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: 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
Equitable Members' Action Group

27 November 2001

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.

  1. 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.

  1. 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.

  2. 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.

  3. It is our understanding that the Society proposes to publish the terms of appointment of the Independent Actuary with the formal scheme documents.

  4. 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.

  5. 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.


Power of the FSA to intervene in relation the proposed compromise

  1. 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:

  • 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

  • if the company is a UK or a non EC company and it appears to the FSA that any of the criteria of sound and prudent management is not or has not been or may not be or may not have been fulfilled with respect to the company.

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. In deciding whether to exercise any of the powers of intervention, the FSA will wish to consider a number of separate issues including:

  • whether groups of policyholders as a whole are being offered reasonable benefits in exchange for the rights they are being asked to give up;

  • whether within those groups some are likely to benefit disproportionately to the detriment of others; and

  • 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.