Double standards will land you in court

Boy, oh boy, the British insurance industry is in a mess. As we reveal on the front page today, Standard Life, our leading mutual insurer, is facing a bill of up to £5bn if it stands by its word and compensates hapless holders of endowment mortgages who were issued "promises" that if their endowment failed to perform the company would ride to the rescue.

Three years ago cocky institutions like Standard were handing these assurances out like candy. They promised investment without the risk, which is of course an oxymoron.

It was an era in which many believed that share prices could only ever go one way - up. The professionals at Standard were as deluded as everyone else.

Because ordinary people listened to these supposed professionals, the insurers hoovered up new business. The newspapers may have been warning about the dangers of endowments not performing well enough to pay off a mortgage, but that didn't matter when the provider was promising to help make up the difference.

Who could have thought up a more splendid marketing wheeze?

We would actually like to know, because it raises some very fundamental questions about the way these businesses have been run, the way they were audited and the way they were regulated.

Did Standard Life provide in any way for the fact that it might, one day, have to shell out £6,000 to more than half its mortgage customers? No. Perhaps it decided at the time that since it was only offering a promise (and not a guarantee), there was no potential liability to provide for. That suggests an incredibly cynical approach to customers - letting them believe they have insurance against a stock market fall in the prior knowledge that if the market did fall, the cover would be worthless.

Or maybe the insurers took a view that because these were long-term products, there was no need, in City speak, to "mark-to-market" - assessing liabilities on a continuous basis with reference to the state of the financial markets. If that's the case, we're talking more about cavalier management.

It will be interesting to see what the courts have to say about all this, because that's where the matter is headed.

Technical detail


Gordon Brown is a great fan of transparency. He was on about it yesterday morning at the Treasury select committee where he told MPs that the European Central Bank could do with being more open about its interest rate setting decisions.

It's a shame then, that the principle doesn't seem to extend to the private finance initiative which, as Capital Economics pointed out yesterday, is starting to look alarmingly like an Enron-style off-balance sheet wheeze.

The problem is simple. While the capital cost of a school or hospital procured conventionally appears on the government's borrowing immediately, the costs of the PFI are paid for over the lifetime of the project. The impact is to minimise the damage to the public sector net borrowing requirement and the government's overall debt position.

Mr Brown has repeatedly stated that the only justification for undertaking projects using the PFI is if private sector contractors can provide better value for money than the public sector to offset their higher finance costs.

In practice there is clearly an incentive for a government worried about the increasing size of its deficit to take the PFI route, regardless of whether it is better value for money. Capital Economics argue that the capital component of PFI projects should count against public borrowing to level the playing field, a solution also advocated by the Institute for Public Policy Research.

The government's justification for not counting the PFI on its balance sheet is that the risk of the project failing is effectively transferred to the private sector. As the example of Railtrack shows, in the last resort the government is always the guarantor of public sector infrastructure projects. Technical arguments over transfer of risk should not be allowed to obscure the true state of the public finances.

Less mumbo-jumbo


After just 24 days as chief executive of Trinity Mirror, Sly Bailey was understandably reticent yesterday about what her plans for the much maligned newspaper group might be.

Yet her first public appearance made one thing clear: she is going to be a breath of fresh air compared to the previous management and, we suspect, far more hands on.

Philip Graf, her predecessor, was a decent enough fellow. But he looked out of his depth in the post, out of love with the job and a little insipid compared to the tough operators at the head of rival newspaper groups.

While there is no guarantee that Bailey can revitalise circulation and profitability at the Mirror, or deliver a similar share price rating as that enjoyed by investors in Johnston Press, she clearly intends to fight.

Also, she is unlikely to turn routinely to consultants McKinsey for strategic endorsement and management mumbo-jumbo in the way the previous regime did.