Outlook: Big bang looms for disgraced life assurance industry

Investor exclusion; Sky feeding frenzy
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The Independent Online

Sir Howard Davies, chairman of the Financial Services Authority, reckons Britain's retail financial services industry is a disgrace. In an extraordinarily intemperate outburst, he's been railing against its failure both to provide value for money, and, as in the case of mortgage endowments and personal pensions, to tell customers when the products sold had turned faulty. In no other industry would the customer be treated with such contempt, he suggests, and there should be compensation all round.

The City and its inhabitants scarcely need or deserve to be apologised for, but in the best traditions of support for the underdog, here goes anyway. The financial services industry in all its various guises has become everyone's favourite Aunt Sally and it is easy to see why. Sir Howard plays to the mob when he rants against the iniquities of the City. Much of what he says is true, but he conveniently forgets one rather vital fact. Over the past two years the stock market has dropped 25 per cent. This is a once in a generation event. It happened in the 1970s and it is happening again now.

An occurrence of this magnitude will always destroy the assumptions on which many savings products are based and sold. This time around it is no different. Indeed, the circumstances surrounding the latest bear market defy all recent history, since it is accompanied by extraordinarily low inflation and interest rates, further undermining the assumptions on which actuaries and other long-term forecasters were working.

Taking the two big "crises" of the moment – endowment mortgages and split capital investment trusts – the underlying cause is not mis-selling but the falling stock market. If share prices had carried on going up, nobody would be complaining. Sir Howard would argue that the industry should have warned investors of the dangers, and been generally less enthusiastic in its commission-driven sales pitch. But it is easy to be wise after the event, much more difficult to spot and act on a crisis in the making. Just ask the FSA about Equitable Life, Independent Insurance and the rest. It is the way of the City, and indeed the world, that products are designed and sold for the moment, opportunistically to take advantage of the prevailing mood. There is nothing the FSA can, or indeed should, do about that.

Still, in every cloud there is a silver lining and the big upside of a bear market is that it acts as a catalyst for necessary change and reform. The fee-driven "boosterism" of Wall Street and the City is being reined in, and in retail financial services root and branch change is in the air. In early July, the Government is due to publish the Ron Sandler report on the savings market. It promises to be dramatic stuff. Life assurers are already preparing for what one graphically describes as "the life assurers' version of big bang". Mr Sandler wants to open up the "with profits" method of saving to public scrutiny.

He's planning to lift the bonnet and show consumers exactly what goes on underneath. For the first time, they'll be able to see precisely what they are being charged, what the investment performance really is, to what extent the value of their investment is being "smoothed" and where the money for the smoothing is coming from. Clear boundaries will be drawn between the interests of shareholders and policyholders. Inefficiencies will be exposed and the obfuscation that lies at the centre of the with profits industry will be swept away.

The upshot ought to be a much more competitive savings industry. Consumers will for the first time to be able to see whether they are getting poor or good value for money. Mis-selling allegations will become harder to make and compensation more difficult to claim. For many in the industry, the reforms should be a blessing in disguise. The stronger players will prosper and grow, and the weaker ones will wither and die. Sir Howard is right about the shortcomings of the financial services industry, but the solutions are obvious enough, and the real wonder is that it has taken him and other policy makers so long to stumble across them.

Investor exclusion

The retail investor nearly always gets a raw deal from the City and as if to prove the point along comes Punch Taverns with a shares flotation so chock full of disregard for the interests of the little guy that he might as well not exist at all. Shares in the pubs group start trading tomorrow but the prospectus is still available only to the select few. Eventually it will be released, the sponsors say, but only coincidentally with the start of share trading.

Newspapers that ask for a copy are politely told it is not available until it has been stamped by the Financial Services Authority. Independent analysts not connected to the banking syndicate running the £682m float are not allowed to see the document either. Are the shares worth buying? Who knows? If you buy when they start trading tomorrow, you'll be doing so blind, in blissful ignorance even of the most basic information, such as the company's trading record, level of debt or assessment of prospects.

Punch says that its IPO is an institutional offer, which bypasses the rules requiring prior publication of the prospectus. This is only partly true. According to the FSA, the prospectus should be publicly available 48 hours before dealings in the shares are due to start. Usually, the document is available a week or two beforehand. Issuing a prospectus less than 48 hours before the float requires a special dispensation from the FSA. Presumably, Punch has obtained one.

In any case, there seems a high risk of the strategy backfiring. All this cloak and dagger stuff achieves is the suspicion there's something nasty lurking in the small print. Some fund managers lucky enough to see the prospectus have already complained Punch's trading record is deliberately confusing. The profit and loss account apparently shows four different year ends covering 49 weeks, 50 weeks, 52 weeks and 28 weeks. Meaningful comparisons are impossible to make.

Whether any of this is enough to cause problems for the Punch IPO is unclear. But after the disappointment of HMV, another poor performance in the aftermarket is just what the growing queue of IPO hopefuls doesn't need. Punch sounds like a good company and an interesting investment. But most investors will rightly think it crazy to buy without seeing the prospectus first.

Sky feeding frenzy

The city cannot get enough of BSkyB to judge by yesterday's successful placing by Deutsche Bank of a giant £1.7bn worth of stock. The placing was five-times subscribed. Over the past few months the bear case on Sky – that it's already near to going ex-growth – has been blown out of the water. The competition is dead, the stock overhang is gone, the threatened Office of Fair Trading crackdown on unfair charging has been quite literally buried under a mountainous 700 page reply, and to make matters better still, the increase in the free float forces the trackers to buy whether they want to or not. The Communications Bill is not as good for Sky as it initially seemed, but when it comes to keeping one step ahead of the regulators, nobody's better at it than Sky. No wonder the City is for the time being totally infatuated with Sky's plain-talking boss, Tony Ball. You never know, he might even produce a profit, the last one being as long ago as 1998.

jeremy.warner@independent.co.uk

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