Jeremy Warner's Outlook: Besieged life assurers face another flogging

Cazenove attraction; Shell pay-off
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The Independent Online

The leaders of Britain's four biggest life assurers are due at the House of Commons today for a second public flogging at the hands of the Treasury Select Committee. For those with a fondness for medieval blood sports ­ bear-baiting and the like ­ much entertainment is promised, but if it is enlightenment you are after, then you better off watching the Teletubbies than this.

The leaders of Britain's four biggest life assurers are due at the House of Commons today for a second public flogging at the hands of the Treasury Select Committee. For those with a fondness for medieval blood sports ­ bear-baiting and the like ­ much entertainment is promised, but if it is enlightenment you are after, then you better off watching the Teletubbies than this.

Strange but true, the title of these hearings is "Restoring Confidence in the Long Term Savings Industry". The effect is precisely the reverse. The last time the life assurers appeared, they were vilified in a manner that failed to cast any light on the darkness whatsoever. The ritual humiliation was so intense that you ended up feeling almost sorry for them.

No one could have any confidence in the our leading long-term savings institutions after attending one of these hearings, where every attempt is made to portray the industry as populated from top to bottom by incompetent rip-off artists. I'm no defender of the savings industry, which after a series of headline grabbing scandals deserves much of what is thrown at it, but little purpose is served by further undermining it.

The commission-driven selling structure of large parts of the industry has much to answer for, but underlying nearly all the recent scandals from the collapse of Equitable to the disaster of endowment shortfalls is not so much mis-selling or even incompetence as a series of rapid and unexpected changes in market conditions.

Chief among these were reduced rates of inflation and a consequential collapse in nominal rates of return and interest rates. Most endowment policies sold in the late 1980s were predicated on the expectation of 6 per cent-plus rates of inflation, with interest rates to match. Unwise though these assumptions now seem, they were widely held at the time. Even 10 years ago, few would have predicted that inflation would remain as tame as it has.

The collapse in the stock market, compounded by the Government's hijacking of the tax credit on dividends, has further damaged returns. These are much more important factors than any direct failings by the industry itself. Yet they rarely get a mention in any official analysis of the problem. Even accepting that policymakers must concentrate on things they can do something about, rather than market trends they are powerless to influence, Government and regulatory interference in the savings industry seems only to have made things even worse.

The Treasury Select Committee's determination to rubbish the reputation of the long-term savings industry is surpassed only by that of the Financial Services Authority, which seems to treat those it is responsible for regulating with open hostility and contempt. Small wonder that two of the City's more fiery operators, John Duffield of New Star Asset Management and Terry Smith of Collins Stewart, are no longer prepared to take their punishment lying down. After being accused by the FSA of "ripping off customers", they are threatening to sue for damage to reputation.

It's already too late for Sandy Crombie, chief executive of Standard Life, and one of the industry players who will appear at today's hearing. Standard Life's sales have yet to recover from the damage inflicted on them by the FSA's mishandling of the introduction of new solvency rules.

To believe the leaks and innuendo that came from the FSA, anyone would have thought Standard Life was about to follow Equitable to the great life assurer's graveyard in the sky. This was never likely to be the case but the FSA's vindictiveness and stupidity came perilously close to making it a self-fulfiling prophecy. The new solvency rules have meanwhile so "de-risked" the industry as a whole that they have made the with-profits tradition of saving little more than worthless. It is no surprise that people are deserted their savings plans for the delights of bricks and mortar.

Cazenove attraction

All of a sudden, everyone wants to buy Cazenove, to judge by yesterday's confirmation by the stockbroking firm of a number of approaches. Having converted a few years back from partnership to PLC status, bringing in some big outside shareholders at the same time, Cazenove is duty bound to consider any offers that might be made, but unless the price is too good to refuse, it won't be easy to persuade Cazenove to surrender its long-cherished independence. David Mayhew, the veteran stock broker who chairs this most famous of City names, would much prefer to continue with the planned IPO.

As the only independent stockbroker of any size to have survived from the pre-Big Bang era, pride certainly has a lot to do with it. Unlike virtually everyone else, Cazenove deliberately eschewed the advances of others at the time of deregulation and, much to the surprise of almost everyone but itself, it managed to thrive in the post Big Bang world.

Many of the reasons for that success still hold true today. Cazenove specialises in the peculiarly British trade of corporate broking. Few can explain exactly what this is, which is why the American bulge bracket firms have such difficulty in replicating it, but in essence it is the business of offering sound, independent stock market advice to big corporate clients, enabling them to gauge what's doable and what isn't amid the shifting sands of the City's capital markets. Cazenove is so good at it that it counts nearly half the FTSE 100 as its clients.

Yet even for Cazenove, the world is changing and many of its employees wonder openly what the future holds. Much of the firm's City mystique disappeared when the company converted from the old partnership structure, enabling everyone to see for the first time quite how small it was in terms of profits and revenues. Against the power and size of Goldman Sachs, Morgan Stanley, UBS and the other great beasts that populate the world's financial markets, it barely registers.

Nor is anyone too sure what life will look like after David Mayhew, the Old Etonian fixer whose fingerprints seem to be on virtually every corporate deal or fund-raising of significance that happens in the City. Hugely experienced and well connected, there's no obvious successor, and one half suspects that the elaborate network of connections and influence that sustains Cazenove won't survive him. It's testimony to Cazenove's and Mr Mayhew's powers of adaptation that it has lasted this long.

A final thought, though. Cazenove is successful because it is trusted by its clients. It won't survive absorption into a big, integrated investment bank, where clients can never be entirely certain their interests aren't being compromised by some wider commercial purpose. If they sell, Cazenove's shareholders should be under no illusions. Whoever buys will be doing so largely for the purpose of closing it down.

Shell pay-off

Can Royal Dutch-Shell really be contemplating a £1m pay-off for its disgraced former chairman Sir Philip Watts? Yesterday, it stonewalled on the subject, mumbling that the matter was still under discussion by its remuneration committee. However, the word from inside the South Bank politburo is that some form of severance deal is indeed being contemplated in recognition of Sir Philip's stalwart service and contribution to the group.

Even by the brazen standards we have come to expect from the British boardroom, that Shell could consider giving him anything at all is quite breathtaking. Isn't this the man who was fired after inflicting the gravest damage on Shell's reputation in its 100-year history, not to mention the odd few billions he wiped off the share price? Well, yes, but he was there a jolly long time, comes the reply. And anyway, there's his lawyers to think about. Aside from his pension, which already guarantees him £479,000 a year, Sir Philip should get nothing, even though he is contractually entitled to three months' money (£186,000 based on his last published salary). No judge in the land would award him more. If Sir Philip's lawyers think otherwise then Shell should offer to see them in court. Unless, of course, he's to be paid to keep his mouth shut.

jeremy.warner@independent.co.uk

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