The Government continues to drag its heels over compensation payments to Equitable Life policyholders. Do they deserve compensation? And will they ever get some? .
Equitable Life is back in the news, or rather, on the political football field. It’s an issue close to my heart, because I was a director of a life company at the time the story kicked off, and so watched the denouement at the House of Lords with a personal interest.
We’ve had a judge and an Ombudsman picking over the bones at great length. The argument is simple: the regulators failed to regulate; policy holders ‘lost out’; and the taxpayer should be called upon to make good their losses.
The Government has dragged its feet, steadfastly refusing to admit that ‘compensation’ is due, but talking about making ‘ex gratia’ payments to the neediest victims. The usual suspects in the media have performed a shrill, self righteous chorus, demanding justice for the victims.
Equitable Life sold direct, and paid their sales people generously. Their customers bought the line about not paying commission to IFAs. They thought they were smart. They weren't. Many of them had far too many of their eggs in this one basket. Many of them should have known that if it looks too good to be true, it is probably too good to be true. Very few of them understood how a With Profits fund worked. Every single one of them had the option to get a second, third and fourth opinion from an independent. They chose to believe the Equitable Life sales person.
The Government – to say that I am not a fan is to demonstrate a heroic degree of understatement – has got this one right.
While the GAR (guaranteed annuity rate) problem was the proximate cause of Equitable Life's demise, the root cause was that Equitable Life, supposedly running a smoothed fund, held very little back with which to do the smoothing, and so managed to declare annual bonuses that topped the bonus tables by a mile every year.
The funds that did hold something back were of course pilloried by the same media singers on the basis that the money (quaintly termed the orphan estate) belonged to the policy holders and should be shared out immediately.
In everyday Law, if a plaintiff claims that he has ‘lost out’ he has to show that the actions of the defendant led directly to and were the cause of his loss.
If the regulators had moved in on Equitable Life early, and told them to stop being imprudent, what would have happened? Well, if the intervention had been made public, lots of people would have wanted out, and no-one would have wanted in. Even if it had been possible to keep the intervention secret, Equitable Life would still have had to trim - perhaps eliminate - annual bonuses while it built up its cushion of assets over liabilities. It may also have been forced to de-risk its assets ie sell equities and buy gilts. The net result might have been that the policy holders would have got more or less what they actually got when the GAR proverbial hit the fan.
The very idea of calculating compensation is barmy. Is there a mystic actuary somewhere who can establish: when the regulator should have intervened; on what basis; and what the consequences of the intervention would have been for the fund? Would the performance have been relatively strong, or weak, and if so by how much?
The Government is right to reserve the option not to rescue wealthy individuals from the consequences of their folly at the taxpayer's expense, and right to concentrate on ex gratia payments for the needy. They should get on with it, though.
The FSA failed to regulate the banks. I have lost a bundle in bank shares. Should the taxpayer compensate me?
Read this article at http://www.candidmoney.com/articles/article66.aspx
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