Paul Braithwaite of EMAG - oral script

(Not for publication)

introduction

I will start with a couple of quotes from the famous American anthropologist, Margaret Mead, which, hopefully, will resonate;

“Never doubt that a small group of thoughtful, committed citizens can change the world…….”

and

“I was brought up to believe that the only thing worth doing was to add to the sum of accurate information in the world.”

I co-ordinate an extraordinary organisation, EMAG, which has a 10-strong board and several thousand paying members whose common experience is OUTRAGE at the UK government’s treatment of the Equitable scandal.

EMAG was formed when problems surfaced more than six years ago, when I was still a young man, and it has behaved with dedication and consistency. Our dedication is to serve investors, present and past, in all the types of Equitable policies who have suffered unexpected large losses to their precious pension savings.

EMAG’s new accurate information contributions

Perhaps EMAG’s greatest contribution to the battle has been to add consistently to the sum of accurate information about Equitable, because there’s been an awful lot of spin. For example, back in November 2004, EMAG issued a paper by our accountants, Burgess Hodgson, as an antidote to Equitable’s so-called “Fact Sheet” that was so flagrantly misleading that we dubbed it “toxic waste”. Interestingly, the Financial Ombudsman Service (FOS) distributed Equitable’s paper and declined to distribute ours.

This week, EMAG has added a lot more information by providing the EQUI Inquiry with no less than six new written submissions and legal Opinions. The most substantial is the one from Lord Neill on the reprehensible behaviour of the FOS. The British have consistently bragged that the FOS is a consumer protection refinement not to be found elsewhere in Europe. Indeed, its services have not been made available to non-UK citizens but you will hear the reality of how dubious the Service provided has actually been.

EMAG acknowledges that a tick-box analysis can demonstrate that the UK did transpose the Life Directives. But the UK’s civil service is a past master at cosmetic tasks. We should also look both to the intention of the legislation and whether it has been delivered in practice.

Therefore, the second subject in EMAG submissions is an up-to-date forensic evaluation of the Life Directives and how the UK regulators have arguably failed operationally, by barrister Josh Holmes. I really encourage you, please, to read his submission very carefully.

The third subject addressed is technical actuarial evaluation reports on over-bonusing in the 1990s. EMAG commissioned actuary Steve Dixon to advise us on causation and what happened. You will find his evaluation, which confirms Lord Penrose’s conclusions, thorough and convincing. The study’s companion-piece is a more approachable summary by Burgess Hodgson. EMAG asks that these particular documents remain privy to EQUI for now, as we do not wish to assist the British Establishment by giving it advanced notice to prepare its rebuttal.

Today, I’m going to confine myself to two main subjects: my belief that there has been a systematic cover-up and the ongoing pattern of behaviour of the FSA.

An Establishment cover-up

It is my view that there is such a thing as “The British Establishment” and that it moves in a seamless, extremely effective manner.

The UK Treasury itself became the regulator of life companies in 1998. I don’t doubt that the depth of the potential catastrophe was recognised at that time. I believe that since then the over-arching plan has been to deny culpability, avoid compensation and to cause delay after delay - in the expectation that we will eventually go away, swallowing policy value reductions in excess of €5bn that we attribute to regulatory failure for over a decade. And it’s all excusable because it’s for “the greater good” of maintaining confidence in the industry.

One of this British Establishment’s favourite devices is to call for a report, to deflect and delay and, if necessary, to then call for another one. Equitable has had more than its share of vacuous whitewash reports, in which category I include Corley, Morris, Myners and the first Parliamentary Ombudsman (PO) report, which pre-dated ombudsman Ann Abraham’s regime.

Scurrilous behaviour by the UK government

I will provide just 10 examples relating to Equitable;

1. When, in December 2000, the Equitable closed its door the government moved swiftly to instruct the FSA to investigate its own contributory role. This was the Baird Report. It was, however, precluded from looking at the period of primary negligence – from 1990 to 1998 - and it covered only the 23 months prior to closure, for which the FSA was responsible.
2. A puppet regime that would not pursue the government was installed, under chairman Vanni Treves, with a totally new hand-picked board of directors appointed early in 2001.
3. Lord Penrose was commissioned in August 2001 to take all the time he needed to look at 40 years of Equitable’s history to establish the facts of what happened, but he was explicitly precluded from allocating blame or addressing compensation. This effectively put the Equitable situation on ice for two and a half years.
4. Treasury minister, Ruth Kelly, presented this report to the House of Commons in a grossly inaccurate, biased fashion. Kelly had the gall to say that Penrose didn’t recommend compensation! The Penrose report, which is a fine and balanced study, has consistently been briefed against.
5. Immediately following the Penrose report’s publication, the FSA granted consecutive waivers to Equitable to ignore complaints, whilst an orchestrated response was planned behind closed doors to see off potential claims arising from Penrose.
6. The FSA refused to publish its post-evaluation on the Penrose report and merely announced in July 2004 its conclusion that “Penrose-related legal claims were unlikely to succeed”.
7. Both the Treasury and the FSA sought, in June 2005, to discourage the PO from conducting a second study. Ruth Kelly had told the Commons, incorrectly, that the Government Actuaries Department (GAD) couldn’t be included.
8. In 2005, both the Treasury and Charles Thomson sought to dissuade the European Commission and the European Parliament from investigating, citing the PO’s study as negating any need, despite the PO having no remit for Europe nor any authority to investigate the FSA after 2001.
9. The Treasury has caused repeated delays to the PO report, first in January 2006 - saying that PO draft findings were proposed on issues not in the original complaints (but ones which could not possibly have been know to investors).
10. Second, it mysteriously managed to find a “truck load” of new written evidence from 2001 that had previously been concealed from the Penrose Inquiry, which was delivered finally to the PO in October 2006. Regrettably, the Treasury seems to have succeeded in ensuring that the EQUI report will not be able to quote from the PO’s Investigation.

A cynical government, contemptuous of the PO

EMAG admires the rigour that the PO has applied in its current study of Equitable, which was commissioned in July 2005. Because of the Treasury’s delaying tactics, it will not now be published before May 2007, at the earliest, despite the UK regulators having received the report last month.

The UK government has recently broken with the tradition of respect for the PO by showing contempt whenever there is a substantial cost implication, even defying the Dr Tony Wright’s admirable Commons select committee on Public Administration (PASC). The government’s response to the PO’s report into failed occupational pension schemes, published in March 2006, demonstrates the depths of its arrogance.

On its publication, the Prime Minister himself reported that the cost to the public purse would be £15bn, when the true figure discounted to present day pounds, is less than a quarter of that amount.

Despite more than half of all UK MPs signing Early Day Motions seeking the payment of compensation for this group, the government continues to stonewall. In consequence, the victims will appear next week in the UK High Court seeking a Judicial Review, arguing that the government does not have the right to contradict a finding of maladministration by the PO - the High Court of Parliament. Deplorably, the UK government has sought to intimidate the victims of that pensions scandal by indicating its intention to seek to recoup its legal costs of about €200,000 from them for daring to bring this Judicial Review!

Maladministration throughout the 1990s

It is EMAG’s view that Penrose, Burgess Hodgson and the new report from actuary Steve Dixon, prove beyond doubt that Equitable systematically over-bonused throughout the 1990s. Further, we allege that the regulator had the evidence and, after adoption of the 3rd Life Directive in July 1994, it also had the power to intercede - but it failed to protect policyholders. That is the central conclusion that EMAG expects to be confirmed by the PO, with a finding of maladministration for serial prudential regulatory failure.

The UK’s single regulator, the FSA

The new documentation handed over by the UK government to the PO relates to the year 2001. We expected it to demonstrate that the FSA worked hand-in-glove with the Equitable’s board to secure the compromise that took away legal rights for no actual gain for the majority, based on misleading and out-of-date information. EMAG has already presented its evidence to EQUI, in confidence, and the FSA has confirmed its refusal to investigate.

When EMAG met the FSA team on 14th December, 2005 (meeting note at EQUI’s website, written evidence, item 75) we asked the team leader, Ian Tower, for the FSA’s understanding of policyholder protection. His answer, which was recorded, was revealing:

“We set out all the rules and requirements and the details that we have which we expect firms to abide by…..Our protection of policyholders and pursuance of our other objectives is done by supervising and regulating firms….We see it as a combination of making rules and requirements which Equitable Life is subject to and supervision of the firm.”

Note that the consumer doesn’t feature in this. The FSA perceives its customers as being industry firms. Nowhere is that more apparent that at the FSA’s annual public meeting, which I have attended for the last four years, and I have felt like a schoolboy wandering into a “fat-cats” clubhouse.

Since 1st December 2001, the FSA has been effectively self-governing. It is accountable only to the Treasury, with additional twice-yearly cursory appearances before the Treasury select committee, chaired by a dependable Gordon Brown crony, John McFall. There are no checks and balances on this omnipotent regulator, which supervises all UK financial products marketed to the 27 member states.

That there is collusion between the Treasury, the FSA, Equitable and the FOS has just been categorically confirmed by two damning UK Treasury emails, with dates in June 2004, which we have obtained under a Freedom of Information (FOI) request. These appear to greatly compromise the chief ombudsman, Walter Merricks – who has consistently declined to appear before you. (Note that the FOS itself is not subject to the FOI.)

What does EMAG want EQUI to recommend?

EMAG petitioned Europe because, after more than four years, we were being thwarted at every turn in our fight for compensation by an orchestrated cover-up from every player in this scandal. We asked the European Parliament to help address the injustice perpetrated against pensions savers in several member states as well as the 1.5 million investors in the UK. Persistent denial of culpability in Equitable by the UK government has also greatly damaged pan-European confidence in pensions.

Of course we wish to see “lessons learned”, but not in isolation. We would like EQUI to be the catalyst for the British government having to own up that its regulators comprehensively failed and compensate for the losses suffered by all – not just the annuitants – but also including those who quit Equitable, suffering onerous extra exit charges.

Additionally, we hope for a recommendation to the European Commission to instigate proceedings in the European Court of Justice (ECJ) to bring an action against the UK government for failing to operate in accord with EC Directives.

Further, we seek a finding that the existing UK regulatory regime, despite recent extensive changes, is still flawed and needs radical reform. The FSA’s main objective of maintaining confidence in the industry that funds it is, at times, in conflict with its duty of policyholder protection. When stress-tested investors, including those with Equitable, have been sacrificed on the expedient altar of “the greater good”. In modern parlance, EMAG believes “the FSA is not fit for purpose”. Having failed the consumer, the FSA should now be stripped of responsibility for policyholder protection and should be subject to the scrutiny of the PO and the National Audit Office (NAO), because at present there are no meaningful checks and balances.

Plaudits

EMAG petitioned the European Parliament more than two years ago. We have been simply delighted with the Parliament’s response. The Petitions Committee, under Marcin Libicki, but with help above and beyond our expectations from Michael Cashman and David Lowe, succeeded in setting the EQUI Inquiry in train. It is to their great credit that half a dozen MEPs that sit on the Petitions Committee also sit on EQUI. This is undoubtedly a Petitions Committee success story to be proud of.

EQUI has met on 15 occasions, 11 of those in public. I’ve enjoyed attending eight of them and seen first hand both MEP’s and your Secretariat’s dedication. I would add as an aside that, despite some 20 round trips made to Brussels by EMAG, we have not cost the Parliament one single Euro! I have sat with you through many of the self-serving “not me, Guv” presentations and boiled with outrage – never more so than at the 21st June, 2006 session with the joined-at-the-hip trio of British regulators.

Finally, I must single out Diana Wallis and admire the way, as Rapporteur, she has approached her mammoth task and Mairead McGuinness for her charming and incisive “light touch” that has brought such good humour to these proceedings. Thank you.

Paul Braithwaite
General secretary of EMAG Ltd.
1st February, 2007