34
Technical Briefing compensaTion
The long road to recovery
Prudential’s Gerry Brown explains the current state of the UK’s financial compensation
system, and assesses how those offshore investors hit by the spectacular collapse
of the Icelandic banks are likely to fare
key poinTs
There is a crucial distinction
between a deposit and
investment in terms of
compensation eligibility
in the UK.
For a depositor to receive
compensation, all that must
happen is for the deposit-taker
to fail. For an investment, it
must be shown that any loss
is down to advice given.
The saga of the collapse of
Icelandic banks in 2008 is
well known, as is the consequence
that those who
invested through the
medium of an offshore
portfolio bond had no statutory
right to compensation
under the UK Financial
Services Compensation
Scheme (FSCS).
The analysis behind this
conclusion rests on the
fact that a policyholder’s
relationship in a life assurance
contract is with the
life office and not the
third parties (investment
houses and banks) providing
the underpinning
investment. The deposits
in the various Icelandic
banks were (and still are)
owned by the life office;
the policyholder has no
contractual interest in them
and has no legal relationship
with the bank. It
must follow that the policyholder
has no compensation
right against the
bank because they had
no legal relationship with
the bank.
l Economic outlook
Of course, the above is
purely a legal analysis; the
economic analysis is that
the bank has ‘failed’ and
the value of the policy
holder’s bond has consequently
fallen. It is the
economic analysis that
concerns the policyholder;
their wealth has been
diminished and legal analyses
are not going to provide
a soothing balm.
The policyholder wants
compensation – a natural
response. But who should
provide the compensation?
My dictionary defines
compensate as 1. to make
amends to someone for
loss, injury or wrong, especially
by a suitable payment;
and 2. to make up
for (a disadvantage, loss,
imbalance etc.). It defines
compensation as 1. the
process of compensation;
2. something that compensates;
and 3. a sum of
money that makes up for
loss, injury etc.
l State intervention
In the UK, the current position
is that the state steps
in and provides limited
compensation depending
on the precise circumstances
of each case. Should
that be the case? Libertarians
might argue that the loss
flows from a private bargain
and the state should
not intervene – a caveat
emptor approach.
On the other hand, pro
INTERNATIONAL ADVISER [www.international-adviser.com] AuguST 2009
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