It could be shaping up to be the classic financial services double whammy and it is the retirement advice bit of the market that is feeling the pinch first.
The crisis has, for example, done considerable damage to income drawdown portfolios. It has also removed a lot of the guarantees from the market in this case shrinking the range of third way products as the guarantees got far too expensive, often a knockout blow when the price for a guarantee was already deemed too high by many advisers.
Then one of the ’solutions’ to the crisis, Solvency II, leads to the withdrawal of another product as Axa pulls its enhanced annuity.
The specifics may not fit that analysis perfectly. One third way provider retreated because it messed up its own investments elsewhere. Solvency two has been a long time in the planning.
Axa’s withdrawal could be for a number of reasons. It was, it says, a pilot, though I have always wondered exactly when a pilot becomes a launch particularly when it is two years old. It may have seen this as a way of firing a significant shot across the bows of regulators. It must have a very strict rate of return on capital across its businesses and Solvency II looked set to mess up those calculations. But I still think the headline is fair enough. ‘Crisis causes problems – solution to crisis causes more.’
The other insurers are obviously worried. Earlier in the week, I was at a CBI and PricewaterhouseCoopers event to celebrate the twentieth year of their survey on financial services. The insurance section of the accompanying report now has extra bite given the Axa move, so here is an excerpt quoting two UK CEOs.
Insurance industry executives had concerns about regulatory overkill that would damage their particular businesses. ‘Insurers aren’t banks,” said Tim Breedon chief executive of Legal & General.
The sector had been unlucky in that the new EU Solvency II Directive for insurers was coming soon after the crisis, amid a general assumption that more capital was needed in all financial services companies. ‘That was certainly true of banks,
but insurers don’t have the leverage or the liquidity risk,’ he said. Being required to hold ‘excessive and redundant levels of capital’ would put up costs and reduce the value of pensions and make it more likely that capital would be deployed outside the EU.
Mark Hodges, chief executive of Aviva had a similar worry: ‘There is a fear in the insurance sector that we’re being swept along on a tide of banking regulation, so we’re advocating proportionality and recognition of the difference between banks and insurers.”
Now obviously, it is the at retirement market where things have been felt most acutely. Solvency II may need to be factored into all sorts of aspects of retirement advice. If annuities are more expensive to provide it has an impact on all sorts of products and solutions. One thing is certain. The big insurers are already recalculating what they are doing.
No, Standard Life has not been malicious.
Yes, they did the right thing by compensating those who had been disadvantaged.
So, was the fine justified? I believe it was but not because of the error – we all make mistakes, after all. The reason is because Standard spent two weeks insisting that it wasn’t their fault and that they would not compensate their investors.
It was their fault and the outcry from all sides was such that their hand was forced.
Consumer power at work, perhaps. The fine should serve warning that financial institutions cannot create problems and proceed to wash their hands of them.