Pay up on Equitable but don’t establish a precedent
We should not expect the government to stand guarantor to every company in Britain – whether manufacturer or investment vehicle. Yet that is effectively what the financial ombudsman is expecting in demanding compensation for the policyholders of Equitable Life.
Equitable made a promise it could not deliver and regulators failed to spot that uncovered liability. But that does not make the regulators – or their state masters – liable for the deficit any more than the police should pay up for burglaries they did not prevent.
We cannot expect regulators to identify 100 per cent of problems but to expect them to pay compensation on the cases that get through their net is to give investors a total guarantee. In this case it is the Financial Services Authority but should we expect Companies House or the UK Listing Authority to recompense creditors if a company fails before those bodies act?
The blame for Equitable’s problems lays primarily with the life assurance company’s management prior to 2000 when it wsas forced to stop taking new business. The regulators may have performed poorly but that does not mean they are to blame.
But neither are the policyholders to blame, and that is what makes this case a hot potato. Investors should pay for taking risk, but with Equitable they had no reason to question the long-established pensions company. And in many cases they gave the company the bulk of their savings, not a marginal slice.
The question is thus whether they should receive compensation irrespective of whether regulators are to blame. A secondary question would be how much.
The ombudsman is wrong to compare Equitable with Northern Rock. The government did not compensate Rock savers: it lent the bank money on which it is receiving a return and which it hopes will be repaid in full. Rock was helped out of a hole: with Equitable the government would be putting money into a hole and would never recover it.
The better parallel is Barlow Clowes, an investment vehicle that went bust in the 1980s leaving savers with losses. Eventually, after regulators had again been blamed, the Conservative government provided £150m ex-gratia compensation.
Darling should take a similar route at Equitable – a partial payment without accepting the blame and without setting a precedent for guaranteeing investments. The payment could be based on the £50,000 limit proposed in his new Banking Bill.
But what he should do immediately is apologise. Money can be sorted out later but the sympathy is due now. He can apologise on behalf of the previous government too – on whose watch Equitable mainly happened - if that helps spread the damage.
