FOS 'subservient' to FSA over Equitable Life

Friday 2nd February 2007
By Nyree Stewart, IFA Online

A report into the handling of Equitable Life complaints by the Financial Ombudsman Service has concluded the behaviour of FOS has left “an abiding and entirely justifiable sense of disillusionment, frustration and injustice”.

Speaking at the last evidence session for the European Parliament’s Committee of Inquiry into Equitable Life, Lord Neill QC, author of the 250-page report, said policyholders had “good reason” to think the FOS’ action on their case was not up to standard and acted as "subservient" to the Financial Services Authority.

The report, which was commissioned by the Equitable Members’ Action Group (EMAG), reveals an analysis of 30 complaints forwarded to the FOS show the service provided by the FOS “fell short of the standards which they [policyholders] were entitled to expect”, considering these were standards which the Service had itself proclaimed and advertised.

In addition, he pointed out claimants had “good reason to be dismayed” by the Chief Ombudsman’s dismissal of all complaints relating to the Penrose inquiry in 2004 without “consideration of their merits”.

Lord Neill also uses the report to criticise the reasons underlying the decision by the FOS to dismiss the Penrose-related complaints stating “the decision could reasonably be regarded by policyholders as one dictated to the FOS by the Financial Services Authority (FSA) and as one with disastrous financial consequences for thousands of ordinary people who were waiting upon his ruling”.

And when he was asked in his evidence by the chair of the Committee, Mairead McGuiness MEP, if the FOS was too close to the industry or the FSA, Lord Neill replied “yes”, stating “you can’t have a truly independent Ombudsman service if it is too close to the regulator”, before adding the FOS is “in the area of a subservient relationship” to the FSA.

In his report Neill quotes an internal HM Treasury memo which was released under the Freedom of Information (FOI) ruling last week, which boosts the policyholder’s belief that the FOS was “leant on", as it reveals the FSA’s plan to provide the FOS “with a basis for considering complaints”.

Dated 18 June 2004, the Treasury memo says: “The FSA appear to have decided they will not publish the reports prepared for them [a report by an independent actuary and counsel’s opinion]." "They propose in due course publishing some sort of statement setting out the overall conclusions of the work – this will not happen until after they have discussed the content of any such statement with the FOS [the main purpose of the statement would be to provide FOS with a basis for considering complaints relating to over-allocation]."

"I understand that initial discussions with FOS will be held early next week.”

As a result Lord Neill says the decision to dismiss around 50 complaints “removed an avenue of free recourse, leaving complainants only with the high cost, high risk option of instituting legal proceedings against Equitable Life”.

And the report points out these actions have left policyholders with the perception that the FOS is not a body “which holds the scales of justice evenly”, and one which “in many instances has displayed partiality towards the financial firm”, including the refusal by FOS to check the figures in any of the complex award payments given to complainants.

Meanwhile Paul Braithwaite, a representative of EMAG who also provided evidence to the inquiry, suggested there was an “overarching plan” by the British establishment to “deny culpability in the expectation that we will go away and die”.
He claims the FSA, FOS and HM Treasury all in effect worked together to prevent policyholders gaining compensation, and he suggests the “FSA is not fit for purpose” as its main objective of maintaining confidence in the industry which funds it, is “at times in conflict with its duty of policyholder protection”.

Diana Wallis, a Liberal Democrat MEP who is responsible for drafting the Committee’s final report scheduled for release in the summer, says the evidence received, particularly from Lord Neill, strengthens the impression that “cross-border redress mechanisms and systems of access to justice” are not adequate.

She points out “while we have black letter law in terms of directives which open up markets to financial services” to the benefit of large corporations, she says when things go wrong for consumers the remedies are “soft, fluffy and difficult to negotiate”.

The latest round of evidence has been released as Equitable confirms the transfer of £4.6bn of its non-profit pension annuities to Canada Life was yesterday approved by the High Court.

And following the sale of its subsidiary University Life to Reliance Mutual in December, this means the bulk of the company’s remaining business is now tied up in its with-profits fund, valued at just under £10bn, along with the remaining 10% of non-profit annuities which were not transferred to Canada Life.

‘Injustice’ does not guarantee compensation

By Matthew Richards, Financial Times

http://www.ft.com/cms/s/34b83de6-b2b9-11db-99ca-0000779e2340.html

Published: February 2 2007

The tortuous Equitable Life saga took another twist this week when Lord Neill QC, a high-profile lawyer hired by an Equitable policyholders action group, told a committee of MEPs that the Financial Ombudsman Service (FOS) had left complainants with “an abiding and entirely justifiable sense of disillusionment, frustration and injustice”.

The hearing in Brussels is part of an attempt by victims of the Equitable debacle to extract compensation from the British government, which they say was negligent in its failure to stop Equitable from making overgenerous promises to with-profits policyholders and from mis-selling pensions schemes.

Lord Neill’s report has generated some headlines, irked the FOS and might even have caused some consternation in the government. But Equitable victims wanting compensation should not get their hopes up.

Iain Anderson, director of Cicero Consulting, a political consultancy specialising in financial services, reckons the odds are against the government paying compensation. He points out that even if a payout does come, the government will fight it all the way because it could open the floodgates to compensation for every other financial scandal it failed to prevent.

“What the Department of Work and Pensions and the Treasury are most concerned about is that they don’t want to set a precedent,” he says.

The Equitable affair has its origins in the 1960s and 1970s, when Equitable Life – a mutual, owned by and run for the benefit of its customers – gave guaranteed annuity rates as part of the deal it offered on pensions. This meant that if your with-profits investments gave a pensions pot of, say, £100,000 when you retired, it would guarantee you an annuity rate often in double digits, giving you a decent annual income for the rest of your life.

Back then, this seemed to be an easy promise to make as the guaranteed annuity rate was lower than the market rate. But rising life expectancy and falling interest rates meant that by the 1990s annuity rates had fallen to single digits – so those promises started to look very expensive.

Equitable did not have enough money to honour its annuity guarantees and still give a decent return to its other investors. But it still took on new customers and did not close its doors to new business until December 2000, after the House of Lords ruled against its attempts to water down its annuity guarantees. The mutual put itself up for sale amid doubts over its financial viability.
There followed a free-for-all in which complaints, lawsuits and investigations flew between Equitable Life, its auditors Ernst & Young, the Financial Services Authority, the FOS, the government and at least seven policyholder action groups.

A key moment came in September 2001, when Equitable proposed a scheme of arrangement to boost returns for policyholders if they renounced their right to pursue compensation claims with the courts or the FOS. By the following January, 98 per cent had accepted the offer. Some 70,000 guaranteed annuity policyholders got a 17.5 per cent increase in their pension pots but signed away the annuity guarantees, while 415,000 others made do with increases of 2.5 per cent.

But the FOS still received 8,000 complaints from policyholders demanding compensation from Equitable. About half the claims were rejected on the grounds that the complainants had benefited from the scheme of arrangement. But many “late joiners”, who invested with Equitable in the late 1990s when its directors knew it was in dire straits, were awarded compensation. Today, the FOS says it has “a few hundred” cases outstanding, mostly relating to guaranteed annuities.

Lord Neill’s report was commissioned by Emag, a policyholders’ action group with 10,000 members paying £25 a year. It accuses the FOS of being biased in favour of Equitable’s management and against complainants. The FOS rejects the claim, which it says is founded on a small sample of 30 individuals whose complaints it rejected. It argues that Lord Neill should have considereda more representative sample, including people whose complaints the FOS upheld, and criticises him for rejecting the FOS’s offer to discuss his investigation with him.

Policyholders are in a bind because, as a mutual, Equitable is owned by its members. So when one group of policyholders receives compensation, there is less money available for the rest. Lord Neill’s report is part of Emag’s campaign to wring compensation out of the government.

Campaigning from Emag and other groups “all builds up to a head of steam”, says Stuart Bayliss, director of specialist adviser Annuity Direct. “All these things make it more likely there will be compensation from the government.”

But the road to government compensation is a long and treacherous one. Ann Abraham, the parliamentary ombudsman who acts as a watchdog on government standards, is expected to deliver her final report on Equitable in May. She may recommend compensation, but the present government has ridden roughshod over her recommendations before. If it does so again, the next step would be a judicial review, which could force the government to pay out – but only after more years of legal wrangling.

The route via Brussels is even less promising. The committee of MEPs may pass the case on to the European Parliament, which in turn can pass it on to the Council of Ministers via the finance ministers’ body. The Council of Ministers can direct the Commission to bring a case at the European Court of Justice.

Bayliss says the most Emag can achieve in Brussels is “acute embarrassment” for the government.

Ombudsman lashed over Equitable

By James Daley, Independent

http://news.independent.co.uk/business/news/article2204137.ece

Published: 01 February 2007

The cross-bench peer Lord Neill of Bladen will launch a scathing attack on the Financial Ombudsman Service (FOS) today, accusing it of unfair and incompetent conduct in its handling of the Equitable Life case.

In a 250-page report exploring the FOS's handling of Equitable Life members following the Society's collapse in 2000, Lord Neill will accuse the FOS of failing to remain impartial in its adjudication of disputes between financial services firms and consumers. He will also accuse the FOS of not retaining sufficient independence from the Financial Services Authority.

Lord Neill will present his report, which was commissioned by the Equitable Members Action Group, to a committee of European MPs today, before formally publishing it on Friday.

"The impression gained by the complainants whose cases I have studied is that the FOS is not a body which holds the scales of justice evenly," said Lord Neill.

"It is a body which in many ways and in many instances has displayed partiality towards the financial firm, in this case [Equitable Life].

"Many of the case studies reveal attitudes on the part of FOS officials which the complainants felt were unhelpful, unnecessarily argumentative, even aggressive."

The FOS dismissed many of the claims against Equitable Life by those who lost out after its collapse. The FOS yesterday hit back at Lord Neill's claims, accusing his findings of being "unfair, unbalanced and inaccurate". The Ombudsman added that it had not yet been given the opportunity to see the full report, and was not allowed to present its case to Lord Neill while he was compiling his report.

David Cresswell, a spokesman for the FOS, said: "It seems ironic that a report that appears neither impartial nor properly representative of the views of people who brought complaints to us about Equitable Life, should accuse the ombudsman of being unfair, simply because we cannot always tell those with complaints what they would like to hear."

Equitable Life policyholders' sense of disillusionment 'justifiable'

SIMON BAIN, The Herald
February 01 2007

http://www.theherald.co.uk/business/news/display.var.1160765.0.0.php

Lord Neill, the former chairman of the committee on standards in public life, will tell a European Parliament committee of inquiry in Brussels today that Equitable Life policyholders who complained to the Financial Ombudsman Service have felt "an abiding and entirely justifiable sense of disillusionment, frustration and injustice."

The eminent barrister and Oxford academic (Lord Neill of Blayden QC) has spent several months investigating over 30 complaints to the ombudsman after being commissioned by the Equitable Members Action Group (Emag) to produce a report for the inquiry.

He was asked to "review whether policyholders could conclude that the service provided by the FOS has fallen short of the standards which the policyholders were entitled to expect", and his 250-page analysis says complainants "could reasonably conclude" that it did fall short of its advertised standards.

He says: "The impression gained by the complainants whose cases I have studied is that the FOS is not a body which holds the scales of justice evenly. It is a body which in many ways and in many instances has displayed partiality towards the financial firm, in this case EL.

"Many of the case studies reveal attitudes on the part of FOS officials which the complainants felt were unhelpful, unnecessarily argumentative, or even aggressive."

Policyholders whose complaints were founded on Lord Penrose's 800-page report into Equitable in 2003, which established systematic over-bonusing' by Equitable during the 1990s, had their cases dismissed.

Neill says: "Policyholders who had Penrose-related claims had good reason to be dismayed by the Chief Ombudsman's dismissal of their claims without considering their merits, both as regards the process by which he reached his decision and as to its content."

The report goes on: "The complainants did not expect to be treated with any special favour but they did believe the FOS would be sensitive to the fact that they had suffered serious financial loss, and to the point that in nearly every case they were without any legal assistance.

"Complainants lost confidence in the system and began to feel the FOS was stalling. At worst the officials were seen as advocates for EL."

The report says that even where complainants have apparently succeeded in establishing liability on the part of the insurer, they have been "dismayed by the difficulties confronting them in ascertaining the amount of damages which they are entitled to claim the attitude of detachment to this issue on the part of the FOS has led to repeated and strong protests."

Neill writes of "a general feeling of outrage among complainants that Penrose-related complaints were not allowed to remain with the FOS for adjudication."

Although in March 2004 a government minister had suggested the ombudsman was the correct remedy, the FSA appears to have decided otherwise.

An internal Treasury e-mail uncovered by Emag from June 2004 refers to the FSA staging meetings to "provide the FOS with a basis for considering complaints" .

Paul Braithwaite, secretary of EMAG, said the report was "a devastating indictment".

Ombudsman failed Equitable Life victims, says report

Rupert Jones, The Guardian
Wednesday January 31, 2007

http://money.guardian.co.uk/equitablelife/story/0,,2003429,00.html

The Financial Ombudsman Service, the official body for resolving complaints about financial firms, let down victims of the Equitable Life scandal by failing to give them a fair hearing, according to a scathing report by an eminent barrister.

Lord Neill of Bladen QC, the former chairman of the Committee on Standards in Public Life who famously advised Tony Blair to hand back a £1m donation from Formula One promoter Bernie Ecclestone, said Equitable policyholders could reasonably conclude that the service provided by the ombudsman "fell short of the standards which they were entitled to expect".

Lord Neill was commissioned by the Equitable Members Action Group to look at how the ombudsman had treated policyholders of the scandal-hit insurer.
Equitable Life shut its doors to new customers in 2000 and later repeatedly slashed the value of a million policyholders' investments after it lost a legal battle involving guaranteed annuity rates, sold as part of pension plans.

Thousands of Equitable policyholders have complained to the ombudsman in an attempt to seek justice or compensation.

Lord Neill's 250-page report, which will be published on Friday, focuses on correspondence relating to the cases of 30 people who lodged claims with the ombudsman service.

In March 2005, Walter Merricks, the chief ombudsman, angered policyholder action groups when he decided not to investigate complaints relating to the findings of the previous year's damning Penrose report into what went wrong at the insurer.

Lord Neill said the impression gained by the complainants whose cases he had studied "is that the FOS is not a body which holds the scales of justice evenly. It is a body which in many ways and in many instances has displayed partiality towards the financial firm, in this case Equitable Life".

He added that long delays in processing complaints "had a corrosive effect,"while many of the case studies revealed attitudes on the part of ombudsman service officials which the complainants felt were "unhelpful, unnecessarily argumentative, or even aggressive. At worst, the officials were seen as advocates for Equitable Life".

He added: "The FOS has left a significant class of complainants with an abiding and entirely justifiable sense of disillusionment, frustration and injustice".

The barrister said Mr Merricks' decision in 2005 had had a "devastating effect".

He said: "The decision removed an avenue of free recourse, leaving complainants only with the high-cost, high-risk option of instituting legal proceedings against Equitable Life."

The Financial Ombudsman Service was scathing in its response to the report.

"We haven't been given the opportunity of seeing Lord Neill's report. From what we hear, his findings sound unfair, unbalanced and inaccurate," said a spokeswoman. "Nor were we allowed the opportunity to give evidence - or respond to criticism - as Lord Neill refused our request to present him with facts and background information about our work on the 8,000 Equitable disputes we have handled."

The spokeswoman added: "It seems ironic that a report that appears neither impartial - nor properly representative of the views of people who brought complaints to us about Equitable Life - should accuse the ombudsman of being unfair, simply because we cannot always tell those with complaints what they would like to hear."

EMAG said the report provided a "devastating indictment of the conduct of the FOS in its handling of complaints from Equitable Life victims".

Equitable victims slate ombudsman

By Matthew Richards, Financial Times
Published: February 1 2007

http://www.ft.com/cms/s/8498f97a-b199-11db-b901-0000779e2340.html

Victims of the Equitable Life scandal were treated unfairly when they took their cases to the Financial Ombudsman Service, a leading barrister will tell a committee of MEPs today.

EMAG, a campaign group for Equitable victims, commissioned Lord Neill QC to review their treatment. Lord Neill's report alleges the ombudsman "displayed partiality towards [Equitable Life]".

"The impression gained by the complainants whose cases I have studied is that the FOS is not a body which holds the scales of justice evenly . . . Many of the case studies reveal attitudes on the part ofFOS officials which the complainants felt were unhelpful, unnecessarily argumentative or even aggressive," it says.

Emag represents with-profits policyholders who suffered financially after a House of Lords ruling that the life assurer had to honour expensive guarantees to many of its pensions investors.

The Financial Ombudsman Service was not available for comment.

Matthew Richards