

The constructive way forward is to update life company taxation, close the old funds to new business, stop wasting time trying to reinvent a transparent form for something which is opaque and accept the logic of Cats, stakeholder and Sandler by regulating the nature and presentation of the product.

The alternative, which the FSA has adopted for the time being, is to relax the solvency rules again and pray. Life companies are doubtless dreaming up new stories to sell with-profits without pointing out that the medium-term outlook for bonuses is grim. Misselling? Give it five years and we will see.

Graeme Laws is a business consultant

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