14th January 2001 - Why EMAG is Pursuing the Legal Aspects of the Equitable Crisis

"Some members have asked whether the House of Lords' decision can be amended. Our legal advice is this is not possible. However, to reassure members that all avenues are fully explored we are arranging for further independent legal advice on this question."

Extract from public release letter issued by ELAS on 11 January 2001.

1. Introduction.

   It is easy entirely to misunderstand the legal position, and the cost and other consequences for the members and for the Society.

   1. We have no enthusiasm for litigation, but there are times when it is wise to recognise the benefit of timely action. Otherwise for so long as there are numerous dissatisfied parties, and the position of the Society remains as uncertain as it is at the present, there will be litigation initiated by others, and there will be external intervention.
   2. The choice is between the Society recognising the issues and bringing them to expert opinion (and representative proceedings if necessary) as rapidly as possible, or the interventions being caused by others outside the control of the Society, with an uncontrollable range of separate legal and regulatory actions.
   3. If the Society does not take the lead in progressing clarification of the position, then it is likely to spend a great deal more time and money dealing with the same issues on a piecemeal basis, with greater uncertainties of outcome, and unpredictable costs to all members.
   4. For representative actions conducted on a pro-active basis by the Society the maximum foreseeable costs, large from a private perspective, will be a triviality when considered in relation to the value of the funds under management.

2. Contents.

   In the following I set out first the nature of the present decisions of the Courts, then the resulting dangers to the Society, then the role of EMAG in this context.

3. The House of Lords Decisions

   Two issues were decided by the House of Lords.

   1. On the first of these they supported the majority decision (2 : 1) of the Appeal Court to the effect that the Society was not free to use its very wide powers of administration to render ineffective specific terms of the policies (i.e. the GAR option).
      1. There is no suggestion that this finding can or should be challenged. There are differences of view about it, but it was a matter to be decided by the Court, and a clear rationale is presented in support of the decision.
      2. For my own part I commend the Court for taking a decision, which while in some ways inconvenient, serves to protect the Consumer from unfair application of policy terms. It is a decision which may have echoes in the context of other Contracts in which there are similar discretionary powers.
   2. On the second of these the HOL overturned the Appeal Court. In this instance the question was whether the same bonus conditions should attach to different types of policy (the 'ring fencing' decision). The Appeal Court said 'no', the HOL said 'yes'.
      1. However, the HOL failed to provide clear reasons for the decision. References were made to the evidence presented to the lower Courts, but the evidence was not presented with a view to addressing this question, and the evidence is demonstrably both mistaken and incomplete. The eventual logic of the HOL second decision is not present within Lord Steyn's speech, and at a detailed level there is every reason for doubt as to his precise intentions.
      2. Further to that, the non-GARs were represented by the Society on the instruction of the Court, it being assumed that there was no difference of interest as between the Society and the non-GAR policyholders. However, as the administrative practices that the Society had been adopting were already in conflict with the reasonable expectations of the non-GAR policyholders it was not possible for the Society's counsel to represent both positions satisfactorily.

4. Dangers

   The Society and its onward management are at present in danger because of uncertainty in interpretation of the Law.

   1. For example, the very decision that prevents the Society from taking the GAR option into account when computing bonus allocations, would logically, on the same rationale, also prevent it from taking the GIRs into account. The Society's present position involves ring-fencing GIRS and not ring-fencing GARs. It is not clear that this is possible.

   2. The distinct case for the non-GAR policyholders was not heard, and the arguments which could be made on their behalf were not presented to the Courts. The policies of the non-GAR policyholders did not form a part of the evidence to the Court, and no reference to the terms or specific and distinct rights under these policies was considered, except to the extent that it served the Society's defence of its practices.

      The Society had elected to disregard the inherent differences in investment yield between the GAR and the non-GAR policies from the inception of the non-GAR policies in 1988 onwards. It maintains that what it did was not irrational but now agrees that it could have done otherwise (Reference meeting of 1st December 2000 between EMAG and ELAS).

      The evidence presented to the Courts suggested that there was little difference between non-GAR and GAR policies and that it would be expected that a GAR policy would have a higher yield under circumstances under which the GAR term became effective. Evaluation of the investment requirements and expected yields of the two types of policy shows that this is not necessarily the case. Insufficient evidence was given on the relative economic characteristics of the two types of policy. It was assumed that a GAR policy on which the GAR option was not exercised was identical to a non-GAR policy and should expect the same benefits. This the Society did not dispute as it was the practice to treat the policies in this way, that is disregarding the economic differences. It was suggested that because there was only a single with profits fund, it was not possible to differentiate between policies on the basis of relative economic cost. However, the Society already makes a similar differentiation for the GIR component of policies. The economic arguments, which favour the interest of the non-GAR policyholders were not put to the Court as they run counter to the main case that the Society was seeking to make.

   3. If the HOL decision is held in the face even of the unheard arguments noted above, then another issue comes into view. This is the 'unfair selling' issue. The nature of the GAR contracts was known to the Society, and the implications of the circumstances under which the GAR term would be effective must also have been understood. It is the case then that Society knew, or should have known, that it was exposing the new non-GAR policyholders to a risk which it did not declare when selling the new policies. This risk was known to the Society, but, reasonably, could not be anticipated even by a careful purchaser. Therefore, the issue of unfair selling must arise, and would appear to have merit over 'caveat emptor'. The buyer could not be expected to discover the risk.

   4. If the issue of unfair selling exists, this creates a conflict of contracts which has not been considered. That is if the HOL has construed the one set of contracts in such a way as to cause an illegality in the other set of contracts. The question then is whether the decision is sustainable in the face of the contradiction thus created.

6. Role of EMAG

   Finally we need to consider the role of EMAG in all this.

   1. From the outset we have maintained that EMAG is not in favour of promoting the interests of any group of policyholder over those of another.
   2. That EMAG will not undertake actions in its own right except to the extent that these are perceived to be in the interests of all the membership.
   3. We have stated that our objectives are to ascertain relevant fact and to inform our membership, so that the membership is in a position to make their own informed decisions.
   4. There can be no objection to individual EMAG members having very different views, so long as these are not represented as policy (i.e. EMAG did not take a position on whether the Society should remain Mutual or be sold, EMAG requested that the information on the resulting effects for the membership should be made available so that members could take their own informed decision on how to vote at an EGM/AGM).
   5. I see the legal issues in the same light. Challenges to the present position of the Society appear inevitable. At the moment there are no certainties as to how these challenges will land. I believe that EMAG should encourage the Society to test and clarify the immediate legal and regulatory framework, so that there is no land left for adventitious proceedings by others. When EMAG members understand where their legal entitlements lie, then they can take informed decisions on the forward management of their policies.

Adrian Howard-Jones
EMAG Secretary
14th January 2001