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

Correspondence: 23/06/2004 - Paul Braithwaite to Treasury Select Committee

James Clarke Esq
Senior Office Clerk
Treasury Select Committee
House of Commons
7 Millbank SW1P 3JA
42, Bartholomew Villas
Kentish Town
London NW5 2LL

23rd June, 2004

A brief submission by EMAG to "Restoring confidence in long-term savings" re meeting Ruth Kelly June 28.

It is EMAG's view that Equitable Life is at the heart of the crisis in confidence in long-term savings.

The situation has been exacerbated by the refusal of the Treasury ever since it was responsible for prudential regulation in 1998 to accept any responsibility.

Its latest manifestation was from Ruth Kelly at the Despatch Box on Thursday June 17th, 2004 when the minister made five misleading claims (see Hansard extract attached):
  1. Penrose found no evidence of maladministration.
  2. Penrose made no recommendation for compensation
  3. Investors in Equitable were different to those in failed company schemes because they did so with free choice.
  4. Investors in Equitable tend to have supplementary pension provision.
  5. It is largely investor expectations that have been disappointed.
Penrose, in his remit, was explicitly precluded by Ms Kelly from addressing compensation and culpability, but his report DOES provide a litany of evidence of maladministration.

The misleading way that Ruth Kelly characterised the Penrose report to Parliament (and your own select committee) was addressed in EMAG's important and succinct paper, discussed face to face by EMAG with Ruth Kelly on May 12 (see attached).

It is EMAG's understanding that, post 1988, no employee has been obliged to participate in his or her employer's company scheme, hence there is no difference on free choice (see Observer editorial 25 April attached).

Whether the Equitable's policyholders have other provisions is conjecture and utterly irrelevant. We know that many do not. Investors were doing exactly what the government has urged by way of prudent self-provision. Whether rich or poor, ALL are equally entitled to expect that the words "regulated by the DTI/Treasury/FSA" had substance.

The loss to more than one million policyholders and their dependents of more than £3,000m NOT related to stock markets but down to regulatory incompetence was REAL and not mere expectations.

Yours faithfully,

Paul Braithwaite
General secretary of EMAG
Telephone: 020.7267.5938
See www.emag.org.uk

Ruth Kelly to the House of Commons. Extracts:


17 Jun 2004: Column 906

Ruth Kelly: "We commissioned Lord Penrose to conduct an independent inquiry into the circumstances that led to the events at Equitable Life. He found no evidence of maladministration or negligence. He made no recommendation for compensation…………

………people who invested in Equitable Life did so of their own free choice. The position is different from that of members of failed company pension schemes such as Allied Steel and Wire, which we have debated long and hard in the Chamber. Investors in Equitable Life tend to have supplementary pension provision, and many members have large pension pots, though others have smaller pots. It is largely their expectations that have been disappointed.

I have met the action groups representing the policyholders."

Comment by EMAG, post its meeting with Ruth Kelly on May 12:

"Through selective quotations to the House and in subsequent letters to MPs, Ruth Kelly has misled Parliament about Lord Penrose's report. That she had the brass nerve to tell us that her ministerial statement was impartial and not political, given that she lambasted failings before 1997 and pretended subsequent regulation had been fine, beggars belief! It's depressing when a minister of the Crown puts in writing that: 'Governments cannot be held responsible for the policy decisions of past administration'.

Ruth Kelly's Statement EMAG's responses
What has Lord Penrose Found:

Lord Penrose's central finding is that "principally, the Society was the author of its own misfortunes"

It was the decisions taken by Equitable Life's management and board of Directors that lad to the financial crisis it experienced in 2001

He also finds that the regulatory system "failed policyholders in this case" (20/83).

He emphasises, however, that "regulatory system failures were secondary factors", and argues that it was "the system that failed to provide the regulation that changing circumstances in the industry required, not that there was failure to implement what was fundamentally a satisfactory system`



Agreed - emphatically

The full paragraph says:'In this report I have been critical of the regulatory system, and on occasion critical of the performance of regulators and their advisers. But the thrust of my criticism is that for the most part it was the system that failed to provide the regulation that changing circumstances in the industry required, not that there was failure to implement what was fundamentally a satisfactory system.' (Chapter 20 Paragraph 69- emphasis added).

Chapter 16 has plenty of criticisms of the performance of regulators and their advisers.

Examples include:
DTI acceptance of Roy Ranson as both Appointed Actuary and Chief Executive

GAD's receipt of 'confidential' board papers and non-disclosure to DTI

Treasury 's acceptance of the £800m 'value' of a worthless 'reinsurance' policy
Why is the Government not paying compensation?

While the Government sympathises with all policyholders who have suffered, it cannot underwrite each and every company whose managements and boards make fundamental mistakes and questionable decisions.

There is no case for taxpayer funded compensation; there has been no finding of misfeasance, negligence or mal-administration on the part of the regulators.
Nor can it ignore the claims of 1m+ sufferers of the consequences of serial failure by Government regulators over a decade.

Lord Penrose says:
'But it may be appropriate to comment that the practices of the Society's management could not have been sustained over a material part of the 1990s had there been in place an appropriate regulatory structure adapted to the requirements of a changing industry that happened to manifest themselves in an extreme form in the case of Equitable Life.' Chapter 20 Paragraph 83

Lord Penrose was not asked to comment on any of these issues. It is therefore unsurprising that he does not and disingenuous to suggest that by not doing so he has 'cleared' the regulators.
What does it matter if it was a failure of past regulatory policy, surely if the regulatory system failed policyholders should be compensated?

Governments cannot be held responsible for the policy decisions of past administrations. Governments are hold to account for their policy decisions at elections.

That financial regulatory system in place during the 1970s, 1980s and early 1990s was termed "freedom with disclosure". It was, by ministerial decision deliberately light-touch and reactive, relying on the regulator's assessment of life Insurers' statutory solvency return.

In hindsight, tile regulatory system was inadequate and failed to adapt to the changing financial services market. However, the system was a deliberate policy decision by ministers.
The British Government has an international European obligation to operate proper regulation of life insurance companies. The previous administration may be partly to blame for what went wrong, but the responsibility to provide recompense lies with the present one.

But Lord Penrose discloses that
  1. the regulators asked for and got responsibility to deal with 'Policyholders' Reasonable Expectations' (effectively terminal bonuses)
  2. the Insurance Companies Act gave them draconian powers of enforcement
  3. they knew from 1991 the awful state of Equitable Life's finances
  4. for a decade they did nothing to protect PRE
'Light touch' meant that companies were not required to supply PRE information. Lord Penrose shows the regulators were given the PRE information. 'Light touch' does not absolve them from dealing with a PRE problem, having received clear information that there was one.
How can the Financial Ombudsman's service help policyholders?

The Financial Ombudsman's service was established by this Government to deal with individuals' complaints against financial services companies that are not handled satisfactorily by the company in question
Our current information is that Equitable Life continues to maintain that the old Board's practice of voting bonuses in excess of assets (throughout the 1990s) was a proper smoothing policy. Lord Penrose demolished this theory, but the FOS still seems to be accepting Equitable Life's line.

What instructions have they been given?
What does the Parliamentary Ombudsman Do?

The Parliamentary Ombudsman investigates complaints that injustice has been caused by mal-administration on the part of government departments or other public bodies
The PO is the proper person to investigate mal-administration.

Her existing report covered the wrong period, looked at the wrong people, accepted wrong interpretations of the regulators' powers and responsibilities and invalid interpretations of what constituted a smoothing policy.
The Government paid compensation to Barlow Clowes investors who lost money; surely it should do the same for Equitable policyholders?

The two cases are not analogous

Barlow Clowes had ceased trading; Equitable is still trading

In the case of Barlow Clowes there was a finding of mal-administration against the then Government; there has been no such finding in the case of Equitable

At the time of Barlow Clowes there was no compensation scheme in place; there is now the Financial Services Compensation Scheme
Why should cessation of trade be a necessary prerequisite to compensation? 1,000,000 people trying to provide for their own retirement have lost upwards of £3,000 million, whilst government regulators looked on. Surely this is more important than the technicality of Equitable Life's continuing to trade? Equitable has not issued any new policies for 3 years. Lord Penrose accurately described it as 'moribund'.

Lord Penrose was not instructed to address the subject of mal-administration. Ruth Kelly relies upon the Parliamentary Ombudsman's report on 'Mr P', which has been totally undermined by Lord Penrose's disclosures.

The PO (Ann Abraham) only considered the period from 1st January 1999 to 8th December 2000, whereas Lord Penrose shows that the damage was done during the previous decade. She ignored (or did not discover) the asset deficit and the practices of dubious actuarial merit, which Lord Penrose identifies as major contributory factors in the Society's demise. She only considered the situation of someone who invested in 2000, just before the House of Lords' decision. Lord Penrose shows a clear case to answer in respect of all Equitable investors during the 1990s. She accepted the Society's line that it operated a proper smoothing policy, a line totally rejected after detailed examination by Lord Penrose. She claims that GAD is excluded from her jurisdiction. Lord Penrose finds fault with GAD throughout his report. A finding of no mal-administration is meaningless without examination of the Government Actuary's Department during the whole of the 1990s.

The existence of the Financial Services Compensation Scheme is a red herring. It will only come into play if the Society goes into liquidation, an event it may well avoid, by continuing to cut bonuses. Even then the FSCS capacity is untested. The cost of its compensation is to be met by the insurance industry, which we expect to resist paying for the failure of Equitable Life. The FSCS would not in any case address the losses of those who have left Equitable Life, perhaps 500,000 people.

Help ahead but is this equitable?

Maria Scott in The Observer
Sunday April 25, 2004

It is hard not to sympathise with the 60,000 people whose company pensions have been lost because their employers have gone bust. For people near retirement, this is a life-wrecking experience.

Government plans to set up an insurance scheme to stop this happening again do not include retrospective payments and there has been an outcry on behalf of those already affected - and the shouting has not fallen on deaf ears. The Government is hinting it may step in after all.

This contrasts with the hard line the Government has taken over the victims of the Equitable Life disaster. Tens of thousands of Equitable investors saved for years only to find that their pensions had been cut because of mistakes at Equitable, yet the Government says there is no case to answer.

So why the difference in attitude? It could be that the Equitable investors are seen as well heeled, whereas the company scheme savers are seen as battling workers of modest means. Not all Equitable investors are well off, though, and there is a contradiction in the Government's attitude to the two groups.

The Government is addressing the issue of bust pensions because it accepts that there is a gap in regulation and protection; yet it dismisses the plight of the Equitable victims on the basis that there was a lack of regulation to prevent the crisis. Since there was a 'light' regulatory regime in place there is no point blaming the system because there was none.

Etc etc