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Same old regulation story?

On reading the headline in Money Marketing on July 27, Abbey Life clients left in advice limbo, I was prompted to reflect on some of the actions and non-actions of our regulators, both under the Financial Services Act and the new FSA regime.

To what extent have they focused on the easy targets while ignoring other major problems and the consequences of their own shortcomings to the detriment of consumers?

Let&#39s go back to the very start of regulation in 1988 when Lautro decreed that all policy projections had to be calculated on the basis that all companies&#39 charges were the same.

This led to the farcical consequence that, in calculating the required premium for a mortgage repayment policy, no matter what company you chose, the calculation prepared for the client was the same, was guaranteed to be wrong and would probably result in a repayment shortfall even if the assumed investment growth rate was achieved.

So is it any wonder that thousands of endowment policyholders, most of whom bought their policies on the Lautro false projection basis, are now, at enormous expense to advisers and at increased premium costs to themselves, having their policies and expected maturity benefits reviewed?

Who do you think is more culpable in this situation – the adviser, who did not appropriately alert his clients that their mortgage endowment policies might not be sufficient, or the regulator, who forced that adviser to give clients totally incorrect projections? It took a new regulator, the PIA, which had some sensible IFAs on its board, to force productcompanies to produce own-charge projections.

In the early 1990s came the new PIA but still with the same regulatory players and attitudes – £100,000 here to pay off Sir Gordon Downey, a rumoured £500,000 there to settle the single PI scheme breach of contract case. But that was peanuts to a regulator which stood by as the Prudential lost some £500m of policyholders&#39 money on its ill-fated venture in estate agencies.

No powers to intervene was the regulator&#39s response, that is, assuming they knew what was going on. They certainly, and miraculously, found powers to intervene and override established legal precedent when their jobs were under the cosh from the Government over the pension review.

Now, of course, we have the new FSA with even wider, stronger powers to protect consumers. But does it look as though it is going to use them?

Look at the discretionary equity management services being recommended all over the place. Many have as much as 5 per cent up-front charges, complex, recurring introductory fees for intermediaries and highly variable attitudes to client risk profiles and consequent investment selection.

But these services are not packaged products, so polarisation does not apply and would you believe that the sale of a Catmarked Isa requires more training, supervision, product particulars, disclosure and record-keeping than the sale of a discretionary management service? But there has been no scandal yet, so no use of its wider and stronger powers by the FSA here.

Nor were the new powers much in evidence with the take-over of Scottish Widows by Lloyds TSB. Can you conceive of any other industry where the shareholders have to wait nigh on a year for payment for the sale of their business and still have no idea what they are going to get?

If Widows had been a quoted company and Lloyds had bought it out but failed to pay off shareholders in the same way they have failed to pay policyholders, the Stock Exchange and the SFA would have been down on them like a ton of bricks. But not a peep out of the FSA, which is supposed to protect policyholders, not big banks.

So I suppose it came as no surprise to learn that the FSA has agreed the smash and grab raid by Axa on Equity & Law&#39s orphan assets. The reported division of £525m to policyholders and £25m immediately and £1.45bn in 2006 to the company, and thus effectively for its shareholders, does not look much like policyholders&#39 reasonable expectations of a 90/10 split. Of course, an independent actuary has to certify that this deal is in the interests of policyholders, the court has to approve it and policyholders have to vote for it.

But who appoints and pays for the independent actuary? You&#39ve got it, effectively, Axa. And what independent actuary is going to rubbish this deal if, by so doing, he not only upsets Axa but also the other product providers waiting in the wings to carve up their own orphan assets?

When the deal goes to court, who has the resources to argue the policyholders&#39 case there? Who has the necessary skills, resources and access to the company&#39s financial records to devise and put forward a more advantageous deal for policyholders? Certainly not the judge and Axa holds the purse strings for all the legal and professional costs for the court proceedings – unless policyholders can get together to raise their own funds out of their own pockets.

So what is the FSA going to do? Send out guidelines to policyholders when they are asked to vote. But does the FSA have the necessary resources, let alone the will, to guide policyholders properly?

The FSA should insist that, in these and similar circumstances, the company should fund an independent inquiry carried out by the FSA, employing top firms of consulting actuaries and other professionals, not only to consider the company&#39s own plans but also to advance alternative proposals designed to get a better deal for policyholders.

But is that likely? And that brings me back to the Abbey Life headline. Surely the FSA could have predicted that the closure of Abbey&#39s sales operation and the transfer of most of its sales teams to Allied Dunbar would leave policyholders without easy access to advice about their existing policies. Why couldn&#39t the regulator insist that proper advice systems were in place before the deal was approved?

It is the story that has been evident right from the start of financial regulation – too little, too late. And not much indication so far that regulation by the FSA will be any different or ultimately any more effective.


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