Money: fear of finance

Hope deferred maketh the heart sick, says the old proverb, and a million policyholders in Scottish Amicable will know well what it means this week. They will have to wait three to five years to get the full "benefit" from their company's decision to demutualise and become a quoted company, although it plans to abandon its mutual status in May.

The bonuses when they come will amount to less than pounds 300 each on average, small beer compared with the hand-outs building society members are getting from demutualisation, and they will be added to the value of current policies rather than given away in free shares. This is perhaps inevitable in view of the small size of the average bonus, which would result in too many tiny shareholdings, but it will not please policyholders who see the top 12 directors share up to pounds 14m worth of shares and the 2,000-odd staff get an average pounds 1,000 worth of shares.

It will not exactly make them all fat cats but it does raise the question of who owns a business. The old distinction between shareholders and the managers has been blurred in the past decade, which is fine for incentivising the top managers of public companies but is likely to look like money for old rope to policyholders in mutual companies, since the recipients are currently responsible to no-one at all for their performance.

One result of the derisory Scot Am bonuses for policyholders is that it should put a stop to any dreams carpet-baggers might have of starting small policies with several mutual insurance companies in the hope of making the 500 per cent profits which anyone who put pounds 100 into half a dozen building societies two years ago will shortly start enjoying. It may even discourage speculative demand for second-hand policies issued by mutual insurance companies.

More worrying is the decision to exclude 250,000 investors who hold unit- linked policies rather than with-profits policies. They will get nothing. It will cause the same sort of resentment as the building society conversions which drew a distinction between accounts that conveyed membership and accounts that did not. The distinctions may have been legally correct but they were not obvious to the unlucky account-holders who were left nursing a grievance.

Whatever the technical justification it can only add to the overriding impression of the general public that the financial services industry is a giant lottery in which the privileged insiders make money and the general public get pigs in a poke.

It may well be that many of the smaller insurance companies are too small to meet the reserve requirements and still compete effectively with the big boys, and the choice for them is between demutualising to raise capital for expansion and amalgamating or being taken over. But as the Nationwide is demonstrating with all its might, mutual building societies can afford to charge their borrowers less and pay their investors more than societies which have turned into banks and need to keep shareholders happy.

Other things being equal the same will apply to insurers, and the reminder that their investments must support millionaire management and an army of shareholders before they start to work for the policyholder can only discourage the public from buying insurance-linked investments at a time when they urgently need to buy more.