Out-Law News 3 min. read
23 Jul 2008, 2:22 pm
But policyholders will have to wait until at least the autumn to find out if the Government agrees with the Ombudsman's report, published last week. The total cost of potential claims has been estimated at over £4 billion. Ultimately, any bill for compensation would have to be met by taxpayers.
The report, Equitable Life: a decade of regulatory failure, is the product of an eight-year investigation by Parliamentary Ombudsman Ann Abraham. It is the latest in a string of enquiries that have looked into different aspects of the Equitable Life saga since it closed its doors to new business in December 2000.
Equitable's problems began in the early 1990s when its directors realised the Society could not meet guaranteed annuity rates (GARs) included in certain with-profits retirement policies.
A GAR is a promise to pay out an annuity at a particular rate when the policyholder retires. But low inflation and low interest rates meant GARs had become significantly higher than current annuity rates.
In 1993, the directors adopted a resolution to allocate bonuses at different rates to different policyholders, which effectively meant they paid lower bonuses to policyholders with annuity rate guarantees. In July 2000, the House of Lords ruled that this practice was unlawful, leaving Equitable with a £1.5 billion liability.
In December that year, the Society closed its with-profits fund to new business and over the following months drastically reduced bonuses for all policyholders. Since then it has sold off most of its operations.
The Parliamentary Ombudsman's investigation focused on the actions and omissions of the regulators at the time.
"My findings in this report show that the prudential regulation of the Society during the relevant period failed – and failed comprehensively" she concluded. "That was not a system failure, but a failure properly to implement in the particular case of the Society the system of regulation that Parliament had enacted".
Maladministration meant regulators were unable to verify Equitable's financial condition for over a decade. Regulatory returns were published without amendment, even though serious questions about the Society's true position remained unresolved.
When matters of concern were identified, the regulators gave little or no consideration as to whether they should take steps to intervene, leading to a series of missed opportunities. Overall, the report found, such actions as were taken "were largely ineffective and often inappropriate".
"The great respect in which the Society was generally held and the reputation it had developed over many years are the only rationalisations that I have been able to find which might explain the passive, reactive and complacent approach to the supervision of the Society as is evident from the acts and omissions of the prudential regulators and [the Government Actuary's Department] during the period prior to 20 June 1998".
Even after the House of Lords' decision was published, the FSA (which took over as regulator in January 1999) provided information on Equitable's situation which was "inaccurate and misleading".
The ombudsman's first recommendation is for the public bodies concerned to apologise to policyholders, who have a "justifiable sense of outrage that those operating the system of prudential regulation so comprehensively failed".
Her second is that the Government should set up and fund a compensation scheme to assess the individual claims of all those affected. Given the time that has already passed, she would like to see this established within six months of the decision to do so – and its work completed within two years.
On a more general note, the ombudsman noted the absence of a single, comprehensive enquiry into Equitable Life and strongly criticised the piecemeal nature of the various investigations that have taken place since 2001.
"Whatever else results from the publication of this report, I hope that I never again have to draw Parliament's attention to such a disjointed process for resolving complaints that have affected so many of the constituents of almost every Member [of Parliament]."
Chancellor Alistair Darling will respond formally to the report in the autumn.
When he does, he may be cautious about setting a precedent for compensation in other cases where it is claimed regulators have failed to take action early enough to prevent financial institutions getting into difficulties.
Life insurance expert Bruno Geiringer of Pinsent Masons, however, hopes Darling will adopt the report's recommendations.
"There are parallels between the findings of maladministration in the regulation of Equitable Life and criticism of the regulators in other high profile cases, such as Barlow Clowes, Vehicle & General and even Northern Rock," he said. "Thankfully, such instances are rare. I hope the Government will accept the ombudsman's proposals for compensation without arguing about setting bad precedents and consider them a small-ish price to pay when compared to the overwhelming need to ensure a safe and just savings platform."