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Year to Year: 2001

The year will be remembered for one day more than any other – September 11. The terrorist attack that took place reverberated around the world and sent shock wave through financial markets that would be felt for some time to come.

But as devastating as it was, it was not the only event troubling the minds of the UK financial services industry.

After embattled insurer Equitable Life closed its doors to new business in December 2000, the year that followed saw the IFA sector set about picking up the pieces.

January opened with news that thousands of Equitable’s income drawdown policyholders were unlikely to be able to transfer their policies. Meanwhile, then Aifa director general Paul Smee was quick off the mark, forging plans to write to MPs advocating the benefits of seeing an IF A and urging them to get advice on their Equitable Life FSAVC policies.

The FSA did its best to deflect blame for Equitable policyholder woes away from itself with then FSA chairman Howard Davies slamming the insurer’s board in November for its “arrogant superiority” and resistance to the regulator’s attempts to intervene in the guaranteed annuity rate problems.

IFAs also came under scrutiny early in the year, as the FSA began mystery shopping them to keep an eye on the quality of advice being given to Equitable Life policyholders.

Other Equitable worries included fears the insurer could “haemorrhage” off policyholders leaving penalty-free, after pension experts found a loophole that allowed clients to escape without being hit by the 10 per cent market value adjuster.
Equitable hit MM’s front page again in August, as IFAs struck out saying the compensation paid to Equitable policyholders for pension misselling was being rendered almost worthless by the with-profits fund cuts taking place.

But the problems did not stop there with concern surfacing that Equitable’s administrative backlog was causing policyholders wanting to transfer out to miss out on thousands of pounds in lucrative annuity rates and creating more potential compensation claims as a result.

Some IFA back-patting was a welcome reprieve in October, when the Faculty and Institute of Actuaries said IFAs would have stopped Equitable carrying on its “disastrous” reserving and bonus policy. But because the insurer did not sell thorough IFAs it had not come under the same scrutiny as IFA life companies.

When the industry was not thinking about Equitable, the potential for depolarisation was never far from its mind. Headlines such as “IFAs will be massacred by multi-ties” and “Banks will rule the life market if polarisation is scrapped” reflected the fears of the times.

Hopes of combating change took a pounding when the ABI surrendered, without a fight, on the first phase of polarisation consultation and the Conservative Party threw its weight behind multi-ties in April. But support from chief financial ombudsman Walter Merricks helped buoy the industry.

IFA hopes were raised again in October when the threat of “full blown” multi-ties was thought to have receded after then FSA polarisation review head David Severn said a question hung over its practicality. But it was not to last.

As if those issues were not enough to keep IFAs entertained in 2001, stakeholder pensions were introduced. Coming into effect in April, the scramble was on for providers looking to win market share in this brand spanking new market. It was a rush
that has not been repeated with the more recently introduced stakeholder medium-term saving products.

By August product providers were locked in a “commission stand off’ after Scottish Amicable scraped initial commission on regular-premium stakeholder business. The test was on to see if companies could make a go of the 1 per cent price cap.
June saw Ron Sandler appointed to complete a review of the retail financial services industry, following on from Paul Myners’ review of institutional investment trends.

Sandler’s consultation paper published in August, dropped a “commission bombshell” for the industry in its questioning of IFAs’ relationship with clients and whether there was a role for regulatory interest in fee setting and commission levels.
Other headline events in 2001 included AMP’s acquisition of Towry Law for £75.7m, Misys snapping up rival DBS Management and Royal & Sun Alliance seeing its guaranteed annuity liabilities shoot up to more than £1.5bn, putting it into the same league as Equitable Life. But the Towry deal made many advisers furious. AMP split the firm’s liabilities with the Investors’ Compensation Scheme. Towry chief Douglas Black went on to claim he had saved the industry millions. He was out by the end of the year.

In September, the FSA threw a lifeline to providers to prevent them being forced into selling equities by relaxing its statutory reserving rules. It could not have come soon enough with life office expert Ned Cazalet warning in October of the plummeting excess capital levels in life office coffers, needed to support with-profits business. He said it had fallen from £130bn at the end of 1999 to only £20bn. He estimated the industry had little spare capital and predicted some companies would have to stop writing new business and cut bonuses.

In November, Pru, as MM had predicted in the spring, finally axed the Scottish Amicable brand.

The year ended with IFAs backing the Treasury’s decision to regulate mortgage advice and general insurance from 2004. And Prudential axed its 1,400-strong direct salesforce, bringing about the end of the road for the Man from the Pru.

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