Correspondence: 27/10/2001 - from John Tiner - Re letter of 5 November 2001
The Financial Services
Authority is authorised to exercise functions of the Treasury under insurance
legislation, pursuant to the Contracting Out (Functions in Relation to Insurance)
Order 1998
From
John Tiner
Managing Director
Consumer, Investment
& Insurance Directorate
Mr
Paul Braithwaite
Chairman
Equitable Members'
Action Group
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27
November 2001
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Thank you for your letter
of 5 November 2001 about the Equitable Life and its proposals for a compromise
with its policyholders. The paragraph numbering below follows that in your letter.
I have noted the other points in your letter, but I do not think you were asking
me to comment on them.
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You have indicated that
you expect the FSA's role to be to ensure that the compromise scheme is
"not unfair" to the different classes. That certainly gives a
general flavour of what we would expect to do in relation to the compromise.
You may be interested to know what I said on this matter in my speech to
the NAPF yesterday.
"We
will explain our views on the fairness of the scheme between and within relevant
policyholder groups and the possible consequences for policyholders if the scheme
fails?. [on the basis that we do not object to the scheme being put to policyholders]?..
I should emphasise that we will not express a view either in support of or against
the compromise."
For
your information, I attach a note that sets out in more detail what we consider
to be our role.
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In making the kinds
of assessment set out in the attached note, we will want to look at the
treatment of all categories of policyholders who are being asked to compromise
their rights. Our consideration will include, but not be limited to, the
treatment of those policyholders you refer to in your letter.
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The constitution of
the voting classes for a section 425 compromise scheme is an important part
of the legal process and this is something we would expect the court to
look at closely. Policyholders and their representatives would be able to
raise any concerns with the court before the scheme could be finally adopted.
Of course, if significant numbers of policyholders ask to be heard, the
Judge is likely to give directions as to the marshalling of submissions
and their presentation.
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It is our understanding
that the Society proposes to publish the terms of appointment of the Independent
Actuary with the formal scheme documents.
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It is my understanding
that the key terms of the agreement with Halifax were published by the Society
earlier in the year. It would not normally be within the FSA's powers to
require the disclosure of commercially confidential documents of the kind
you would like to see, though if the parties thought it appropriate to do
so, we would not object to them publishing the agreement.
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We agree that it is
important for policyholders of the Society to have access to information
about its financial condition before they are asked to vote on the compromise.
The FSA will be looking to ensure that the Society does all it reasonably
can to provide that information.
Annex
Power of the FSA to intervene
in relation the proposed compromise
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The powers of intervention
into the management of a company are set out in sections 38 to 45 of the
Insurance Companies Act 1982 and they are exercisable by the FSA, subject
to certain limitations, on the grounds set out in section 37. The powers
of intervention may be exercised by the FSA on behalf of the Treasury. Section
37(2) provides that the powers are exercisable on various grounds, including:
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if the FSA considers
the exercise of the power to be desirable for protecting policyholders or
potential policyholders of the company against the risk that the company
may be unable to meet its liabilities or, in the case of long term business,
to fulfil the reasonable expectations of policyholders or potential policyholders;
or
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Sections 38 to 45 provide
various powers of intervention which the FSA may exercise. For example,
section 45(1)(a) confers the power to require a company to take such action
as appears to the FSA to be appropriate to protect policyholders or potential
policyholders of the company against the risk that the company may be unable
to meet its liabilities or, in the case of long term business, to fulfil
the reasonable expectations of policyholders or potential policyholders.
Similarly, under section 45(1)(b), the FSA may impose appropriate requirements
for the purpose of ensuring that the criteria of sound and prudent management
are fulfilled with respect to the company. One relevant criterion of sound
and prudent management is that the company should conduct its business with
due regard to the interests of policyholders and potential policyholders.
These interests are not, in the FSA's view, confined to contractual rights,
but extend to policyholders' reasonable expectations.
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The FSA will have similar
powers under the Financial Services and Markets Act 2000 and these will
be exercisable in similar, though not identical, circumstances.
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Equitable Life is currently
developing a proposal to compromise certain rights and claims of its with-profits
policyholders. This would be done by way of a scheme of arrangement, or
compromise scheme, under section 425 of the Companies Act 1985. Section
425 applies to any company and provides a mechanism for a company to compromise
with its creditors. The company can choose to seek a compromise with particular
classes of creditor only - there is no requirement for the company to compromise
with all of them.
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The section 425 procedure
can be adopted by any company (including insurance companies and other financial
services firms) at any stage, not just when in provisional liquidation or
administration. There is no prerequisite of insolvency. The compromise is
subject to the support of the majority (by number and value of their claims)
of the relevant creditors at meetings of the classes of creditors. It requires
the sanction of the court before it can become effective. The benefit of
a scheme under section 425 is that, subject to the safeguards described
above, it can bind a dissenting minority to the settlement.
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The FSA is not given
a formal role in relation to section 425 of the Companies Act 1985. However,
the powers of intervention available to the FSA under the Insurance Companies
Act 1982 may be relevant - for example if exercised they may have a significant
impact on the operation of the compromise scheme. The FSA will of course
continue to consider whether it would be appropriate or desirable to exercise
any intervention powers. Given the FSA's consumer protection roles it will
wish to consider, on a case-by-case basis, whether it should convey its
views on the scheme to policyholders. It will also wish to consider whether
it would be appropriate to appear in Court (at one or more of the proposed
hearings) either to make representations relative to its own role to protect
the interests of policyholders, or to assist the Court where it can in assessing
the effect of the scheme (and the alternatives to a scheme) on policyholders
and by explaining the FSA's approach in assessing the scheme. It is common
in our experience for the Court to be interested in the views of the regulator
on any proposals of this sort relating to a regulated firm.
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In deciding whether
to exercise any of the powers of intervention, the FSA will wish to consider
a number of separate issues including:
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whether groups of policyholders
as a whole are being offered reasonable benefits in exchange for the rights
they are being asked to give up;
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whether within those
groups some are likely to benefit disproportionately to the detriment of
others; and
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whether the information
being provided to policyholders about the choices before them is clear,
accurate and intelligible so that policyholders are able to take informed
decisions on whether or not to support the scheme.
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