Jeremy Warner's Outlook: L&G's Prosser strikes blow for natural justice

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Whether it marks a turning of the tide remains to be seen, but David Prosser, the chief executive of Legal & General, certainly seems to have struck a blow for the long-term savings industry with yesterday's judgment from the Financial Services and Markets Tribunal, even if by so doing he may very well have destroyed his chances of a gong.

Whether it marks a turning of the tide remains to be seen, but David Prosser, the chief executive of Legal & General, certainly seems to have struck a blow for the long-term savings industry with yesterday's judgment from the Financial Services and Markets Tribunal, even if by so doing he may very well have destroyed his chances of a gong. It was a brave decision to take on the might of the FSA by challenging its ruling on endowment mis-selling, and it seems to have been vindicated.

Mr Prosser was giving vent to industry-wide unease when he complained of oppressive regulation by the FSA. The appeals Tribunal has largely backed him up by ruling that the FSA was in error in its approach to the mis-selling case, reaching conclusions not justified by the material before it. Legal & General was, on the other hand, judged to be completely justified in feeling aggrieved. The FSA has been ordered to reduce its £1.1m fine.

Indeed, had the tribunal been the Court of Appeal, it would have been game, set and match to L&G, since the prosecution as originally presented was judged to have been unsafe. It was only because the FSA was able to present the case afresh before the Tribunal, bringing new allegations of systemic mis-selling, that it was able to salvage something from the wreckage. In the event, the Tribunal found that the FSA has proved only eight cases of mis-selling, against an original claim that 39 per cent of all L&G endowment policies had been mis-sold.

This is not much of a plank for the FSA to cling to, but even so it was unwilling to be gracious in defeat. There was little sign of the Tribunal's strictures in the FSA's press release yesterday, which to a casual reader rather suggested that the FSA had won the appeal hands down. Any hope the savings industry may have that the FSA will now reform its procedures and stance to take account of yesterday's ruling seems largely misplaced.

In fact, the FSA is almost wholly unrepentant. The points it draws from the judgment are quite different from those that L&G has chosen to highlight. Were L&G's control systems deficient? The Tribunal agreed that they were, even though the FSA's predecessor regulator, the PIA, had judged them satisfactory. Did these failings cause mis-selling? Again the Tribunal finds that they did, though the case is only proved in an almost insignificant eight instances.

The only thing the FSA seems prepared to concede is that its statistical extrapolation of widescale mis-selling at L&G was at fault. That procedure won't be used again, but as to the broad framework for disciplinary action, under which the FSA acts as prosecutor, judge and jury, the regulator remains unwilling to contemplate reform. Its view is that any attempt to open the Regulatory Decisions Committee up to legal challenge would only create a lawyers charter of no benefit to consumers.

Yet it is to be hoped that Callum McCarthy, the FSA's chairman, will privately draw some lessons from this first significant attempt to challenge the FSA's authority. Of course public trust in the long-term savings industry needs to be restored after a series of high-profile scandals, but the FSA's current penchant for beating its charges around the head, sometimes as this case has proved in an entirely unjustified manner, will result only in an industry without the will or capital properly to serve the interests of its customers.

It's obvious with the benefit of hindsight that the sort of promises the savings industry made to endowment and other policyholders back in the 1980s and 1990s should never have happened. Yet at the time no regulator stepped in to say the promises were wrong and the selling practices inappropriate. Bad practice by the savings industry is hopefully now a thing of the past; so too should be oppressive regulation.

Leahy's leviathan

The welter of praise heaped by the City on Tesco yesterday after another startlingly good trading update is reminiscent of the plaudits that in the mid-1990s used to be routinely won by another well-known high street name - Marks & Spencer. As with Tesco now, M&S could once do no wrong in the eyes of the City and the press. Great tracts of analysis were devoted to the secrets of its success, which was variously attributed to its paternalistic approach to employment, its uniquely British supply chain, or just the plain brilliance of its management, then led by the redoubtable Sir Richard Greenbury.

Even the company's expansion into overseas markets, previously the death of many a British retailer, seemed an example of flawless execution and triumphant success. Why couldn't more British companies achieve the same world-class status of M&S, lamented many a newspaper leader column.

Nobody seemed to notice that if you actually went into an M&S store, it was expensive, down at heel, and progressively out of touch with modern tastes. The supposed success of the overseas operation turned out to be largely a mirage too. As ever, perceptions trailed the reality. The M&S success story was like one of those cartoon characters that keeps on running on thin air long after it has gone over the cliff, only eventually to look beneath it, and with an expression of horror on its face, plunge into the abyss.

I often find myself wondering whether the same fate will eventually befall Tesco, the latest doyen of the retail sector. Everything about the company would at this stage suggest powerfully that it will not, but success seems more and more to be built on monopoly, and that in itself is worrying. Sir Terry Leahy, the chief executive, is understandably less triumphant than he used to be about the ever onwards and forward progress of the Tesco juggernaut, for it is beginning to become an embarrassment.

He even made himself absent abroad on business for yesterday's Christmas trading statement, and the company these days likes to play down its once-proud boast that it now accounts for one in every eight pounds spent in the British shops. Ironically, this factoid was originally aired by Sir Terry as an indication of how much scope Tesco still has for expansion as it begins to attack the soft underbelly of non-food retailing and services. Today Sir Terry would much rather that we forgot all about it and concentrated instead on the everyday low prices Tesco manages to bring to the British consumer.

As Tesco grows ever-more dominant, decimating the high street small guy and undermining many suppliers as it goes, the dangers of a public policy backlash are all too obvious. No wonder so many retailers had such a poor Christmas. All the growth seems to have gone to Tesco. Yet though public policy could end up doing Tesco a lot of damage, particularly if there is a crackdown on its further expansion through planning constraints, it is to more human weaknesses that we must always look for the roots of corporate decline. Complacency and hubris are the biggest enemies of business success.

A restless and driven soul, Sir Terry is not the complacent type, yet somewhere in his organisation a comfortable contentment with the success so far achieved will already have taken root. All big, successful organisations eventually and inevitably grow fat and lazy. They also start to invest inefficiently and unwisely, if only because they can afford to. Somewhere in Tesco, this will already be happening, and try as he might, Sir Terry will not be able to stop it.

As things stand, it's hard to see where the challenge to the might of Tesco might come from. Certainly not J Sainsbury or Wm Morrison. Even the Wal-Mart-owned Asda looks too far behind to catch up. Yet on one thing we can be certain. Eventually, the creative destruction of capitalism will riddle this company with crisis and decline. It won't happen this year or next, but happen it eventually will. While Sir Terry's still around, the company looks set fair, with international expansion alone enough to keep the company powering ahead. But there's no obvious successor, and it's what might happen after he's gone that investors need to watch out for.

jeremy.warner@independent.co.uk

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