Leading Article: An industry in need of more scrutiny

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ONCE again the insurance and pensions industry is revealed (in a Coopers & Lybrand analysis) to have attracted business by giving advice that left clients potentially worse rather than better off. The latest instance involves up to 2.4 million low earners who were persuaded to opt out of the state earnings-related pension scheme (Serps) and into a personal pension scheme run by a life insurance company. They risk being poorer than if they had remained in the state scheme.

The regulators are also investigating a separate category of abuse suffered by more than 500,000 investors who transferred their retirement savings from an occupational pension scheme, which often offered some form of guaranteed benefits, into private plans often less suited to their needs. They, too, are expected to be out of pocket as a result of the move.

Other victims include those who have sought premature repayment of life insurance premiums - only to discover that not even the amount contributed is returnable, thanks to the huge commission paid 'up front' to salesmen.

Those commissions lie at the heart of the problem. It is accurately said that life insurance and pensions schemes are sold, not bought. Before the Financial Services Act of 1988 introduced two layers of watchdog and a rough regulatory framework, hungry salesmen dependent on commissions could do virtually what they liked, and customers had little redress.

The public is now better protected, and policies are supposed to take account of a client's overall personal and financial situation. As this month's stories show, in the past that has not been the case: of the 6 million private pension schemes so far sold, up to half give grounds for concern.

From next January, commissions will have to be disclosed, which is likely to result in them being spread over a longer period; and a new training regime will be in place. Yesterday the watchdog Securities and Investment Board published various recommendations for raising the quality of sales practices in the pension transfer business. Those are welcome moves towards better regulation and an improved sales culture.

What inspires less confidence is the recent appointment of a senior executive from the insurance industry itself to run the new Personal Investment Authority (PIA). Joe Palmer was chief executive of Legal & General when it failed to comply with rules, for which it was later fined pounds 200,000 by Lautro, the body from which the PIA takes over. Mr Palmer will be well advised to show that as a poacher turned gamekeeper, he is determined to stamp out practices that have so damaged this huge and important industry.