EMAG

The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

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Media Stories: 29/03/2003 - "A black hole that raises expectations" by Pauline Skypala in the FT

29 March '03 - "A black hole that raises expectations" by Pauline Skypala in the FT

Long-suffering Equitable Life policyholders are still hoping for government compensation. But delays and a confusing stream of reports and inquiries have lowered their expectations.

They have a strong suspicion that the government is holding up reports on who is to blame for the whole disaster in case it is government departments that are found to be at fault. The Department of Trade and Industry and then the Treasury regulated Equitable before the Financial Services Authority took over the job in 1999.

The compensation case was strengthened this week by a report alleging that Equitable concealed a £1bn black hole in its finances throughout the 1990s that regulators failed to spot, or ignored. The Equitable Members Action Group (Emag) that commissioned the report from chartered accountants Burgess Hodgson says it is evidence of mismanagement and regulatory failure.

Colin Slater, a partner at Burgess Hodgson and the report's author, says: "Policyholders were failed for more than a decade not only by the management of Equitable Life but, even more importantly, by the regulators who had at their fingertips all the information that we analysed, yet they failed to act to protect policyholders."

The report found that declared policy values were consistently £1bn to £2bn higher than the value of assets held in the with-profits fund, after allowing for the cost of guaranteed annuity options. The one exception was in 1993 when the fund earned an exceptionally high return of 29 per cent.

Emag has sent the report to the Penrose inquiry, commissioned by the Treasury in 2001 to identify what went wrong before the FSA took over regulation. Lord Penrose will report to Treasury ministers in July.

Lord Penrose has suggested considerations of commercial and regulatory confidentiality may prevent some information being published, a statement that concerned the Consumers' Association.

"It is difficult to see what commercial interests could be prejudiced by having an open and transparent inquiry," says Mick McAteer of the CA. "The only people who are protected by that are the regulators and government."

There are fears that other factors may delay publication, perhaps into 2004.

All eyes are on the Penrose inquiry as the biggest and most wide-ranging. But Paul Braithwaite, general secretary of Emag, says it is not the key inquiry for policyholders. "It has no remit to determine liability and will be of little material benefit to policyholders."

Emag puts most emphasis on the inquiry by the Parliamentary Ombudsman, even though it has been dragging on almost as long as the Penrose inquiry. It is, says Braithwaite, the only one that can claim to be truly independent. It is also more focused than the Penrose inquiry, it will report to Parliament, putting its findings in the public domain, and it has the remit to address compensation.

The inquiry began in the autumn of 2001 to investigate one test case about the regulation of Equitable by the FSA during 1999 and 2000. A report is expected in June.

The ombudsman has refused to deal with complaints relating to maladministration in the period before 1999 on the grounds that it would be a duplication of effort by the Penrose inquiry. She awaits the outcome of that before deciding whether intervention would be useful.

Policyholders say this is not good enough, pointing out that Lord Penrose cannot provide any information to the ombudsman other than the published report. EMAG plans to use the findings from the Burgess Hodgson report to press MPs to ask the ombudsman to reverse her decision to wait for Penrose.

The Consumers Association suggests there has been much unnecessary delay. It says there was enough ammunition in the Baird report, commissioned by the Treasury to review the period when the FSA formally took over life company regulation.

"The report was pretty damning and pointed to failings by the regulator," says McAteer. "I don't see why the Parliamentary Ombudsman can't process the claims of people who were making decisions during that period."

Those worst off in the ongoing saga are the people who bought annuities from Equitable, particularly those who chose with-profits annuities. They are trapped with no prospect of rescue except by the government, and face a dismal future of falling income.

Ann Berry, 64, is typical of many. She chose a with-profits annuity in expectation of a rising income that would protect against inflation. Instead, she has suffered a 20 per cent cut in her income and faces further reductions.

"My monthly payment after tax has fallen from £528 to £422," says Berry. "When or if the annuity goes altogether, I shall have only the basic State pension plus a tiny NHS pension of £68 a month to live on. I just do not know how I am to survive financially in future years."

Former policyholders are faring little better in their pursuit of compensation for mis-selling. These are people who left Equitable before the compromise agreement came into effect in February 2002.

The compromise gave a one-off uplift to policy values in exchange for guaranteed annuity rate policyholders giving up their right to the guarantee and non GARs giving up their right to sue for mis-selling.

Many policyholders decided to keep alive their chances of compensation by cashing in, and have lodged claims with the Financial Ombudsman Service. The FoS is dealing with more than 2,800 complaints. It says it has concluded several hundred, but these were generally non-GAR related. It cannot give a timetable for GAR-related claims.

The long and tortuous route to compensation winds on, but the mounting evidence of serial regulatory failure makes it increasingly difficult for the government to hide behind endless inquiries.

It paid out in the end over Barlow Clowes, but faces a much bigger bill for Equitable Life. Emag has commissioned Burgess Hodgson to evaluate how much failed regulation has cost policyholders. "I think we will be looking for an enormous amount of money," says Braithwaite.