Address to the European Parliament's Petitions Committee in support of EMAG's petition 29/2005 on UK Life Insurance Regulation in relation to Equitable Life. 13 September, 2005

Tom Lake, Chairman, and Paul Braithwaite, General Secretary.

I’m Paul Braithwaite, the general secretary of EMAG, the Equitable Members’ Action group and, along with my colleague Tom Lake, EMAG’s Chairman, I present this petition. We are most grateful to Mr Libicki, to Mr Cashman, and to the secretariat of the Committee for their assistance - and we thank the Committee for this opportunity.

OVERVIEW

EMAG was formed over five years ago, when problems at Equitable first became apparent. We have always sought to represent all the classes of investor in Equitable and have received subscriptions from more than 15,000 members. Our primary purpose is to achieve the payment of compensation from the British Government for what we maintain has been catastrophic serial regulatory failure, dating back to the 1980s.

The main events of the Equitable scandal are now well established.

Equitable closed to new business in December 2000, when its with-profits fund stood at €37bn euros invested by more than one million prudent savers. It is the oldest mutual insurance Society in the world and it was venerated as being safe.

The official report of Lord Penrose revealed that, despite ten years of rising stockmarkets, when Equitable closed there was a huge asset shortfall of €4.5bn euros. Further, the black hole had existed all the way back through the1990s. Although this information had been readily available to regulators in each and every year, it had been concealed from investors.

The UK’s finance ministry, the Treasury, itself took over responsibility for financial regulation in 1998. There can be no doubt that it realised then the magnitude of the mess. Subsequently, the Treasury has refused to admit culpability by regulators and it has pursued a policy of denial and cover-up.

On 16 July 2001, more than one million Europeans – including over 15,000 non-UK residents – with investments in Equitable’s closed with-profits fund, suffered REAL losses exceeding €5bn euros, by way of reductions to their retirement savings. This clawed back the huge asset shortfall and more. Even now, the elderly and the vulnerable continue to suffer worry and ongoing reductions to their Equitable with-profits pensions.

With-profits policies are a hybrid UK form of pensions savings, with €450bn euros invested - more than half of which is now in closed so-called Zombie funds - like Equitable’s - which are at high risk of being abused.

The FSA and the FOS

In the UK there is today a single regulator, the Financial Services Authority - or FSA - which became fully empowered from November 2001 and since then it has not been subject to any effective checks and balances. It has consistently refused all requests by Equitable investors to intervene, saying only: “We continue to monitor the situation.”

The FSA is charged with the objectives of both preserving confidence in the industry and consumer protection.

Similar concerns have recently been raised about two other UK financial scandals: In endowment mortgage mis-selling, the FSA’s solution has been to insist that consumers must lodge detailed personal mis-selling complaints within a fixed period, or be timed out. In the past in a similar situation its predecessor body, the Personal Investment Authority, imposed a generic compensation approach. Split Capital Investment Trusts are estimated to have lost investors more than €5bn euros, but the FSA has “done a deal” with the industry, such that only €300m euros needs to be paid out. So it appears that the FSA now avoids generic solutions, thus greatly reducing compensation payouts.

While the FSA is charged with consumer protection, the Financial Ombudsman Service, or FOS, is a safety net for consumers, providing a free adjudication service to the customer. Despite claiming to be independent, it is effectively a subsidiary of the FSA - which appoints its directors, approves its budgets and oversees any controversial decisions under a Memorandum of Understanding agreement.

EFFECTIVE ACCESS TO JUSTICE IS BLOCKED

The FSA is compromised in respect of investor protection because its annual running cost of €300m euros is funded by the industry. A serious question mark hangs over the FSA as an unaccountable judge AND jury - a body with monopolistic control over consumer protection, whilst being in thrall to its industry paymasters. The Treasury and the FSA, aided by the FOS, have systematically sought to deny the general principle in Community law that citizens should have effective right of access to justice, as enshrined in Article 6 of the European Convention on Human Rights.

Report after report has been published, but none had the remit to address culpability or authorise compensation. When the Penrose report was presented to the House of Commons in March 2004, the Treasury Minister responsible gave a flagrantly “selective” summary of its contents but suggested that, if investors were aggrieved, recourse was available through the FOS. Extraordinarily, one year on in March this year, that door too was shut, by the FOS deciding to use its “discretion” to not look at Penrose-related complaints. There has been systematic foreclosure of any effective means of redress.

Today, we’re told the UK IS compliant with the Life Directives - but that is by no means certain. It is true that in the last two years there have been enormous changes to regulations, and from January 2006, they will become more arduous. But the new FSA rules are now remote from legislation, being enacted by an unaccountable industry-funded body operating according to vague principles. It is unclear, as yet, whether there will be sufficient transparency for consumer protection of the €450bn euros locked into with-profits funds.

It is suggested that the correct route to redress is through the UK Courts. The Equitable’s own expensive legal advice from Herbert Smith in 2004 included:

“We consider that there is a potentially arguable claim on the part of the policyholders for breach of the Third Life Directive………..Quite apart from uncertainty regarding the merits of a novel claim of this sort, there are further difficulties in that (i) it may well involve a reference to the European Court of Justice; (ii) there are likely to be numerous complex causation and loss issues; and (iii) such litigation would be lengthy and costly.”

The British Government can be relied upon both to maximise its legal costs and to use every available appeal process - with the intimidating risk of the Government’s legal costs being awarded against complainants. TENS of millions of euros would be needed to sue the UK Government and this is evidenced by the cases of BCCI against the Bank of England and by the shareholders in Railtrack who, before being permitted to sue the UK Government for misfeasance, had to pay into Court €3.3m euros - only made possible with the help of a major financial institution, which would certainly not be available in Equitable’s case.

The UK Courts are not a viable alternative for impoverished annuitants. Justice is being denied - which is why we need your help. What are regulators for, if not to pre-empt a need for last-ditch recourse to high cost litigation?

THE COMMISSION’S REPORT (22 June, 2005)

The Commission writes that EMAG’s petition was wrong to assert the unequal treatment of non-UK investors, but it was correct when lodged! Only as a result of the European interest was there a U-turn in May by the UK Government. This shows us exactly why it is so important for MEPs to persist. Further, if Equitable was yet to fail, non-UK residents will not receive the compensation payable to UK citizens under the Financial Service Compensation Scheme - so the disparity of treatment persists.

The Commission tells us that there have been lots of reports. SO WHAT? It is the UK’s way of shelving problems! They are commissioned from “friends” of Government and typically commissioned “to learn lessons” only. NONE of these studies had the authority to ORDER Government compensation. NONE of them has studied the FSA’s behaviour in the past four years while it has been orchestrating a cover-up.

The Commission tells you that the Parliamentary Ombudsman has a broad remit and is currently looking at Equitable, so remedy may be at hand. It is ironic that the Treasury and the FSA both made written representations against conducting this Investigation.

The Parliamentary Ombudsman’s remit is NOT broad: it excludes the FSA; excludes any aspect of EC law; excludes half of the regulatory regime concerned with marketing and conduct of business, and excludes the Equitable itself. Its function is to address whether prudential regulation was mal-administrative. Furthermore, and crucially, whilst that Investigation could recommend compensation, the UK Government is under NO OBLIGATION to honour its recommendations and, on 12th July of this year, it rejected a Parliamentary Ombudsmen recommendation concerning British subjects interned in the Second World War by the Japanese.

EMAG’s view is that the Commission’s report is superficial, having taken UK assurances at face value, without engaging with complainants. EMAG trusts that, with your backing, the Commission will be persuaded to look again, this time much more thoroughly.

The Commission wrote that it:

“………cannot make any pronouncement on the content and application of the FORMER regulatory regime which has now been replaced. The Commission has consistently maintained………. that the objective of such proceedings under EU law is to establish or restore the compatibility of existing national law with EU law, and NOT to rule on the possible past incompatibility of a national law which has since been amended or replaced.”

But pensions savings are products accumulated over 50 years or more, to provide for old age. It can take decades for black holes to be revealed, as with Equitable. EMAG suggests to you that it is unacceptable for the Commission to refuse to address past failures. In what effective legal framework can offenders walk away just with promises to reform?

Thank you. My colleague Tom Lake will now take over.

Tom Lake: I would also like to express my thanks for assistance that we received. I will briefly describe what happened in this affair.

Two main official reports have covered this scandal so far, with the UK Parliamentary Ombudsman working on an extended investigation. It is helpful to look at the findings from the European viewpoint.

The FSA issued the Baird report in October 2001 on regulation in the two years leading to Equitable's closure to new business, 1999 and 2000. This was just a few months after Equitable cut policy values by 16%. It showed that the means of supervision, manpower and skill levels had been lacking, particularly in the early part of the 1990s. This was immediate evidence of a breach of European law. Baird also drew attention to the regulators' traditional “light touch” approach. Later Lord Penrose said, “The touch was so light that it missed the surface altogether”.

The Treasury established an inquiry by High Court Judge Lord Penrose. He was given no power to compel witnesses and was directed to “learn lessons”. He recognised that he had no brief to blame or exonerate. But his report contains ample evidence of wrong doing both in Equitable, where he described failures of management and control, and by the regulators.

Lord Penrose showed that most damage had been done in the early 1990s. The policy values which were annually communicated to policyholders averaged around 33% above the supporting assets for 1990-1994.

He also detailed endless failings by the regulators: allowing Roy Ranson to be both Appointed Actuary and chief executive at the same time, allowing the discount rate to be manipulated to produce meaningless surpluses, knowingly ignoring Equitable's secret 'office valuation accounts' which showed the deficit of assets, approving a ridiculous valuation for a reinsurance contract, failing to assess Policyholders' Reasonable Expectations, failing to investigate Guaranteed Annuity Options until these were “in the money”, and many others.

Again, these showed breaches of European law.

The UK government declined to admit responsibility and blamed “the system”.

We must ask How could losses and declining pensions occur under European Law?

The Life Directives progressed standards for supervision, authorisation and reserving. By the Third Life Directive insurance could be sold throughout Europe under the supervision of the “State of the Head Office” of the supplier. This was the 'passporting' system. The directives mandated reserving with safety margins for guaranteed liabilities and options. They included a requirement to enforce Member State national law. Additional national measures were allowed.

UK law had protection for both guaranteed benefits and also for “Policyholders' Reasonable Expectations” (PRE), which allowed the flexible UK “with-profits” policies to operate with some non-guaranteed benefits, usually terminal bonus. During the 1990s Equitable developed policies with decreased proportions of guaranteed benefits. They sold a with-profits annuity contract where the GUARANTEED element DECREASED ANNUALLY. When UK regulation failed the consequence for policyholders was that much of their benefit was OUTSIDE the European umbrella.

According to legal advice recently obtained, European law permitte this prejudice to the individual saver while allowing sales across Europe under 'passporting'. Only the failure of UK regulators to enforce national law was in breach of European law.
But is it acceptable that pensioners be left with declining incomes?

Here is What we ask of the European Parliament

We are asking the Committee to engage the Institutions of the Community in obtaining correction and remedy. Note that the acceptance of the petition has already brought about a change of the UK Government's attitude to the rights of citizens of other Member States.

The scandal has shown how reliance on national supervision can give rise to failures of consumer protection under the 'passporting' system. We invite the Parliament to look into the matter deeply to prevent a recurrence in any field. We suggest that this matter should have the attention of the Economic and Monetary Affairs and the Internal Market and Consumer Protection Committees.

The Commission has commented on existing reports. We suggest that you now invite it to establish the facts, which would be helpful to investors in recovering their losses.

The Commission indicates that it is still studying current regulatory arrangements in the UK. We have pointed out defects in the present arrangements, particularly in transparency and access to justice. The Commission has pointed approvingly to the Ombudsman’s investigation without noting that the FSA is excluded from the Ombudsman’s jurisdiction. Future complainants could not appeal to the Ombudsman. Considering also the remoteness of regulatory rule-making from the British Parliament we suggest that the Commission has grounds to act against the UK government at the European Court of Justice.

Finally, the Committee may note that the Parliament has available to it under Article 193 the possibility of setting up a special committee of enquiry, on the initiative of the Committee of Presidents.

We thank the Committee for hearing our petition and thank the many members of the Committee and Parliament who have taken an interest and given their support. We urge the Commission to approach the matter in a constructive spirit. A failure to progress would be disappointing for the Union. EMAG stands ready to assist the institutions in their efforts to realise the rights of European citizens in this scandalous affair.

Paul Braithwaite and Tom Lake, for EMAG 13 September, 2005