Outlook: Lloyds pays the price for bancassurance sins of the past

Remember the word bancassurance? Current account holders were an under exploited asset, the theory went, that could be used as an easy market place for selling all manner of things they didn't necessarily need or want. The idea of bancassurance was that banking and life assurance could be combined in a mutually beneficial relationship. The branch network would provide the buyers, the life assurance company the product and together the two would make hay.

Good in theory, but as Lloyds TSB is now discovering to its cost, bad in practice. Lloyds' first significant life assurance acquisition was Abbey Life, bought at a time when the concept of mis-selling was barely heard of, still less did people complain of it or seek compensation for its consequences. Abbey Life was the original high pressure life assurance sales house. The co-founder, Sir Mark Weinberg, later went on to found Allied Crowbar (sorry, Dunbar), and then later still, another Abbey clone, J Rothschild Assurance, where he is still chairman. Whatever, Abbey was where it all began.

For a while, the partnership flourished, but Lloyds never managed to tame the aggression of Abbey's sales techniques. As profits rose and rose, it might even have encouraged them. Repeated complaints by regulators went unheeded, and just as the problems start to pile up for the banks, Lloyds is being hit with a massive fine and bill for compensation.

The £165m provision announced yesterday for endowment mis-selling accompanies a further £40m provision for pensions mis-selling, which brings the total cost to Lloyds of the pensions debacle to £1bn. Whatever Lloyds has made from Abbey and its other life assurance businesses over the years, it cannot have been worth this. Lloyds closed Abbey to new business two years ago, and sold its sales force to Allied Dunbar of all people, now trading as Zurich Financial. But it hasn't escaped liability for the sins of the past.

Lloyds points out that the Financial Services Authority is about to have a blitz on the main offenders in endowment mis-selling, and that yesterday's fine is likely to be only the first of many across the industry. That doesn't make the pain any less severe. Lloyds is being made to pay for past excesses at a time when margins are falling because of new competition and bad debts are rising. On top of everything else, there's a big unprovisioned exposure to Argentina and Brazil. Lloyds is big and strong enough to survive the present battering. None the less, the renewed turbulence in the bank's affairs gives a new perspective on its glory years during the 1990s.

As is so often the case in big corporations, the apparent success of those times was just a cloak for a mass of up and coming problems.

National Express

Perhaps the mystery illness that kept Phil White off work at National Express for so long was an aversion to finance directors after all. No sooner has the company's chief executive dragged himself off his sick bed and back into the office than William Rollason has been shown the door.

The official explanation is that National Express needs a finance director who is happy to stick to the day job and file the management accounts. Mr Rollason, who came from a background in corporate finance and wheeler-dealing did not fit the bill.

The inevitable suspicion elsewhere will be that Mr Rollason was doing rather too good a job at deputising for his boss and that he might even have had his eye on a permanant position in the driver's seat. Mr Rollason is not the first senior executive to alight the bus around at National Express with a helpful shove from Mr White and a fat cheque in his back pocket. The chief executive has his hands firmly on the steering wheel and shows no signs of loosening his grip.

So far, Mr White has kept the show on the road successfully. National Express has managed to extend its empire from coaches and buses to become Britain's biggest rail operator. It has also expanded into the US market without coming a cropper like Stagecoach by concentrating on the dull but predictable business of school buses.

But the strains are beginning to show. The group's interim profits were down by almost a half because of a failure to get as many passengers back onto its trains as rivals such as First Group and there is now talk of National Express giving up some of its nine UK rail franchises.

Mr Rollason should not have too much trouble finding another finance director's job – there are vacancies going begging at Trinity Mirror, MyTravel, Amey and WS Atkins to name just four. As for Mr White, he says he is fully recovered from his illness and has never felt fitter or better. He may need all his strength.

Schroders

Michael Dobson, chief executive of Schroders, has been in the City long enough to have had direct experience of both the big post war bear markets - the one in the mid-1970s and now the present one. In its depth and severity, the last one was much worse, but it wasn't as long. Three years of negative returns has never happened before.

For the fund management industry, whose fees are determined on the basis of a percentage share of the value of funds under management, the present bear market has therefore seemed equally bad. Fund managers specialising in equity investment, as Schroders does, have had the double whammy of falling year on year revenues from the funds they manage on top of the constant attrition of disillusioned clients removing their money altogether for the perceived haven of bonds.

During the boom, Schroders deliberately shunned the bubble sectors and was duly punished for its caution with a level of underperformance that made clients desert. It is little consolation that the strategy was ultimately proved correct. Bear markets take no prisoners and Schroders is being made to pay for the excesses of the boom along with everyone else.

The good news from Schroders yesterday is that Mr Dobson, now a year into the job, seems already to be making progress in halting the outflow of funds. In the past four months, there has been no net outflow at all, and although it may be still too early to call the bottom, there are other signs too that Schroders is turning the corner. Investment performance is still mixed, despite the recruitment of some top drawer managers, but on the key three year benchmark, 75 per cent of funds are now outperforming major equity markets.

Still, the problems remain severe. You get some idea of the scale of the challenge from the fact that funds under management fell during the third quarter by 15 per cent from £102.7bn to £87.2bn. The 20 per fall in equity markets during that period makes the relative performance seem reasonable, but that doesn't ease the task of managing a 15 per cent collapse in fee income. Costs must be perpetually trimmed to match the new circumstances.

Mr Dobson's own view is that equities remain a better long term bet than bonds, and that investors will eventually come back. It is in markets like these, when stock picking is the essence of successful equity investing, that active fund management comes back into its own, he says. There speaks a true salesman.

All the same, he must be right. It would be silly to try to call the bottom in such volatile markets. The present rally is the best we've seen in quite a while, but it still looks and feels speculative and it wouldn't take much to finish it off. On the other hand, there's plenty of value to be had out there for those willing to take the longer view. The quality stocks have been trashed along with the rubbish, and eventually they will rise up once more.

jeremy.warner@independent.co.uk