Why Ron has got it wrong

By DAILY MAIL REPORTER
Updated:

 

THERE is a great deal wrong with Britain's insurance industry. Its reputation has been savaged by a series of scandals, including pensions misselling, endowments that fail to pay off the mortgage, poor surrender values and the collapse of Equitable Life. So it needs fixing.

But none of this justifies the sweeping interference in the free market in savings products proposed by Ron Sandler.

His report reminds me of many others commissioned by Gordon Brown, including that on the NHS by Derek Wanless (Sandler's predecessor as NatWest chief executive). They listen to what the Chancellor wants and produce a report that fulfils his expectations.

What is bizarre about this is the public enthusiasm with which big insurers Aviva, Prudential and Legal & General greeted Sandler's incoherent package. It is almost as if they have decided they no longer know how to run and structure their own businesses and are only too happy to let an outsider do it for them.

The bigger players are acutely aware that they are the only people with the 'manufacturing' skills to create the new low-cost products proposed. This could be their weapon to increase their domination of Britain's savings market over the longer haul.

Sandler says his report is based upon 'industry economics'. I would suggest it is a distortion of industry economics. His suggestion that governments should 'avoid' introducing new tax incentives for savings is cloud-cuckooland.

Without a shadow of doubt, the savings products that have been most successful in Britain - from company pension schemes to Isas and life assurance and National Savings - have been those with the most attractive tax features. That is largely why the industry spends so much time promoting its tax-efficient products.

This is but one of several airyfairy assertions from Sandler. He blames the industry's rising cost structure on the increasing number of more complex products, the tax bias in the system and the move to more expensive unitlinked products.

But sophisticated, competitive societies are all about choice. If quoted companies decide that the best way of serving their shareholders and customers' needs is to offer them a range of products suited to individual circumstances, so be it. The 'vanilla' life products proposed may, like stakeholder pensions, be suited to a middle-tolower-income group, but reduce savings ambition to the lowest common denominator. It is as if Marks & Spencer decided that the public no longer deserved its fantastic variety of freshly-made pastas and steamcooked products and offered only fish fingers.

Sandler dismisses mutual ownership as allowing 'smaller and less-efficient firms to survive'. Clearly, mutuality was a factor in the failure of Equitable Life. But for Sandler to dismiss this form of ownership, which itself offers competitive advantage, is gratuitous. Standard Life, one of the more transparent life companies, which offers investors great flexibility in products and markets to invest, is a credit to mutuality. Some smaller friendly societies, which offer tax- efficient investments, provide another important element of choice.

There is, of course, much in Sandler to be commended. Product regulation may make it easier for investors to understand what they are getting into. The 'black box' accounting of some insurers has had its day. But we have moved well beyond the moment when the 'orphan asset' issue and 'smoothing' in life companies had to be dealt with.

The Financial Services Authority under Sir Howard Davies, is already on top of the case. It did not need a former boss of Lloyd's of London simply to repeat the exercise. In fact, the industry, led by companies such as L&G, has been marching down the simplicity route for some time. That is why it has gained new distribution channels such as Barclays. It also recognised the benefits of a lowcost structure in products such as tracker Isas.

But not everyone wants a tracker and, indeed, if everybody had one, there would be no chance of anyone ever outperforming the market. There has to be a role for active and value investors such as Fidelity, which charge a little more for doing the job.

Putting almost all the nation's savings into one great index-linked pot would do no more than exaggerate the swings in a market that is already hypersensitive. In the past, Gordon Brown has tended to accept the recommendations of his chosen experts almost in their entirety. This time, he should stop and think again.

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