Kevin Brown: Glad tidings

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The campaign for compensation for the victims of the Equitable Life fiasco received some seasonal good news this week as Ann Abraham, the parliamentary ombudsman, set out for the first time the detailed parameters of her investigation into the government's regulation of the troubled society.

Abraham's announcement received very little attention. Most observers probably thought it amounted to no more than a repetition of earlier complaints. Others are probably just bored with the whole complicated subject, which seems to have more twists and turns than Muttiah Muralitheran's bowling arm.

However, I think the statement marks an important moment because it ensures that Abraham will address all the serious charges made against government regulators without attempting to sidestep them. The list is long. It includes claims that regulators (variously, the Trade and Industry Department [DTI], Government Actuary's Department [GAD] and the Treasury) were under-resourced by the government; that they adopted a “light touch” regime incompatible with British and European Union law; that they failed to liaise properly; and that there was a conflict of interest caused by Equitable's position as administrator of the principal Civil Service pension scheme.

Other areas for the inquiry include claims that regulators failed to evaluate the potential impact of guaranteed annuity rates on the society's solvency; that they failed to give sufficient weight to Equitable's reliance on future surpluses to balance the books; that they allowed Equitable to publish misleading financial results and projections; that they allowed the society to use practices of dubious actuarial merit, such as undervaluing future liabilities; that they allowed it to declare unsustainable bonuses; and that their failure to force Equitable to provide sufficient reserves played a direct part in its eventual closure to new business and cuts in policy and annuity values.

The publication of this detailed catalogue of issues for investigation is a crucial development, and not just because a ruling that the society was negligently or improperly regulated is now the only hope of forcing the government to pay compensation.

As the reports into Equitable by Lord Penrose, the BBC by Lord Hutton and Iraq intelligence by Lord Butler have shown, the most important thing about these big-picture inquiries is the remit with which they begin their work. Abraham's statement gives no clue about her eventual ruling, but it does suggest that there will be no Hutton-like refusal to engage with the issues.

The tone of the statement also helps to dispel concerns about Abraham's enthusiasm for the inquiry, especially when taken together with a letter she sent to Equitable members three weeks ago. In this context, it is worth remembering that Abraham agreed to undertake this investigation only in the face of widespread dissatisfaction with her earlier ruling that the Financial Services Authority bore no blame for events since 1999. For a long time, she maintained that nothing would be gained by a broader inquiry because the ground had already been covered by Lord Penrose.

This was always nonsense. Penrose did conclude that the society was the prime originator of its own misfortunes. But his 817-page report also catalogued the incompetence of regulators at the DTI, the Treasury and especially the GAD. This was so widespread as to amount to a wholesale failure of the government's duty to ensure fair dealing.

Now we learn that Abraham is not only prepared to reinvestigate the issue of regulation, but has taken possession of the entire archive of evidence gathered by Penrose, much of which is already being re-analysed by her team. Abraham has also made clear that her inquiry will conclude in 2005, if possible, and that she will probe as far back in the society's murky history as is required to determined the role played by regulators.

This is an important point because, as Penrose showed, the farther back she looks, the more likely she is to find evidence of lax regulation.

Abraham had earlier said only that she would take soundings on the time span of the inquiry, while noting that memories were likely to be defective and that documents might have gone missing. This suggested that she wished to limit the inquiry to more recent events that could be blamed on the rejection of the society's differential terminal bonus policy by the House of Lords in 2000, rather than on regulatory failures.

Clearly, she has changed her mind on that issue, as well as on the advisability of a reinvestigation of the ground covered by Penrose. Campaigners will be hoping that this means that Abraham has decided to forget her earlier misguided judgments, and to ignore the government's attempts to wriggle off the compensation hook by refusing to acknowledge that flaccid regulation played a significant part in the society's misfortunes. That line of defence already looks threadbare to anyone who has waded through the Penrose report. Abraham's statement doesn't guarantee that she will end up ruling that there was regulatory failure, but her increasingly robust approach must be making ministers very nervous.

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kevin.brown@ft.com

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