Outlook: Roll up, roll up for McKechnie's compensation gravy train

British Energy; Outlook changes

Sheila Mckechnie, director of the Consumers Association, thinks that endowment mis selling is "nothing short of a national scandal that has shaken the lives of millions of people". Even allowing for Ms McKechnie's penchant for exaggeration, her call to arms seems hard to justify.

Nothing excuses the life assurance industry's taste for mis-selling, or the fantastical claims its salesmen once made for its products, but in the scale of national scandals, the mortgage endowment débâcle comes a long way down the list and as for shaking the lives of millions of people, if that's the case how come so few of them have complained? Ms McKechnie means to ensure that in future they do.

In a survey, 61 per cent of people with endowment mortgages said they were told the endowment would definitely or was guaranteed to pay off the loan. The Consumers' Association extrapolates this less than scientific finding to come up with the big number of five million people who could be in line for financial compensation. What Ms McKechnie does not seem to have realised is that if everyone with a potential shortfall was compensated, it would destroy an industry already perilously close to its statutory solvency limits. The £11bn in compensation awarded over pensions mis-selling would pale into insignificance set alongside this mother of all liabilities.

According to the Financial Services Authority, the cost to life assurers of dealing with the administrative costs alone of an industry-wide compensation order would be £5.5bn. The enormous scale of cash payouts on top would be enough to send many firms to the wall. It is not apparent this would be in the interests even of disadvantaged endowment holders, let alone anyone else.

An endowment is an investment product whose maturity value can never be guaranteed, since it will depend crucially on what the stock market is doing. A mortgage is a fixed sum which must eventually be repaid. To attempt to marry one with the other was always folly, and yet millions of the things were sold on the basis that the endowment would not only repay the loan, but provide a tidy little lump sum on top.

As ever with the life assurance industry, it was a commission-driven thing. The lender would get a commission for selling the endowment and the salesman would get a commission for selling the endowment to the lender. Everyone was happy. Until, that is, the plunging stock market and rate of inflation undermined all the assumptions on which the endowments were sold.

This would indeed have been a national scandal but for two rather important mitigating facts. One is that the rise in house prices has in most cases more than compensated for any likely shortfall. The other is that for many it might still have been more expensive in the round to have opted for the alternative of a repayment mortgage. The problem arises because policyholders haven't been paying enough into the endowment to cover the loan.

Sir Howard Davies, chairman of the FSA once characterised it as a bit like a burglar breaking into your home, but instead of taking anything, leaving a small cash sum on the mantlepiece for his trouble. The FSA's general approach to mis selling of endowments – which is to demand compensation where clear cut cases of abuse can be demonstrated – looks about right. Life assurers are already required to tell their policyholders how to set about lodging a claim. Ms McKechnie's rantings don't seem to add much to the debate.

British Energy

British Energy has bought itself a bit more time in persuading the Government to extend and increase its emergency loan facility, but long-term solutions seem as far away as ever. It's a pretty rum state of affairs when British Energy has to rely on state handouts just to pay the wages, never mind setting the company on a sound financial footing once more. Taxpayers can only hope that the security British Energy is giving in return holds good.

Even with the new loan, it is not yet clear that British Energy has much of a future. If the Government assumes responsibility for decommissioning and the electricity trading arrangements are adapted to give nuclear an economic rate of return, then maybe the private sector would continue to support the company. But these are big ifs and there is no chance of either of them happening until the energy White Paper is completed and published. That's unlikely until next year, even given the added urgency.

In the meantime, other generators warn that they will sue if there are any special favours for nuclear. Extend a rate of return policy to all generators and it's goodbye Callum McCarthy's shiny new electricity trading arrangements. Ministers cannot have both.

Whatever the outcome, it is already clear that bankers and bondholders will have to take a hair cut to salvage anything at all. The chances of there being much left for shareholders once the refinancing is complete look remote. Fidelity, which has raised its shareholding to 10 per cent, seems to think there is still value in the shares. Maybe Fidelity knows something the rest of us don't, but from this vantage point, it looks like delusion.

Outlook changes

Regular readers of these pages might have noticed that the Outlook column has changed. From today, a picture of yours truly replaces the old logo, which was a skyline of the Canary Wharf property complex. In other respects, things will remain much the same. In commenting on the major business, financial and economic stories of the day, Outlook will continue to reflect the expertise, sources and collective judgement of The Independent's business staff as a whole.

This is a good opportunity, none the less, to restate some of the principles which underscore The Independent's approach to business commentary. We aim first and foremost to be open minded and fair. Our mission is to explain as well as to take a view.

Marshalling the arguments is one thing but the aim is to be provocative, compelling and to land some punches as well. The law of averages would suggest that everyone gets their judgement right at least half of the time. Remarkably, many columnists do less well than that. I'm intending to do rather better. In London, we are at the heart of one of the world's great financial centres. The City is a huge source of wealth for our country and it provides financial journalists lucky enough to work here with an unequalled window on the forces that shape the modern world. The City is a delicate flower that must be constantly watered and nurtured, or it will wither and die.

Business is the productive, money creating part of the economy. Individual pursuit of wealth is demonstrably the most effective way of achieving jobs and prosperity for all. Industrial leaders, financiers and entrepreneurs can therefore expect to be supported in what they are trying to achieve unless there are sound public interest reasons for opposing them. On the other hand, there are limits.

In the financial world no less than any other, the interests of the little guy, justice and common decency come first. It is our job to be watchdogs against abuse, recklessness, and negligence. This newspaper is free market in its approach but not so slavishly so that we think all regulation a bad thing. Capitalism survives and prospers because Western democracies have learned to regulate its excesses. This column has an inbuilt bias against monopoly and authority that will sometimes bring it into conflict with Big Business.

The most difficult thing City Editors are required to do is to guide their readers through the treacheries of the investment landscape. So difficult, in fact, that many have given up the endeavour. I've been as wrong as the next guy in my time, but I don't promise to stop trying.

jeremy.warner@independent.co.uk