In the five days since the attack on New York there has been much written about how the atrocity will change the world and our lives forever.
While change will undoub-tedly occur, I do not believe that a peaceful new dawn is but a short conflict away. As rubbernecking motorists slow down and judge traffic accidents before speeding up again themselves, I cannot help feel that a global spirit of co-operation will evaporate. There are just too many vested interests.
One of the most interesting angles has been the idea that we are at war but we do not know who with. Before the US and its allies engage in conflict, it must determine who to aim at. Probably not the kind of problem that Ron Sandler or Howard Davies and his crack team at the FSA are likely to encounter.
Rather than camouflage themselves, topics such as income drawdown, with-profits bonds and high commission levels have all made themselves worthy targets for the Government and the regulator. Groups of ducks probably sit around marvelling at the stupidity of the industry.
Someone once said that a problem shared is a problem halved. I cannot help but feel that financial services could not have been further from his or her mind. In our industry,a problem shared is both likely and multipliable.
A fact not lost on the FSA it would seem. Among all the gloom of the past week, there was some extraordinarily good news for UK life offices. The slackening of the valuation regulations is an incredible step by the regulator. Adjusting the rules to allow offices to retain large equity exposures and consequently protect the UK stockmarket is a quite unprecedented move.
Does this mean we have an entirely artificial situation whereupon the “market” is more important than the regulations? Given the close proximity to the Equitable Life shambles, one would expect the lessons to have been remembered. What we basically have here is a climate in which many of the product providers may be technically insolvent and the regulator has flicked a switch and suddenly they are “sorted”.
I only hope that when life offices next launch an attack on the regulator, they remember the lifebelt that was thrown in their direction when things were in danger of going extremely pear-shaped.
While the move will allow offices to retain a relatively high equity component in their with-profits funds, at least for the meantime, I wonder how many will heed the warning. It seems unlikely to me that the FSA will allow the situation to persist if markets fail to recover soon. Rather than spend every last cent of this regulatory overdraft, companies should take a more responsible approach and moderate their expectations for the performance of their with-profits investments.
Will they? Er, I predict not. Instead, they will continue to skirt the thin line between the truth and the fantasy. Even if the current market situation does not persist for long, the long-term warning signs are there – outmoded assets of this type will struggle to perform in future. Falling interest rates and high volatility mean the types of returns we are accustomed to will not be sustained.
The magical actuarial phrase “policyholders' reasonable expectations” is finally getting the respect it deserves at the back end of investments. How long will it be before sales and marketing processes get a similar treatment? We are still bombarded with past performance statistics that unque-stionably give rise to investment optimism that just cannot be justified.
As Prudential has been brave enough to stop paying high initial commission on stakeholder, I wonder who will be the first to be brave enough to break the with-profits mould? If no one does, I feel a very bumpy ride lies ahead, and soon. Like you, I do not know exactly where the next major problem will arise. We will find out soon enough.
David Ferguson is director of the abacus