Jeremy Warner's Outlook: Who would have thought it? Sir Phil Watts escapes scot-free from Shell reserves fiasco

Standard trumpets its Sipps success; Europe's diverging interest rates
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The Independent Online

To use the jargon, Sir Phil emerges without a stain on his character and quite right too after the nearly two years of abuse and vilification he's received over the affair.

Never mind that Sir Phil's own head of exploration and production said in a memo to Sir Phil shortly before the scandal exploded on an unsuspecting world that he was sick and tired about lying to the markets over the state of group reserves. Never mind too the damning findings of a Shell-commissioned investigation of the mischief. These are just minor nuisances which the FSA has, to everyone's relief, seen fit wholly to ignore.

OK, OK, so that's enough of the heavy irony; I've beaten the point to death. The truth of the matter is that the FSA has made itself a laughing stock by brutally pursuing two directors of a tiny software company through the courts for issuing false and misleading information - and securing custodial sentences against them - while failing to make even the civil offence of misleading the stock market stack up against Sir Phil in the most high profile case of its kind in years.

As it happens, the FSA's own enforcement people were all in favour of stringing Sir Phil up from the nearest tree too. It was the Regulatory Decisions Committee, made up of a motley crew of former bankers, PR men, lawyers, actuaries, stock brokers and policemen, that vetoed taking any further action.

All the same, to the outside world the decision, which carries no explanation or elaboration, looks incomprehensible. On the available evidence, a clearer case of knowingly issuing a false prospectus is hard to imagine. Yet the FSA has ducked it.

Meanwhile, the two AIT directors languish in a prison cell for what to most would seem the far less heinous crime of allowing an overly optimistic trading update to be released to the stock market. By comparison with Shell, it was a tin pot little case of hardly any significance at all. Certainly the scale of the losses suffered by investors bare no comparison.

No doubt there is some compelling legal reason for letting Sir Phil off the hook. If in the end there is no case to answer, there's no case to answer. Yet to the outside world it looks like double standards: one rule for the little guy, pour encourager les autres, and another entirely for the higher, more powerful, echelons of British industry.

Standard trumpets its Sipps success

A 7 per cent fall in new business at a time when rivals are loading it on at 20 per cent plus may not seem like the best of backdrops to float a life insurance business against. Yet Standard Life's chief executive, Sandy Crombie, was yesterday trumpeting his continued loss of market share in the third-quarter numbers as a matter of some personal pride.

To understand the reason for this apparent outbreak of madness, you need to know where Standard Life is coming from. As a mutual, Standard Life hasn't had to care too much about the usual financial disciplines of return on capital, margin and profit. With no shareholders to bring them to account, directors instead judged their success only by growth, to which bonuses were directly linked. With the meltdown in the life fund and the consequent, looming stock market flotation, they have had to change their tune.

Out the door goes growth for the sake of it, as too do high commissions for low-margin business. For years, Standard Life was the independent financial adviser's friend,because of the generous commissions it would pay for new business. Now it is the meanest kid on the block, foregoing much of the business so expensively bought in the past. Standard Life is having to shrink to survive and to prepare itself for the disciplines of stock market life.

But not in all departments. Please don't look at sales of traditional pensions and savings products, says Mr Crombie. Instead concentrate on the new mandates we are winning in fund management and in particular on the growth in sales of self-invested personal pensions (Sipps), which are now outstripping individual pensions as the group's biggest seller.

Sipps are the latest big thing in the savings market, and with the further loosening of investment rules due to come into effect next April, they are set to become bigger still in Standard's view. Perhaps surprisingly, given the recent record, Standard finds itself far and away the market leader in this relatively high-margin product category.

Yet even Standard Life cannot live by Sipps alone, and by putting so much emphasis on this "wrapper" investment product, the company makes itself vulnerable both to another mis-selling scandal - as things stand, Sipps are unregulated - and with pension reform in the air the possibility that government might clamp down on their tax advantages. However, neither of these outcomes look very likely, and with a bit of luck Standard should be able to use its SIPPs success as a key reason to buy in next summer's £4bn IPO.

Europe's diverging interest rates

Question. Would you rather hold your money in German or Greek national debt? Alright, so neither really, and with the interest rate so derisory, who in their right mind would? Yet given the fact that the rate is essentially the same, most of us if forced would opt for the obviously safer bet of Germany.

Market mechanisms would normally force the Greek government to pay far more interest on its debt than that of Germany, this to reflect the greater risks of outright default, or default by the backdoor, otherwise known as currency depreciation.

The fact that there is scarcely any difference at all is down to the convergence brought about by the introduction of the euro. In order to have a currency union among countries, you also require a single interest rate. This applies as much to long-term rates as short-term ones. If there were significant differences in rates, there would be arbitrage between nations (borrow in Germany but lend in Greece), which in time might cause the currency union to collapse.

The European Central Bank helps sustain this convergence of rates by making no distinction between nations in accepting sovereign debt as collateral for providing liquidity. This is in turn underpinned by the stability and growth pact, which is meant to discipline governments into keeping their borrowings under control.

With the pact now being overtly flouted all over Europe, the ECB has been looking at ways of imposing its own disciplines, and in doing so it has come full circle back to the idea that there may be some merit in market mechanisms after all. One way of achieving this would be to refuse to accept the sovereign debt of recalcitrant nations as collateral.

The existing list of eligible collateral doesn't include anything rated by the credit rating agencies at below A minus. Not even the main offenders - Greece, Italy and Portugal - are yet as low as this, so as things stand proposals to enforce the principal are largely meaningless.

Yet the threat does provide a useful way of firing a warning shot across the bows. Where the Stability and Growth Pact, largely controlled by the politicians, has failed, the ECB hopes to succeed. Whether the single currency could withstand such action is an interesting question. The moment the ECB starts refusing debtors collateral, spreads would widen and the single interest rate would disintegrate. It's uncharted waters and nobody knows where it might lead.

j.warner@independent.co.uk

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