Embarrassment all round over L&G

By the standards of corporate disasters, paying a fine of pounds 180,000 plus costs of pounds 220,000 may not appear too bad, but the fact that Legal & General should be down this amount following 'serious breaches' of its regulator's rules is grave indeed.

In public relations terms it is embarrassing, for it makes a bit of a nonsense of those natty little umbrella advertisements on television: in this case the umbrella is truly blown inside out. But this is not just a PR point, or indeed an embarrassment just to L&G. It is an embarrassment to the industry, for this is one of the City's best life assurance groups - large, competent and well managed. If it can goof like this, you shudder to think what the others have been up to.

There are three charges to which L&G has admitted misconduct. They are: that L&G staff and representatives did not conform to their responsibilities under the rules of the regulator, Lautro; that L&G did not monitor these people properly; and that it did not keep proper records of the terms under which policies were sold so that it could be shown the company or its representatives had followed their duty to give 'best advice'.

In reality, though, there is really only one core failure: the failure to sell people the policies that best suited their interests, as any life assurance firm is obliged to do.

There are three ways of looking at this. One is say that quality control in any service industry is always difficult, and it is particularly difficult when the producer of the product, the life assurance group, does not have full control of the outlets that sell it.

L&G had, on this reading, a problem of quality control. But this is a problem with which any franchise operator, any hotel group, any airline is familiar. The observation is perfectly correct, but given the size and long-term nature of many life assurance products, a company such as L&G should have realised that it was as important to control the way the products were sold as it was to produce them.

The second view is that what went wrong was inevitable, for it was the result of the way in which the reward system was in conflict with the regulatory system. Sales people, be they direct employees or indirect representatives, were encouraged by the reward system to sell the longest-term contracts, for these paid the highest commission. Yet they were also obliged to give best advice, which for many people meant shorter- term contracts, or maybe not buying anything at all.

The result has been something akin to the piecework regime that the British motor industry operated until the 1970s, when companies claimed quality was important but paid people according to the volume of work they did, with very little regard to quality.

The third way of regarding this tale is to say that putting the responsibility on to the sales staff only to sell products that are appropriate is quite a tall order. It is not politically correct to say this, for the acceptable view is that the life assurance companies have been greedy and inept.

But if you look again at the parallel with the motor trade, you can see how difficult it is to ensure that all products sold are appropriate. If a young woman walks into the showroom wanting to buy a soft-top, is it the duty of the sales staff to dissuade her on the grounds that she is more vulnerable to carjacking?

No one would ever be able to sell hot hatchbacks to people under the age of 40 because of the difficulties they would have getting insurance. And imagine a salesperson saying to someone in a showroom: 'Under my duty to give you best advice, I have to tell you that according to what you have said about your financial position, you can't afford a new car at all.' But that is precisely what life offices' sales people are supposed to do.

It is right that reform of the framework should therefore be on the table. It is a pleasant coincidence that as the L&G fine was being announced, the Securities and Investments Board was publishing its interim report on the handling of pension transfers and opt- outs, where this clash between the obligation to offer best advice and the financial rewards for doing much the opposite has resulted in some sales of inappropriate products.

The report should be published by the end of this month so perhaps it would be fairer to delay any substantive comment on the SIB plans until then.

But it is worth saying now that were the same standards of best advice applied to company pension schemes, many such schemes would have few new recruits.

In final salary schemes, for example, the company would be obliged to point out to the new recruit that it was most unlikely he or she would still be in the employment of the company at normal retirement age. It would be obliged to compare its transfer provisions with those of alternative schemes. It would be obliged to point out how many people it had retired early, or made redundant.

The best advice might even be: 'Don't join our scheme, but bully us to pay the same amount of money into a personal pension of your own.'