The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

Media Stories: 21/09/2007 - Northern Rocks the Establishment.

Northern Rock Press Coverage - September 2007

Bail-out not very Equitable

Liz Dolan in Sunday Telegraph, 23rd Sept

As an Equitable Life policyholder who has been told by the government again and again that they were not responsible for supporting us over the Equitable fiasco, I am appalled at the Government’s hypocritical stance regarding Northern Rock savers.

Victims of bust occupational schemes, some of whom have lost their entire pensions, have been told the same thing. I am very glad that Northern Rock customers’ savings have been guaranteed.

But why are they any different from those who have lost pensions and been supported by those who have lost occupational pensions, whose claims for Government compensation have been supported by the Parliamentary Ombudsman and the courts? Or Equitable Life victims, when the European Parliament recommended earlier this year that policyholders should also be compensated by the UK Government?

Gordon Brown was very happy to say no to these people when he was chancellor, but now that he is worried about his poll rating, it seems that he can back the banking system with a seemingly bottomless-pit guarantee. - Liz Kwantes, Cookham

I suppose the straight answer is that the Northern Rock debacle was considered by the Bank of England to be a serious threat to the UK economy, whereas the Equitable Life and company pension scandals was "only" a problem for the victims.

My own view is that, while pragmatic, Gordon Brown’s decision to deprive the company pension and Equitable Life victims of their just desserts is quite possibly illegal and certainly immoral. I also think that the ensuing panic after the Bank revealed the Northern Rock bail-out was due, at least in part, to the lack of confidence in the Government engendered by its attitude to the earlier cases.


What price a little trust?

The Times, Andrew Ellison 22nd Sept, 2007

THE events of the past week have been both bewildering and instructive. Six months ago nobody could have predicted that there would be a run on a British bank before the end of the year, certainly not one with assets in excess of its liabilities and annual profits of more than half a billion pounds.

Yet that is exactly what happened this week when the Northern Rock crisis offered a stark reminder that a bank is nothing without the confidence of its customers. Thankfully, the Government’s decision to offer a watertight guarantee to Northern Rock’s savers calmed the situation and prevented the problem from escalating. Contrary to what many people believe, it is extremely unlikely that the taxpayer will ever have to make good on a penny of its £28 billion promise.

Now, as recriminations begin, there is little point blaming the customers. Yes, there was a certain herd mentality to the people queueing outside the bank’s branches. At no stage was Northern Rock in danger of going bust; it was solvent and had the support of the Bank of England. But quite understandably many customers felt it better to be safe than sorry.

Tellingly, many cited the losses incurred through other supposedly reputable financial institutions, such as Equitable Life, as the reason why they did not trust the words of reassurance offered by Adam Applegarth, the company’s chief executive, or Alistair Darling, the Chancellor of the Exchequer. Others simply said that if the world’s banks were not prepared to lend to Northern Rock, then nor were they.

This crisis illustrates that there is a deep public cynicism about the financial services industry. The banks and the Government both now have a role to play in restoring trust. The first and most obvious step should be reform of the wholly inadequate Financial Services Compensation Scheme (FSCS).

The FSCS, which is funded by a levy on banks, insurers and fund managers, offers full refunds for the first £2,000 saved. Redress is limited to 90 per cent of the next £33,000, while anything over that amount is lost. This contrasts with America, where the Federal Deposit Insurance Scheme guarantees a full refund of $100,000 (£50,000). By prioritising savers before creditors, the US system also allows depositors to access their cash within days of a bank going bust, compared with more than six months in the UK.

Guaranteeing 100 per cent of savings up to a higher limit in the UK may cost the industry more, and savers will ultimately pay through marginally lower interest rates, but it is a step worth taking if it helps to stop a panic the next time bad news about a bank emerges.

The Government must also realise the importance of its role in fostering trust in the financial system. Ministers’ refusal to provide decent compensation to the thousands of people who have lost company pensions may have saved the taxpayer a few million pounds in the short term, but the wider cost to the credibility of pensions, and the financial system in general, is immeasurable. The Government need not underwrite all private pensions and savings, but it must act quickly, competently and fairly when problems arise.

The level and structure of regulation in the banking industry must also be examined, not least whether the stress tests conducted by the Financial Services Authority on banks’ finances over the past few months were rigorous enough.

As for Northern Rock, its management must accept responsibility for adopting a strategy that left it overreliant on wholesale money markets. With Northern Rock’s now tainted reputation, the sooner the brand is consigned to history, the better.

Your feel-good factor is key to next move in interest rates

THE only good news to emerge from the Northern Rock debacle, for borrowers at least, is that the outlook for interest rates has now taken a decisive turn.

Only two months ago most economists were predicting that the cost of borrowing would increase by at least another 0.25 percentage points to 6 per cent or higher before the end of the year. Last month, as the global credit crunch triggered a 10 per cent stock market correction, expectations of higher rates began to evaporate. Now, after a week of almost unprecedented crisis in the UK banking system (and a widely overlooked fall in inflation), many economists are predicting that the next move in borrowing costs will be downwards, possibly before the end of the year. Some are even suggesting that this could happen next month.

But while the mood music on interest rates has changed, some of the hard facts have not. The UK economy is still, at the moment, motoring along nicely. The latest retail sales figures released this week show that last month’s stock market turmoil had little impact on Britian’s redoubtable consumers. The number of mortgage approvals and business confidence also held up well and total employment is at record levels.

Whether the Bank of England does decide to cut rates over the coming months will depend, therefore, on the extent to which the Northern Rock saga affects the wider economy. If the events of the past week sap consumer confidence or undermine an already fragile housing market, growth will inevitably suffer and rates will move lower.

This means that you, the readers, hold the key. If enough of you are feeling sufficiently worried by the events of the past week to tighten your belts in the run-up to Christmas, then rates will probably fall. But if enough of you are feeling relaxed about the whole affair, then expect no change.


Rock bottom - that's where trust in financial services is.

The Guardian, Deborah Hargreaves, 20th September, 2007

If the government wants us to take responsibility for our money, it will have to address why savers are so suspicious

One of the biggest casualties of the Northern Rock debacle is the public's faith in financial institutions. The ranks of savers queuing outside the bank's branches at the weekend clearly did not believe protestations that their money was safe. Their behaviour was perfectly logical. Until the government stepped in with its guarantee for all deposits on Monday evening, savers were only protected up to £31,700, and it could take them six months to get their money back if the bank went bust.

It is no surprise that savers did not believe the bank's assurances; we have, after all, been here before. Every time a new blow-up occurs regulators, politicians and management repeatedly urge the public not to panic, but in fact this has often proved to be the best thing to do. If savers in the now collapsed Equitable Life had left when it first ran into difficulties seven years ago, they would have been able to take out all their money. Equitable subsequently slapped on increasingly high exit penalties to stop others withdrawing, and many are still pressing for compensation.

The financial services sector has itself, largely, to blame for the collapse of public confidence. Mis-selling scandals from pensions to endowment mortgages have made people wary of trusting its marketing pitches or its executives. For far too long, financial services were peddled by salespeople working on commission who were paid to punt products that offered the best rewards for themselves rather than customers. Many products were designed to work when stock markets were buoyant but fell apart in a downturn - and too often, small print on sales literature was at best opaque and at worst misleading.

The savings industry has always been keen to lock people into long-term products and investments because it makes more money that way. But people's circumstances change, and life-altering events such as divorce and unemployment mean many products are cashed in before their term. Similarly, pensions and savings products extracted fees from the first few years of contributions, meaning that savers who cashed in after only a few years might get back less than they paid in.

John McFall, the chairman of the Commons Treasury select committee, a constant critic of the financial services industry, has said that it has limped "from crisis to crisis, each one inflicting more damage on its reputation in the eyes of savers". Under pressure from regulators and public alike, the industry has taken steps to address some egregiously bad practices. But the nature of long-term savings is that many older-style products are still in existence, and public faith is far from restored.

Paradoxically, Northern Rock has been a beneficiary of this loss of trust. Many people have turned away from conventional products and sunk their pension savings instead in buy-to-let flats. Northern Rock was among the lenders fighting for a piece of this market. The collapse in confidence in long-term savings has in fact helped push up property prices as a consequence - and these would be most vulnerable in a house price downturn.

The industry's problems, with the knock to confidence in long-term savings, mean that people now trust their local supermarket with their money more than many financial services companies, a fact which supermarkets have not been slow to exploit. This at least has meant some competition for traditional operators, forcing them to improve their game. Regulators have also weighed in, imposing fines for mis-selling and forcing some companies to pay compensation to savers in failed products. But financial watchdogs are often slow to move and do not act until a fullblown crisis is under way. The Financial Services Authority has to become more muscular in its supervision of the selling and structure of retail products.

The speed with which account-holders moved to withdraw money from Northern Rock is a sign of how unsuccessful attempts to restore trust have been - and there is little doubt this is a big problem for the government. At a time when it is urging us to save more for retirement and accept more responsibility for our finances, our trust in the industry is at rock bottom. Most company final-salary pension schemes have been closed, leaving savers even more dependent on stock market returns. In fact many people have eschewed savings because they have such large debts. Consumer debt in the UK is now more than £1,000bn, and few understand how much it costs them in charges.

Ministers have tried to encourage saving with the introduction of the children's trust fund and state pension reforms, but the public's understanding of money matters is still poor. If we are going to learn to trust the financial services sector again we need more than Alistair Darling telling us to do so. We need to be confident that the industry is not trying to rip us off.


Darling accused of double standards by workers who lost pensions

The Times, Christine Seib 19th Sept 2007

Workers who lost their pensions through corporate failure accused the Government yesterday of opportunism and double standards over its decision to bail out Northern Rock while denying them compensation.

Investors whose savings were slashed after the near-collapse of Equitable Life, and those robbed of final-salary pensions after the failure of their companies, have been refused full compensation by the Treasury. The Government insists that taxpayers should not foot the bill for their losses.

Alistair Darling, the Chancellor, said on Monday that he would guarantee the savings of all Northern Rock customers. By implication, that has made taxpayers responsible for underwriting the entire £1,600 billion held in UK deposit accounts.

Hector Sants, chief executive of the Financial Services Authority, said yesterday that the compensation scheme set up to protect retail bank deposits may be made even more generous to restore confidence in the system. He said that the limits of the Financial Services Compensation Scheme, which pays a maximum of £31,700 on deposits, had contributed to the panic over Northern Rock.

Customers withdrew more than £2 billion after it emerged that Northern Rock had sought an emergency loan from the Bank of England. As much as half of the bank’s £24 billion retail deposit base is expected to drain away.

Having announced that the Government would cover all of Northern Rock’s deposits if the bank collapsed, Mr Darling said yesterday that the same support would be given to other banks hit by the crisis stemming from problems in the American sub-prime mortgage market.

Paul Braithwaite, general manager of the Equitable Members Action Group, said that members were furious over the treatment handed out to Northern Rock’s customers, compared to those of Equitable Life.

“We’ve been stonewalled for six years and Northern Rock, with its highly dubious business model, gets dealt with in a few days,” Mr Braithwaite said. “What’s the difference? An election’s looming this time, that’s what.”

More than one million Equitable policyholders found that their pensions and savings had been cut by up to 50 per cent after the House of Lords ruled in 2000 that the mutual must honour its promises to policyholders with guarantees built into their pensions.

The judgment blew a £1.5 billion hole in the insurer’s finances, forcing it to close to new business.

Despite being responsible for financial regulation at the time of Equitable’s near-collapse, the Treasury refuses to take responsibility for the debacle. The Parliamentary Ombudsman is due to report on the Equitable case next year.

Ros Altmann, a spokeswoman for the Pensions Action Group, said that the Government’s decision to bail out Northern Rock, while refusing full compensation to workers who lost their final-salary pensions when their companies collapsed, was unacceptable. “The Government has consistently said that taxpayers cannot be expected to compensate the victims of this scandal, [but] Northern Rock savers have had their savings fully underwritten by the taxpayer,” Dr Altmann said. “No wonder no one trusts the Government when it says that Northern Rock is safe. It said the same thing about final-salary pensions, and look what happened to them.”

The Parliamentary Ombudsman ordered the Government to cover the total losses of an estimated 125,000 employees who followed incorrect government advice that final-salary schemes were infallible.

The Government has refused, instead setting up the Financial Assistance Scheme, which pays out about 65 per cent of the lost pensions — and costs more to run than it delivers in compensation.


Pension victims accuse Government of hypocrisy

Daily Telegraph, Alistair Osborne, 19th Sept 2007

The Government has been accused of "breathtaking hypocrisy" after giving a £21bn guarantee to the savers in Northern Rock while refusing to compensate the victims of other financial failures.

Campaigners for the 125,000 pensioners in occupational schemes who lost millions of pounds when their companies went bust and for policyholders in Equitable Life, which crashed in 2001, slammed the Government for its double-standards.

Both cases, they claimed, demonstrated similar regulatory failings, particularly by the Financial Services Authority (FSA).

Ros Altmann, a governor of the London School of Economics and campaigner for the 125,000 pensioners, said the Northern Rock bail- out "shows that this Government's treatment of the victims who lost their pensions after believing that their money was completely safe and protected by law – because that is what the Government repeatedly told them – is unacceptable".

The pensioners were members of final salary schemes which failed after 1997 but before the Pension Protection Fund came into force in April 2005, offering 90pc protection. Rulings from the Parliamentary Ombudsman, Ann Abraham, in March 2006, the European Court of Justice in December 2006 and the High Court in February this year have all blasted the Government's handling of the affair.

Yet, Ms Altmann said, the Government continues to refuse to come up with the relatively small sum of "£10m or so a year" to provide workers, such as the 1,000 Allied Steel & Wire employees, with their pensions. She stressed that booklets published by the FSA had told workers that their occupational schemes were safe, with one saying: "You are guaranteed a certain level of pension when you retire."

When asked by MPs last year to defend the use of the word "guaranteed", then FSA chief executive John Tiner said: "When we said that they were guaranteed, we didn't mean guaranteed under all circumstances" – a position the FSA reaffirmed last night. Ms Altmann said such dissembling by the authorities explained the queues outside Northern Rock branches yesterday even after Chancellor Alistair Darling's "guarantee" to savers on Monday.

"The one thing that comes through loud and clear is that, whatever the Government says, we don't believe them," Ms Altmann said.

"Ten years ago if a Chancellor had stood up and said, 'don't worry, you don't need to withdraw your money', that would have been good enough. It's not good enough today."

Paul Braithwaite, general secretary of the Equitable Members' Action Group, said the society's 1m policyholders had similarly relied on "grossly misleading" assurances from the FSA.

He said the Government's handling of Northern Rock showed "breathtaking hypocrisy. Here we have a business model that was highly questionable and the Government is underwriting 100pc of it. Yet we have been fighting for six years over a situation where the Government was asleep at the wheel over regulation".

Chris Grayling, the shadow pensions spokesman, said the Northern Rock bail-out highlighted the Government's double-standards over the 125,000 pensioners.

"Until this case is sorted out, it will be a running sore on the pensions industry," he said.


Darling's botched rescue

Alex Brummer in the Daily Mail, 19 September 2007

The government in the shape of Gordon Brown and Alistair Darling may have felt on Black Monday they had no choice but to end the disgraceful queues at Northern Rock.

The open ended guarantees to depositors may have staunched the bleeding at the Rock and knocked some sense back into share prices, but may, over the longer haul, leave the government with serious problems.

If ever there was a case of 'dangerous dogs' style decision making it was this. The guarantee as offered and spelt out by the Treasury means that all depositors, even if they are overseas (Northern Rock has a big operation in Ireland), stand to be saved, were NR to fail, with British taxpayers money.

The same it seems would happen for any further mortgage banks, were similar difficulties to occur. How this will make the one million hard working savers at Equitable Life, who saw part of their retirement stolen from them without compensation, despite the recommendations of the Parliamentary Ombudsman, remains to be seen.

Absolute fury would be in order as it should for the 80,000 or so people who saved for their pensions, found themselves in wind-up and are now being offered pitiful compensation.

Having left the door of moral hazard open, the government cannot but expect others to come marching through and the ferocity of their case may turn out to be indisputable. All that Darling's action has done is stem the symptoms of the crisis, not the underlying problems.

He has dealt with the retail end of the matter, but the fundamental problems in the wholesale money markets remain. As I understand it, Northern Rock is rapidly running out of liquidity and by the end of the week will have to avail itself of the Bank of England's emergency loan facility - with the need to provide high quality collateral.

It is expected it will also have to pay a penal interest rate. So far the Bank of England has been reluctant to disclose the exact terms. The decision making from above by the Treasury, which dreamt up the deposit insurance, is certainly causing some anguish in the City.

The much vaunted independence of the Bank of England and to a lesser extent the Financial Services Authority is looking strained. The Bank, as this paper has now argued on several occasions, has been slow to act and miserly in its approach. But it at least could make an intellectual argument for its behaviour, which meant its credibility is intact.

What one fears now is that government-interference has undermined-that credibility just at the point that the Bank has recognised the need to do more. For the second week in succession, it is being more generous in the overnight money markets, where banks lend to each other, making an extra £4.4bn available.

There is a growing feeling in the City that King, who has served Britain well in the long term battle against inflation, is being made something of a scapegoat by the politicians. He may have been too technical in his approach but now, like the European Central Bank and the Federal Reserve, he is learning to hold his nose and make the necessary credits available.

Will any of this make any difference to his reappointment next summer?

At this point it is hard to know. It may even be the case that the Governor, recently married, turned 60 and with large outside interests from the National Gallery to Aston Villa, may feel it is time to put away his fan charts and computer simulations. There is certainly no obvious successor as when King took over from Eddie George.

An essential qualification next time round is that the governor is both a skilled economist as well as someone with hands on experience of markets and the City. The name Gavyn Davies keeps on cropping up, but his closeness to Brown - not to mention some recent difficulties in his hedge funds - might well rule that out.

As for the real villain in this crisis, it must be the ineffectual Callum McCarthy of the Financial Services Authority, who unhelpfully described ordinary people, looking out for their savings, as 'irrational'. Before criticising consumers he should take a good look at the Financial Services Authority's record.

Equitable Life happened on its watch for those who have forgotten. Clearly, it should have spotted much earlier the potential instability in Northern Rock's balance sheet and its vulnerability to market conditions. The idea that a former civil servant turned energy regulator is the right person for such a sensitive job is in itself questionable. But McCarthy's communications failure, in the midst of the worst financial crisis in a generation, is deplorable.


Why Rescue Some Savers But Not Others?

Motley FOOL, Cliff D'Arcy 19 September 2007

It appears that the immediate crisis at mortgage lender and savings bank Northern Rock is over. The long lines of savers seen withdrawing money on Friday and Monday fell sharply yesterday. Today, it was almost business as usual at Northern Rock branches.

However, now that savers have been reassured that their deposits at Northern Rock are safe for the present, the ‘blame storming' exercise can begin. Naturally, pundits are queuing up to criticise Adam Applegarth, Northern Rock's chief executive, and the bank's board of directors.

Other commentators point the finger at the Bank of England and the Financial Services Authority (FSA) for failing to rein in Northern Rock's aggressive expansion in the mortgage market. Others are blaming Prime Minister Gordon Brown for presiding over a decade of cheap credit and soaring personal debt while he was Tony Blair's Chancellor.

Regardless of where the blame lies, the fact remains that -- uniquely in my twenty years in financial services -- the government has given an exceptional guarantee to support customers of a struggling financial institution. Although that promise provides welcome relief to Northern Rock savers, it places the cost of support firmly on British taxpayers.

So, my big question is: why offer to bail out Northern Rock savers when ‘New Labour' allowed life insurance and pensions provider Equitable Life to fail? As has been well documented, the spectacular near-collapse of Equitable Life in 2000 left over three million prudent savers and pensioners out of pocket to the tune of billions of pounds.

Furthermore, 150,000 low-income families lost their hard-earned Christmas savings in October 2006, following the collapse of disgraced hamper/voucher firm Farepak. This left some of the country's poorest people nursing a loss of £45 million just two months before Xmas.

Come to think of it, why give guarantees to the UK's fifth-largest mortgage lender, but not support insolvent company pension schemes which were allowed to fail? In total, around 125,000 workers and pensioners lost some or all of their company pensions when their employers went bust or abandoned insolvent occupational pension schemes.

All in all, I'm sure you'll agree that this government has seen more than its fair share of financial scandals! Indeed, by offering help to Northern Rock savers, it stands accused of applying breathtaking double standards. However, I can imagine three simple reasons why the Chancellor, Alistair Darling, stepped up to offer a lifeboat to Northern Rock customers. I label them the three "Rs": Revenue, Reputation and Rewards:

  1. Revenue (supporting the tax take)

    British banks generate around a third of all corporation tax paid to HM Treasury, or over £10 billion a year. If the lack of public confidence in Northern Rock spread to other financial institutions, it could cause a run on the banks. However, by stopping the rot (at least for now), the Chancellor immediately relieved anxieties about the state of British banks' balance sheets. In doing so, he's done his bit to hold onto the huge tax revenues generated by the banks, their employees and their investors. So, in one sense, the Chancellor's move was purely self-interest on the part of the Treasury.

  2. Reputation (hanging onto the reins of power)

    Just eleven weeks after becoming Prime Minister, Gordon "Prudence" Brown found his nickname under threat as worldwide banking turmoil led to the events at Northern Rock. With his reputation for fiscal good sense at risk of a mauling, Gordon did what any wily politician would do. He took whatever action was necessary to make the threat to his strong leadership go away. Gordon wants a decent shot at winning an election without Tony Blair, and you can't blame him for that!

  3. Rewards (winning votes)

    Northern Rock had amassed a large number of affluent, older savers by promoting special savings accounts aimed at the over-fifties. What's more, the Golden Generation of over-55s own around three-quarters (75%) of all UK wealth and, crucially, are the group most likely to vote in elections. By appearing to save their savings, Gordon Brown wins their goodwill and, with any luck, their future votes.

So, in the words of pensions guru and former government adviser Dr Ros Altmann, "The government has consistently said that taxpayers cannot be expected to compensate the victims of this scandal [failed final-salary pension schemes], but Northern Rock savers have had their savings fully underwritten by the taxpayer."

In short, I think it is largely thanks to a fluke of timing that Northern Rock savers found the government coming to their aid. If this crisis had happened last year or next, I doubt that Gordon Brown would have been so keen to help out!