The love affair ends in tears

WHAT goes around comes around. Four short years ago Edinburgh-based Standard Life, Europe’s biggest mutual fund, regarded demutualisation as the devil, and those who supported it as beyond the pale.

I know that from first hand experience. In the early summer of 2000, when demutualisation was last a serious option, this newspaper’s sister paper, The Scotsman, supported the move, arguing that it was in both the long-term interests of Standard Life and of Edinburgh as a leading financial centre. That was when things turned nasty.

Standard Life was outraged. The Scotsman was banned from its palatial headquarters. Advertising was withdrawn. Edinburgh’s other great financial institutions were encouraged to pressure The Scotsman to change its mind. When that did not work, the rest of the Scottish media was whipped up to round on The Scotsman for being a traitor to Standard Life, Edinburgh and Scotland - a task to which they took with gusto.

The Scottish political, financial and media Establishment was united in standing behind Standard Life’s defence of its mutual status. Those on the left - most of whom understood little about the issues involved, saw mutuality (wrongly) as a form of financial socialism, going with the grain of Scotland’s liberal-left collectivist culture - a worthy alternative to capitalist companies quoted on the stock exchange. The panjandrums of Edinburgh finance, especially Standard Life’s, knew it was none of the above; but mutuality offered a cosier (The Scotsman said complacent), less accountable life compared to the rigours of the stock market and the interests of shareholders.

The airwaves, public prints, union meetings and expensive drawing rooms of Edinburgh New Town echoed with condemnation of our sister paper. The Scotsman was a lone voice, denigrated by all proper-thinking people, its publisher (me) a pariah in his own land, unfit to run Scotland’s national newspaper. Before long Standard Life and its allies were pouring poison in the ears of our proprietors. Standard Life was clearly in no mood to take prisoners. It spent £10m of its policyholders’ money in a successful attempt to see off the demutualisation threat.

That was then, this is now. "Standard Life is not wedded to mutuality as some form of mantra," said its corporate affairs director last weekend. Actually, it wasn’t a mantra, it was a fanatical religion. But a reformation is under way now that the Financial Services Authority has deemed that Standard Life has not enough liquid assets to cover its liabilities and must do more to shore up its long-term solvency. Given the absence of alternative sources of funds - the company is already borrowed to the hilt - suddenly a stock market floatation doesn’t look such a bad idea after all.

Except that now it will be to the regulator’s timetable rather than a timing of the company’s choosing. Four years ago Standard Life was valued at around £16bn. Today it would be lucky to fetch £4bn. It is not just that policyholders can expect to pocket substantially less of a windfall than four years ago, but that the company is being dragged against its will to flotation, rather than having enthusiastically grasped the opportunities of being a quoted company when it had the chance.

Very little has gone right for Standard Life since it rejected demutualisation. Every financial institution suffered when markets plummeted in 2000, but Standard Life has made the worst of a bad job by staying over-weighted in equities as stock markets slumped, moving into bonds just as that market peaked then missing the revival in stocks. If it had been a plc the discipline of the market would have forced a more even spread of investments on its executives. But, cocooned and complacent in their mutual status, its bosses continued to plough their own furrow.

Last week was miserable for Standard Life. Already red-faced from the embarrassment of having its credit-rating downgraded to AA - after a £1bn bond issue, trading in its bonds had to be temporarily suspended on Monday as its stand-off with the FSA was revealed.

On Tuesday, chief executive Iain Lumsden was shown the door. A zealot for mutuality, his job prospects turned out less secure than mine, despite 36 years’ service with Standard Life. On Wednesday it was announced that as a short-term measure the company would raise £750m in ‘hybrid’ capital, which is just about the most expensive around.

That same day the new chief executive, Sandy Crombie, spoke the dreaded words "strategic review" - code for considering if demutualisation is now the only way forward. Crombie has been with the company since he left school at 17 in 1966; both outgoing and incoming chief executives are classic examples of the closed coterie that has dominated Scottish mutuals, unchallenged, since time immemorial.

Most of Scotland’s great mutuals have had to be dragged kicking and screaming towards demutualisation; as a result, they have invariably lost everything. Many of the great names of Scottish finance - Scottish Widows, Scottish Provident, Scottish Amicable - have either disappeared or become divisions of non-Scottish financial institutions. The mutual world was comfortable while it lasted and provided well-rewarded, secure and prestigious employment for the small group of Edinburgh private schoolboys and Edinburgh University graduates who ran it.

But their failure to see the writing on the wall and their lack of entrepreneurial drive have resulted in the slow death of Scotland’s great mutual industry and the danger of the decline of Edinburgh as a financial centre.

Today the capital boasts only one genuinely world-class financial institution, the Royal Bank of Scotland. It could have had two if Standard Life had merged with Bank of Scotland. But Standard Life’s love affair with mutuality denied it such a marriage. The tragedy is that the love affair looks like ending in tears.

Not for the first time, the true Scottish patriots turned out not to be those who meekly fell in with Scotland’s establishment consensus - but those who opposed it.