THE ousting of Mike Ross as chief executive of Scottish Widows has nothing to do with the mis-selling of so-called precipice bonds, according to the Scottish Widows chairman.
In his first public statement since the scandal erupted, Gavin Gemmell said: “The fact that Mike has been replaced has to do with the future. It has nothing to do with blame for the past. The existing business of selling to IFAs is doing very well. The trouble is that Scottish Widows has not co-ordinated well enough with the network.”
Gemmell, a former senior partner at Baillie Gifford & Co, who is also a non-executive director of Lloyds TSB Group, rejected suggestions there was any connection between Ross’s departure and the “precipice” bonds scandal, which last week engulfed Lloyds TSB, costing the bank £1.9 million in fines and £98m in compensation.
Widows devised the Extra Growth & Income Plan (EIGP) at the heart of the scandal, but Gemmell insisted that literature for the EIGP “was very clear indeed about the risks” and incorporated a number of health warnings and descriptions of what could go wrong”.
He added that investors in the EIGP “certainly lost less than they would have done in straight equities. That’s something that has been lost sight of in all this. It was a [Scottish Widows] board decision to approve that product.”
The EIGP promised savers a yield of 10.25% but ended up losing them around half their capital.
The Financial Services Authority last week hauled Lloyds over the coals for mis-selling the product to 51,000 bank customers without giving them sufficient warning of the risks. Around 22,500 of them are to receive immediate combined compensation of £98m.
The FSA said: “The failure to ensure that adequate procedure and controls were put in place to sell EIGP throughout the branch network occurred even though Lloyds TSB had clearly identified in advance the potential risks of mis-selling the EIGP and had put in place a number of measures to mitigate those risks.”
Alan Burton, director of retail funds at Standard Life Investments, said: “Anyone in their right mind knows that you can’t get double the base rate without a massive amount of risk. But they didn’t make that sufficiently clear to investors.”
One former Scottish Widows insider said Ross was driven by the need to meet ambitious sales targets laid down by Lloyds. The insider suggested Ross presented far too rosy a picture of Widows’ future prospects to Sir Brian Pitman (former chairman of Lloyds) and Peter Ellwood (the bank’s former chief executive) in 1999.
He said: “The projections for future growth that Ross put in front of them were pumped up for the sale. But he had created a rod for his own back.”
Some believe Ross should now step down immediately as chairman of lobby group Scottish Financial Enterprise. But SFE last week said Ross would continue as chairman until the end of this year and that it will announce his successor then.
Archie Kane, who replaces Mike Ross as Scottish Widows’ chief executive this Wednesday, denied any linkage between Ross’s departure and the mis-selling of precipice bonds.
He said: “I can categorically say that is not true. The timing may be difficult but that is not right at all. It’s purely a timing thing, it is not related.”
This article was published in the Sunday Herald on 28 September 2003