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Verity&#39s VIEW

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&#39s

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&#39s investment portfolio did well compared with

other life insurers in the year to December.

True, Equitable&#39s policyholders had lost about 4 per cent of what they

would have had if Equitable had not cancelled seven months&#39 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&#39s 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&#39 pension funds by 16 per cent.

Indeed, the FSA&#39s 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&#39t 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&#39s 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&#39s 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&#39s 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


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