Sir Howard Davies
The FSA
25 North Colonade
Canary Wharf
London E14 5HS

By fax (020 7676 9700) and post 8^th Feb, 2001

Dear Sir Howard,

Equitable/Halifax: The FSA's responsibilities and the case for caution.

On Monday we faxed you a copy of our press release concerning immediate anxieties about the prospective sale by Equitable Life to the Halifax. On Tuesday Vincent Nolan, our chairman, faxed you with early notice that we ask that the FSA delay regulatory approval to allow sufficient time for proper consultation. This letter is to convey, in advance of our meeting on Monday next, our anxieties in greater detail.

Background:

Our understanding is that the FSA and the PIA are charged as regulators with overseeing policyholders' interests and ensuring satisfactory stewardship in organisations such as the Equitable. In all, more than one million people have a vested interest in the Equitable's with-profits fund, though some do not enjoy voting rights. They have suffered great anxiety in the last six months plus a very real loss of seven months bonus. The FSA is charged with protecting their interests and we would like to help you do just that.

Throughout the autumn of year 2000 policyholders were led by the Society to believe that a sale of the Equitable would be achieved for circa £3 - £4bn, with the re-instatement of the seven months lost bonus. The valuation was presumably endorsed by the then finance director, Chris Headdon, the Equitable Board and the Society's advisors Salomon, Smith Barney.

Mr. Headdon:

Only eight weeks after the collapse of negotiations to sell the whole business the Society, led by Headdon accepted (presumably with the blessing of S.S.B.) an offer from Halifax for the assets and the businesses of the Society, unfettered by the downside, of just £200m guaranteed. An additional £300m was offered for the unit-based business. All the rest is "jam tomorrow" and cannot to be relied upon.

EMAG described these figures as "derisorily low" despite Headdon's claim that: "This is a good result for policyholders?"

The deal is, according to the official press release, "subject only to regulatory approval". Hence we write to you as the appropriate regulators formally to ask you to act with great caution.

The sum offered is VERY poor value for policyholders and holds no prospect of reinstatement of any of the lost bonus. The Halifax's chairman has said that he would expect the acquisition to add £120m anually to his company's profits. In the three days after the announcement Halifax's shares rose sharply increasing that company's value by more than

£1.3 bn - this at the direct expense of policyholders, who have again been sold short by their incompetent Board.

Policyholders would probably have a brighter prospect if the Equitable were now to be run by a liquidator. On Jan 5^th the FSA met with our fraternal action group EPHAG who at that time requested that the FSA explore putting the Equitable into liquidation.

The Halifax deal would transform the Society and divest it of its core business - managing the £30bn with-profits fund. It would leave the future of the Equitable totally fettered - effectively a shell Society, a cadaver, with no way forward or back.

The deal agreed also provides Halifax with a contract to recoup part of its £200m up-front payment. The Equitable Board has entered a "quid pro quo" TEN YEAR contract for Clerical Medical to manage the with-profits fund on questionable terms. Headdon admits: "?investment management costs will be higher going forward".

He confirmed to us in writing that his Board had a strong preference for a vote by members, so why did it not insist? Apparently Halifax made its offer conditional on acceptance NOT being subject to ratification. One can understand Halifax's motive for "trying it on" but we believe this to be flagrantly unfair as it rides roughshod over members.

Headdon has been quoted as saying: "It does not need shareholders' approval because there are no shareholders and it does not need policyholders' approval". This may be technically true but it demonstrates an on-going lamentable contempt for the owners.

The FSA 's role and indecent haste:

The FSA's role in this acquisition is bound to invite scrutiny. The suspicion is that the FSA wishes to solve an embarrassing problem at any cost, or more accurately at our cost.

The FSA is the subject of widespread criticism for not acting to protect policyholders. It is charged with preparing a report on Equitable's demise and, within that, its own role. Speculation has it that this will lay blame squarely upon the Equitable's Board and explicitly on managerial and actuarial mistakes. This report must already exist in draft. It must be feared that out of expedience in the search for "a quick fix" the FSA has entered into an unholy alliance with the Equitable's Board. A body which the FSA believes to be responsible for the dreadful crash.

The spotlight is on the FSA and there has obviously been pressure to resolve uncertainty as quickly as possible. The Treasury Select Committee meeting on Feb 15^th will take evidence from both The Equitable and the FSA, hence it must have been tempting to seal a deal and "bounce" policyholders into an irreversible deal, however untimely on inappropriate.

EMAG acknowledges that the Halifax presents an acceptable "safe haven" that could be endorsed by the FSA but so could GE Capital. Members may be well served if the outcome is that The Halifax becomes "the white knight" - but NOT on these current terms that mug the policyholders and through such a shabby back-door process.

It has never been EMAG or ELMHG's policy to make recommendations to members - rather we have sought much greater information and influence to aid individual members reach their own more informed decisions. But information has ALWAYS been in very short supply from "the secret society".

The timing shows indecent haste: we understand that GE Capital delivered on the afternoon of Friday 2^nd Feb (having given notice by phone the day before) a letter to the Equitable indicating an intention to make a serious offer. We have always been assured that there is absolutely no short-term solvency problem at the Equitable, so time should NOT have been of the essence in arriving at a long-term resolution.

Indeed, after months of patient lobbying EMAG finally persuaded the Equitable to fund a counsel's second opinion on interpretation of The House of Lords ruling (known as the Lever argument). This could transform the magnitude of the so-called "black hole" and it will be received very soon - by the end of February. Arguably, any major action prior to that would be premature and may be proved to be unnecessary.

Any reasonable board would have encouraged, delayed and explored the emergence of a substantial alternative bidder. Instead, the Equitable's Board did exactly the opposite, hit the accelerator and announced 48 hours later that an unconditional contract had been agreed with Halifax. What consideration, if any, could have been given over the weekend by the lame-duck Board to the prospect of an alternative competitive bid? Is this the action of a Board acting in the best interests of policyholders?

The Equitable's Board:

There can be no disputing that the existing Board directors have been discredited.

They and their predecessors are responsible for the demise of a once fine Society. For years the Board has been accused of arrogance, cronyism, poor judgement, secrecy and resisting member participation. It has been nothing if not consistent to the very end.

Finally, after enormous pressure was exerted in December, they "did the decent thing" on December 20^th and publicised their intention to resign as soon as suitable non-exec future replacements could be found. Action groups immediately and repeatedly offered experienced pro tem board directors to help the inexperienced Mr. Headdon steer the Society through the crisis until the next AGM. All such offers were declined.

The recruiting of non-execs has however put on hold until a new chairman has been selected and he will be charged with picking his new team. The effect of these delays is that a discredited board of directors who have indicated their intention to depart cannot possibly have been realistically expected to have executed their duties on behalf of members.

Jonathan Dawson, who is responsible for recruiting the new chairman is a managing director of Lazard. Halifax is one of Lazard's clients. Hence, due to conflict of interests, Mr. Dawson could not have played any active part.

It is EMAGs view that the Equitable has been without any effective board since Christmas. Further, that Headdon was totally unqualified to negotiate a deal of this magnitude.

We believe that the FSA had a duty to satisfy itself that the Equitable had an effective operating Board. The FSA was fully aware of this weakness at the top but once again appears to have done nothing.

The Society's Articles of Association:

We suspect that in accepting the Halifax offer the board may have been acting Ultra Vires, outside the Mem and Arts.

Viz: Para. 54 "The business of The Society shall be managed by the directors."

There can be no doubt that the contract involves significant divestment by The Society of its business, not least the unit fund, even if the fee-based management of the with-profits fund is technically not a disposal. It is quite clear though that the sale contract is contrary to the spirit and intention of the Articles.

The effect of The Halifax deal would be that the only business of the Society would be the operation of the with-profits fund. But the sale contract provides for the fund to be delegated outside the Society to be managed by a leading competitor for fees greater than currently incurred, for a ten-year term. This contract was agreed by a Board of directors, all of whom have indicated that they will soon be departing.

The FSA must surely be obliged to ensure that a contract of sale affecting pensions of over one million policyholders is being negotiated on their behalf by a competent, committed Board clearly authorised under the articles to agree such a contract? There must be a responsibility by the FSA as guardians to ensure that policyholders are treated fairly?

What would EMAG have the FSA do?

1. Withhold "regulatory approval" whilst these concerns are investigated.

2. Impose a short "cooling off" period to allow alternative bidders to decide whether to make a serious offer.

3. Insist that ANY deal for the total transformation of he Equitable must be subject to member ratification.

4. Ensure that the Equitable immediately put in place competent directors.

We look forward to meeting with the FSA on Monday Feb 15^th to discuss the above.

We will release this letter to the press and send it to all members of the Treasury sub-committee, plus MPs known to have expressed interest in the plight of the Equitable.

Yours sincerely,

Paul Braithwaite

Vice chairman EMAG

For and on behalf of:

The Equitable Members' Action Group (EMAG) and

The Equitable Life Members Help Group