Until last week, for all the brouhaha about Equitable Life, it was still
very difficult to pin down exactly what its policyholders had lost.
Equitable had stopped trading. So what? Existing policyholders could if
they wanted still continue contributing to their plans. Equitable's
investments might grow more slowly because reserving rules required it to
sell equities and buy gilts. So what? Last year, gilts outperformed
equities. In fact, Equitable's investment portfolio did well compared with
other life insurers in the year to December.
True, Equitable's policyholders had lost about 4 per cent of what they
would have had if Equitable had not cancelled seven months' worth of
bonuses for 2000. But so what? It was money they had not yet been given.
And they were still being offered a bonus of 8 per cent for the coming year.
Hindsight is, as everyone is been saying, a wonderful thing. When
Equitable closed to business, many personal finance hacks suspected
something was rotten in the finances of Equitable, something more than had
so far been admitted or why had Prudential backed out of buying it? Should
people simply cut their losses, take the 10 per cent hit and get out? A few
prominent IFAs such as Alan Steel thought there was no reason why not. But
newspaper and broadcast editors shied away from suggesting that
policyholders might well want to do so for fear of being accused of
“causing a run” on the society.
The FSA – voice of sobriety – made it clear that we would be irresponsible
journalists if we did. It pointed out – and most of us hacks agreed – that
those approaching retirement might well be better off staying. How wrong we
Last week, FSA chairman Howard Davies was accused of suggesting earlier
this year that policyholders should not rush a decision and might be better
off keeping their money with Equitable. Of course we now know they would
have been much better off if they had rushed their money out of the society
and have lost thousands because they did not .
Davies rebutted the criticism, saying the FSA had simply said
policyholders should consider various options and, if they were worried,
take independent financial advice.
But here is the point. Through no fault of their own, IFAs were as much in
the dark as everyone else about the crucial issue in that advice. Just how
damaged were Equitable's funds and just how likely was it that things would
get worse and not better?
Only Equitable itself and the FSA were in a position to answer those
questions. By May, when Equitable held its AGM, the Halifax deal had been
signed and it seemed that things could only improve.
Neither Equitable nor the FSA mentioned the possibility that Equitable
would have to slash the value of its members' pension funds by 16 per cent.
Indeed, the FSA's position on this is rather like its position on
independent insurance. In as many words, “we knew they were reviewing their
finances but we could not tell you this disaster was possible because we
ourselves weren't told.”
The FSA says it was in constant, almost daily touch with Equitable about
this review. So how on earth did they not know this earthquake was coming
or at least that it was a risk? Given that this had a crucial bearing on
best advice, should not the possibility of this at least have been raised
and made public?
It will not do to reply that neither the FSA nor Equitable could predict
the movements of the stockmarket. First, Equitable's funds grew by a small
amount in the year to December and the stockmarket has not fallen by as
much as 16 per cent since then. So not all the loss is down to the
Equitable's new directors say they did not let on that this was a
possibility because they could not. That would be like warning shareholders
that a rights issue might be necessary ahead of time. The warning makes the
action you need to take less feasible. But that is no good as an excuse.
With a rights issue, shareholders have a choice as to whether to accept it.
Equitable's policyholders had no choice about losing their money.
Either the FSA did not know this was a possibility – in which case, even
the closest monitoring by the FSA has proved embarrassingly ineffectual –
or the FSA did know and did not warn IFAs or customers. In which case, it
must share responsibility for the fact that, over the last year, crucial
information about the risks inherent in staying with Equitable Life was
It must share responsibility for the fact that policyholders were
prevented from taking an informed decision and IFAs were prevented from
giving them the best advice.
Andrew Verity is personal finance correspondent for the BBC