The MPs, the watchdog and a question of honour

HONOURABLE Members of Parliament are, as we know, honourable. They don't lie. They are committed to the good governance of Britain. And they would never allow their own financial concerns to influence their pursuit of what is best for the public interest.

Indeed, our political masters promise even more. They promise that they will be as open as possible with us, the people who voted them into power. We will always be told when an honourable member has an axe to grind. If he or she seems particularly keen on promoting the interests of widget manufacturers, then we will at least know why: the MP concerned will have declared that he or she is a paid consultant to the British Widget-Makers' Association.

With that in mind, dear reader, burrow into your bookshelves for the minutes of the Treasury Select Committee meeting of 30 October. You haven't yet downloaded it from the Treasury's website? No surprise in that; few people have.

So I'll help you. That meeting was the first of two at which the committee gave a grilling to Sir Howard Davies of the Financial Services Authority. You may have read reports about these meetings. Sir Howard was questioned for several hours about the demise of Equitable Life as the committee tried to find out what went wrong and how it might have been prevented. The questioning was scarcely friendly. Several members (all terribly honourable, remember) apparently felt the FSA, which took over responsibility for life assurers at the beginning of 1999, hadn't woken up quickly enough to the potential for disaster faced by Equitable.

In 1999, of course, Equitable had yet to lose the Lords appeal that forced it to close its doors. (The case, for those who have been in hibernation, turned upon whether Equitable could cut bonuses for those to whom it had promised high annuity rates; the Lords said it should pay the same bonuses to all. In effect, by offering guaranteed annuities, Equitable had taken a punt that interest rates as a whole would not fall; it had failed to lay off that bet through adequate insurance or hedging; it was left having given promises it could not meet.)

Several members of the Treasury committee appeared to suggest - no doubt in the entirely honourable pursuit of the truth - that as soon as Equitable came under the FSA's regulatory umbrella, Davies and his doughty band should have, well, done something. The 'something' is not entirely clear. Forced Equitable to put itself up for sale?

Forced it to stop taking new business? Told it to stop advertising? In any case, according to the more aggressive MPs, the supine FSA should have done something to prevent a potential deep catastrophe becoming even deeper. Remind yourself of some basic points about the Equitable affair.

First, the firm started selling pension policies with guaranteed annuities more than four decades ago. With the exception of a brief period in 1993, it was only in the latter half of the Nineties, as interest rates ticked steadily downwards, that they became valuable to holders of guaranteed annuity policies - and a problem for Equitable.

Second, no one has actually run off with the cash. There is no villain now living on a South American ranch enjoying the proceeds. The issue is one of distribution: to what degree should investors in Equitable with-profits funds subsidise those who took advantage of the firm's promise to guarantee their annuities?

Third, Equitable was stupid and reckless to offer a guarantee without trying to hedge its exposure to a fall in interest rates.

Fourth, there is little doubt that it should have been stopped from offering unhedged guarantees - or at the very least, it should have been forced to make appropriate reserves in case the interest rate cycle turned against it.

Fifth, the FSA was late on the scene. To quote a nice phrase used by Davies himself, it came into this film only in the third reel.

And finally, when the FSA did try to get heavy with Equitable, the firm threatened the authority with judicial review for overstepping the limit of its powers.

No doubt the honourable members on the Treasury committee will weigh all this with care, wisdom and impeccable disinterest.

But how curious it is that it was only late in the 30 October proceedings - well after Davies had given evidence and when the press table was virtually empty - that several committee members murmured something rather intriguing.

Committee member Michael Fallon had earlier admitted he had an Equitable policy. Then, as the meeting was drawing to a close, chairman John McFall declared that he also had an interest. Fellow MPs David Ruffley and James Plaskitt piped up to say that they had, too. Then Nick Palmer said, 'I, too.'

THAT means at least five members of the committee - of 11 at the 30 October session - have an interest in Equitable Life. These five, by implication, have a direct interest in whether blame is finally pinned on the regulators, either before or after the FSA took over responsibility. After all, upon that is likely to hang the issue of whether compensation - for which read taxpayers' money - should be paid to those policyholders as a result of the folly and stubbornness of Equitable's management.

It would be far too cynical to suggest that the MPs' determination to give the FSA a hard time reflected an unhealthy desire to see blame fall on a regulator - any regulator - for the debacle, and therefore increase the chances of the Government having to cough up money for those feeling cheated. Perish the thought.

But two important points emerge. First, wouldn't it have been appropriate for the Treasury committee to exclude from this investigation those with a vested interest in its outcome? At the very least, should not those with a financial interest have declared it very publicly and right at the start of any inquiry?

Second, the regulators charged with overseeing Equitable at various stages in its life - the DTI, the Treasury, the FSA - face a formidable phalanx of investors who want blood (and money). Lawyers, accountants, MPs - these were exactly the people to whom Equitable sold its policies. Whatever the strength of the argument for compensation, those seeking it are an articulate, organised, powerful group. But the Treasury committee - and Lord Penrose, who's now picking over the affair - should remain aloof from lobbying in drawing conclusions about blame.

Oh, and just to avoid any accusation of hypocrisy, I will make a declaration: I hold an Equitable Life with-profits policy and I have a modest amount of pension money with Equitable.