Outlook: Now even Standard Life is forced mutually to cut bonuses

The case for a cut; American dogma

It is now nearly three years since Fred Woollard, the carpet bagger from Monaco, tried and failed to persuade Standard Life policyholders to back demutualisation. After the damage done yesterday to annual and terminal bonuses, reducing maturity and retirement payouts by 15 per cent, with more to come, they must be wishing they'd listened. Many will reasonably think they could have found a better use for the surplus capital Standard Life was then awash with than Standard Life itself, which has squandered much of it of it on new business and a badly misjudged attachment to the cult of equity.

By any yardstick, Standard Life's capital reserves remain strong. But they are not nearly as strong as they used to be and as yesterday's bonus cuts demonstrate, even Europe's biggest mutually owned life assurer is feeling the pain of falling stock markets acutely. Even today, the with profits life fund has more than half its assets in equities, but this is a lot lower than it was, and there is no doubt that Standard's exceptionally high equity weighting this past three years has been hugely capital destructive.

Whether that would have happened to the same degree had Standard Life been forced to convert is a moot point, but it has raised further questions over whether mutuality is an appropriate structure of ownership for life assurers. If, like Standard Life, mutual life assurers build up too big a surplus of capital they then become an obvious target for carpet baggers keen to relieve them of it. If on the other hand they pay out all their surpluses in an effort to demonstrate the superiority of mutual ownership, they can find themselves like Equitable with nothing left in the kitty when something goes wrong and no capital markets to turn to to bail them out.

Nobody is saying that Standard Life has been busy these past few years making itself into another Equitable in waiting. Even with yesterday's bonus cuts, its return on life and pension products remains respectable and so too do the capital reserves. All the same, the bear market is testing the durability of the mutual model to its very limits.

The case for a cut

Nobody expects interest rates to be cut after this week's meeting of the Monetary Policy Committee and with good reason. To judge by the recent Nationwide survey, the housing market continues to defy all forecasts of a significant slowdown, and while consumer spending growth is plainly abating, it is still, well, growing. Meanwhile, unemployment remains at historic lows, at least on the official numbers, real wages are still rising at a fair old clip, and so too is the oil price, keeping the overall rate of inflation slightly above target.

There seems no immediate need for a rates cut, especially when the part of the economy that needs it most, business, reckons it doesn't get the benefit anyway. If you are judged a poor credit risk, lower interest rates don't necessarily mean cheaper money. Businesses most in need of relief – because they are financially stretched and cannot afford to invest – are the least likely to get it.

Even so, I'm sticking to my view that eventually rates will have to fall quite a bit further, and actually I think there is a good case for pre-emptive action right now. It's the Chancellor's job to say everything is fine on the ranch, that the British economy is better placed than anywhere else to weather the present international turbulence because of all the wonderful things he's done to make it storm proof.

But the reality is that the American recovery is stalling, Europe's largest economy, Germany, is slipping back into recession, and here in Britain consumption is about to be hit by higher taxes at a time when it is finally beginning to dawn on people that they need to save more to pay down excessive debt and counter the collapse in stock markets.

Like everyone else, the Chancellor is borrowing to spend, which helps because it has a counter cyclical effect. Even so, to rescue the economy from stagnation or worse, he also needs to be cutting taxes, like the Bush Administration in the US. Unfortunately, he cannot afford to do both, so it's spending that takes priority, leaving the MPC with the unenviable task of attempting to put extra coppers in the consumer's pocket without triggering inflation.

Mervyn King, the Bank of England's Governor in waiting, reckons that the longer the housing and consumer credit boom is allowed to go on, the greater the risk of a nasty demand shock somewhere down the road when finally it comes to an end. If he's right, it might seem to justify keeping rates higher than they would otherwise need to be.

Personally I doubt whether cutting interest rates more deeply would have any further effect on the housing market, which looks destined to abate of its own accord anyway. The higher end of the London housing market is already seriously off the boil, whatever self interested estate agents and the glossy property magazines tell you.

Opinions are easy. Unlike me, the MPC has to live with the consequences of its actions, and the responsible thing to do is probably to sit tight and see how things pan out. All the same, it is the MPC that will get the blame if Britain slips into recession, and the chances of recession seem to me rather higher than a quickening of the pace of house price inflation.

American dogma

Policymakers on both sides of the Atlantic keep on going on about how there's much more that unites Europe and America than divides them, but it is sometimes hard to see it that way. Forget Iraq, "Old" Europe and the rest, think about accountancy and corporate governance. OK, OK, so don't read on if you don't want to, but there are big differences on these issues as with so much else, and of late, they have caused tempers to fray.

Sir Howard Davies, chairman of the Financial Services Authority was at his most eloquent and witty in discussing them yesterday in a speech at Harvard University, as indeed he would need to be given the dryness of the subject matter. As it happens, some progress is being made through the International Accounting Standards Board in reconciling different approaches towards accounting and auditing. There has been a general acceptance that the UK's principles based regime on financial reporting is more effective that the US black letter rules.

The same cannot be said of corporate governance, where the US in a knee-jerk response to its own failings in boardroom and audit oversight passed the Sarbanes Oxley Act, which it is attempting to impose on all companies with shares traded on a US exchange.

In point of fact there is almost as much grumbling in the US about the prescriptive and inflexible rules of Sarbanes Oxley as there is in Europe, but Sir Howard is surely right in suggesting that extraterritorial legislation is simply wrong in principle, especially when applied to companies that are perfectly adequately regulated in their home countries already.

We've had no big fraudulent collapse in Britain during this business downturn, though we have had several cases of good old fashioned British incompetence. As far as shareholders are concerned, the distinction might seem a fine one, since in both cases they lose their shirts. Even so, there's been no obvious case of audit failure.

"Corporate governance is an organic subject we learn more about how to optimise as we go along", Sir Howard says. The UK system, relying as it does on codes devised by the private sector but administered under the listing requirements through a statutory authority, allows for rapid change with appropriate flexibility without the need to resort to legislation. Sir Howard thinks he can persuade the US that the British system of corporate governance can be relied on, and that as a consequence Sarbanes Oxley does not need to be imposed on British companies. We'll see.

jeremy.warner@independent.co.uk