Royal Scottish Assurance scandal brings rift in Scottish financial services
Royal Scottish Assurance was meant to be the harbinger of a new era in financial services. It was the last piece in the Royal Bank of Scotland’s financial services supermarket jigsaw and an attempt to bring the continental “bancassurance” model — where insurance is sold through a bank’s branches — to the UK market.
Dr George Mathewson, the Royal Bank of Scotland‘s then-deputy chief executive, described the joint venture with Scottish Equitable as the “last link in the chain of necessary personal finance services”. The new company even introduced its own corporate tartan, containing red, purple and blue hues.
But Royal Scottish Assurance has now been accused of miscalculations that is so serious it is likely to harm the good name of its current parent and could damage Scotland’s hard-earned reputation as a home of trustworthy and prudent financial players.
In its first four years of life, Royal Scottish Assurance had few qualms about selling its customers mortgage endowment products which had very little chance of meeting their mortgage liabilities.
Sceptics would argue Royal Scottish Assurance was so anxious to win new business, it was tempted to pitch the premium at an unrealistically low levels and it didn’t care if customers would be left out of pocket. The practice has left 30,000 customers facing shortfalls of up to half of their mortgage debt.
According to the Financial Services Authority, Royal Scottish Assurance was culpable of “serious and widespread compliance failings”. The regulator has unearthed a litany of bad practice that extends far beyond the four years during which Royal Scottish Assurance was selling its “flexible mortgage plan”.
Royal Scottish Assurance’s two-year hesitation in writing to its clients to advise them they might need to increase their payments — without bothering to mention the original policies were flawed — appears to have particularly irked the Financial Services Authority. It led the regulator to accuse Royal Scottish Assurance of a “lack of high standards, integrity and fair-dealing.” Last week, the regulator, chaired by Sir Howard Davies, fined RSA £2m, a record amount for the UK financial regulator, for “serious irregularities” in the way it was the endowment mortgages were sold.
The episode caused Royal Bank of Scotland to launch a court case against its erstwhile business partner, Scottish Equitable, now a subsidiary of Dutch insurer Aegon, perhaps in an attempt to deflect blame. In July 1999, Royal Bank presented a case against Scottish Equitable in the Court of Session, which went unreported at the time.
Royal Scottish Assurance, chaired by the former Standard Life executive Benny Higgins, did this because of a belief that, as the architect of the flawed and badly-priced endowments, Scottish Equitable not the Edinburgh headquarterd bank itself should stump up the £50m compensation bill in addition to the £2m fine.
But Aegon owned Scottish Equitable has already described the court action, which is likely to muddy the waters for other Scottish financial players for some time to come, as “wholly without merit”.
For reasons seemingly unrelated to the endowment mis-selling scandal, Royal Bank of Scotland has been through a quickfire succession of insurance partners in its Royal Scottish Assurance joint venture: after Scottish Equitable (1990-96) came Scottish Widows (1997-1999) and then CGNU (2000).
In July, CGNU, formed from the 1998-2000 mergers of Commercial Union, Perth-based General Accident and Norwich Union, confirmed it would become the bank’s insurance partner. CGNU said it would pay £600 million for 50% of both Royal Scottish Assurance and NatWest Life Assurance, which together would have a total embedded value estimated at £630 million. But will the gnu now get cold feet?
Benny Higgins has been big enough to apologise for the misdemeanours but there is a feeling at large that the Royal Bank of Scotland will has to work a lot harder at demonstrating that it genuinely values its customers.
This business comment piece was published in the Sunday Herald on 3 December 2000