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Why Equitable Life must face up to its liabilities

There is something about this Equitable Life saga that I cannot understand. They sold policies which clearly had a contingent liability in them for the society which threatened their financial viability.

They carried on selling policies after it became app-arent that the contingency was materialising, namely, the guaranteed annuity problems which would threaten all new with-profits business. They offered guarantees that all other life insurance companies who made similar offers have been forced to honour at whatever cost.

They actively sold with-profits bonds last year to policyholders who requested advice over savings plans. In doing so, it seems that conven-tional wisdom is that they missold these investments.

Is it correct that they are now offering a small uplift in policy values in return for policyholders agreeing to forgo the right to claim compensation for misselling? If so, it has to be said that the FSA might presumably have something to say about this.

Every other adviser or provider who has been found guilty of misselling, even though, in many cases, on strict legal interpretation they may have been innocent, has had to stump up the compen-sation, even if by so doing they have been financially ruined. The compensator of last resort has been the ICS, paid for, of course, by an industry levy. Surely this is the situation which should apply with Equitable? Can they really contract out of their liabilities just like that?

How many policyholders in their last year were sold with-profits bonds rather than Isas, which in many cases may have been far more appropriate advice? It would be interesting to review the cases of such sales. How many were encour-aged into WP AVCs and other WP policies when, by any actuarial calculation, the society almost certainly was not financially strong enough to take on any more WP business?

I do wonder if the desperate need to build the WP fund was an overriding consideration, regardless of the fact that by doing so in the circumstances, they were building contingent liabilities which were unwise. The mere fact that they were given authorisation to market stakeholder a few days before closing to new business brings into question the wisdom of the Treasury and the regulators and their lack of understanding and awareness of the parlous financial state.

If not that, then the auditors and actuaries within the com-pany were somewhat careless in their financial analysis. It is also worth remembering that in the last year of their trading, they ran high-profile press and TV campaigns to increase business while shouting about their low charges despite the fact that the more business they took on board, the more they would grow their liabilities.

This would have compoun-ded rapidly with every extra stakeholder sold by their highly remunerated direct salesforce.

Even without the implic-ations of the GAR debacle over which one may have sympathy on account of a strange court ruling, they were running on thin margins, increasing their WP liabilities and about to take on a raft of totally unprofitable stakeholder business.

An attempt to extricate themselves from these liabil-ities by offering a pittance of compensation to policyholders in return for them giving up a statutory right to seek compen-sation for misselling is a very strange deal for the regulator to find acceptable. I wonder if there is potential for a legal precedent if other companies find themselves in a similar position? Because of the magnitude of the problem and its high profile, the regulatory regime and Treasury, who have failed to exercise the right degree of control, are anxious to see the matter cleared up as painlessly and cheaply as possible, even though the treatment of the matter seems to be exclusive to Equitable Life and perhaps not available to other organisations.

PS: Just a final thought for those who want to see the abolition of independent financial advice and for Ron Sandler to think about before handing a report to the Treasury stating what they probably want to hear.

Would the problem have been of this magnitude had Equitable Life sold through IFAs to whom they refused to pay commission in favour of selling through the most highly remunerated salesforce in the industry? IFAs knew just how financially weak they were.

I venture to suggest that even had they paid the level of remuneration to IFAs that they paid to their own sales-force, few IFAs would have marketed their products on account of perceived financial weakness and rather historic mediocre performance of most of their funds.

Equitable ran a brilliant marketing wheeze to convince the public, press and the professionals who invested their money with them that commission was bad and cost the policyholder money. Well, well, Mr Sandler. Is indep-endent financial advice such a bad thing?

I wonder how the entire debacle would have fitted in to a multi-tie scenario had that been the norm (assuming, that is, that Equitable been involved in multi-ties in such a regime)?

Trying to look back at such a situation under a multi-tie regime, who might have been responsible – the multi-tied adviser, the providing company? But how would they control the adviser who was tied to and could select from many providers or some shared responsibility between the panel of providers to whom our multi-tied adviser owes his allegiance?

Would the adviser advising the policy be at fault for recommending the provider used? So, Mr Sandler, the Treasury and FSA, consider some of the implications of the above before scrapping or marginalising IFAs.

Peter French

Troy French & Partners,

Wimbledon

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