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: 10/01/2003 - Letter to Mr Alex Henney of EMAG from John Tiner, FSA

10 January 2003 - Letter to Mr Alex Henney of EMAG from John Tiner, FSA

Dear Mr Henney,

Thank you for your letters to me of 5, 12 and 18 November, and 10 December about Equitable Life. Howard Davies has also passed to me your letters of 29 November and 13 December in order that we can give you a consolidated response.

I am sure that you will appreciate that many of the points that you raise are really for the management of the Society to answer rather than the FSA. However, with that caveat, I shall endeavour to respond to the points in the order you have raised them in your various letters to us.

I will start by working through the points in your letter of 12 November and the numbering below refers to the paragraph numbering in that letter.

1. It is clear from your letter of 18 November that you are aware that the interim accounts were published on 15 November, and covered the period up to 30 June. Naturally, I agree entirely with your view that the sooner financial information can be made available to its intended audience, the better. However, so far as we are aware, Equitable Life is not under any obligation to produce interim accounts at all, so their production is a positive voluntary move on the part of the Society's management. It follows that it is difficult to be too critical of the production timetable, particularly if the process of compiling the information has been unusually complex.

2. Your comments here conflate a number of separate points. From our experience, in general terms, the information provided by Equitable Life to its policyholders has been on a par with other with-profits offices. Of course, there is always room for improvement. We have published legal advice from Ian Glick QC and Richard Snowden about the lack of information given to some policyholders about the risks of the potential costs of the GARs, and the consequences of failing to provide that information. We therefore need to be careful to distinguish between the generality and the specifics. Our statements in the context of the With-Profits review have been about the general provision of information to policyholders to enable them to have an informed view of their investments.

3. Your letter then goes on to demonstrate a number of ways which you say is evidence that the Society's management have failed to provide information to policyholders. Of course the FSA would have no objection to a company disclosing any of the information you have mentioned, but that is not to say we consider we should necessarily require it. I offer some comments on the examples that you have given.

(i) The FSA has no objection to the parties to the agreement disclosing the information. However, the agreements include commercial information that is subject to confidentiality restrictions. It would probably not, therefore, be open to one of the parties to disclose the information if the other objected to its disclosure. You say that EMAG would like to take a view on the terms of the agreements between HBOS and Equitable Life to ensure that they are in the interests of policyholders. The terms of the deal were considered by the FSA before it was completed. We did not need to approve the deal, but we were satisfied that we had no reason to object to the arrangements proposed.

(ii) The information that was used to assess Equitable's decision to cut policy values was management information that would not ordinarily be published by a firm. It seems to us also that this specific decision was particularly complex and was based on a number of underlying actuarial and other assumptions and accordingly involved a significant degree of judgement. I am sure you will appreciate that financial information put into the public domain raises questions about the level of audit scrutiny necessary to validate the information, with consequences for costs and speed of action.

(iii) We considered the points raised in Professor Blake's report. We accept the argument, which Equitable Life's Counsel advanced in court, that there had to be a cut-off for the information to be used for the purposes of the scheme. If the cut-off had been later, it would simply have delayed progress on the scheme while the later figures were audited. The information would still have been out of date by the time of the vote. In any case, we do not consider that the later information, had it been available to policyholders, would have changed the basic assessment of the benefits for policyholders of the compromise scheme.

(iv) The FSA processes the regulatory returns when they are received from insurance firms. Companies are required to make the returns publicly available. We note that the requirement that you refer to (IPRU (INS) 9.7R) gives a firm 30 days to comply with a request (from the date of the request or the date that the returns were deposited, whichever is later). If you have evidence that Equitable Life failed to comply with this requirement, we should be pleased to receive it.

(v) Section 356 of the Companies Act 1985 provides for access to be given to the register of members of a company in certain circumstances, or on the payment of the prescribed fee, for a person to receive a copy of the register. It is not clear from what you have said that Equitable Life has failed to provide the necessary access. A company that fails to comply with the requirements under that section may be guilty of an offence. The Department of Trade and Industry is responsible for enforcing those provisions.

(vi) We have proposed various changes to the way that with-profits offices operate for the future, and are now in the process of developing our proposals, which we will consult on further. We certainly have proposed that consumers should have access to more information about their investments and many firms are already responding to our proposals by trying to improve the information they provide to consumers. However, we need also to recognise that firms are not yet subject to this proposed obligation to disclose further information.

(vii) The articles of association are a matter for the company concerned rather than the FSA. It is fairly typical for a with-profits office to have a requirement in its constitution to conduct a valuation every three years. However, we require life offices to undertake such a valuation annually.

(viii) As a general matter, we cannot discuss the details of Equitable Life's approach to paying bonuses on particular types of policy. Relevant information should be available in relevant policy documents and the other material produced by the company, such as the with profits guide and the annual returns. We would expect a firm to explain to individual policyholders how the specific terms of their policies work, but it is not clear to me that you are suggesting that Equitable Life has failed to do that. However, I will return to the points raised in your letter of 18 November at the end of this letter.

(ix) Equitable Life has explained publicly that where a policyholder takes a contractual surrender, the payout will be calculated as the policy value, subject to the "maturity adjuster", or the guaranteed value if that is higher. We understand that the basis of calculation for pensions and life policies was most recently explained in a letter from Equitable Life on 1 July 2002. As the letter explains, the value of a non-contractual surrender is calculated by applying the market value adjuster ("MVA") to the policy value at the time of surrender. The underlying "guaranteed" and "policy" values have built up by the addition of the declared guaranteed bonuses and the non-guaranteed interim bonus rate. The effect of the additions can been seen from the annual statements that all policyholders receive.

I do not think there is anything specifically I can respond to in paragraphs 5 and 6 of your letter. However, I can confirm that the FSA is clear about the extent of the information that EMAG has asked for and the extent to which Equitable Life has felt able to comply with those requests. I have highlighted above areas where we believe that the information should have been available and the basis on which that should have been done.

In your letter of 18 November, you set out details of the policies that you and your wife have with Equitable Life. You will understand that it is not for me to provide an explanation of the figures. However, there may be some general points I can make. First, I am not sure what the relevance might be of the ratios you have highlighted. For example, the guaranteed value is not a proportion of the indicative policy value. The values are derived independently, one by the addition of guarantees and the other by the addition of non-guaranteed bonus. I have already commented above (see paragraph (ix)) on the relationship between those values and the surrender and maturity values.

At a general level, I should also say that is difficult to draw direct comparisons between different policies. The values you refer to will be affected by a number of things, including the type of policy, the amount of premiums paid and the precise date of every payment, the impact of any guarantees that might be provided for under the terms of the contract and any charges that may be deducted.

I need also to reply to your comments in your letter of 5 November about the MVA. The precise circumstances in which a firm may impose an MVA may vary. However, I enclose a copy of an FSA factsheet about with-profits policies which includes a general explanation of MVAs and how companies set surrender values. We have been following the way Equitable Life is using MVAs for some time and we have found no evidence that there is anything in Equitable Life's approach that is inconsistent with the general statements in the enclosed factsheet. You will appreciate that the points made in paragraph (ii) above are equally relevant in this context.

You enclosed with your further letter of 10 December some papers relating to a review of the Equitable Life's interim accounts. We have noted the observations made in those documents, but do not think it would be appropriate for us to comment on them.

Your letter also enclosed a note that you have submitted to members of Equitable Life's board. Clearly, as members of the Society you are entitled to express views of this kind, but again it raises issues on which the FSA cannot comment. I should, however, remind you that Mr Treves' appointment was subject to regulatory approval by the FSA when he took up his position at Equitable Life and the requirement about fitness and properness is, of course, ongoing. The FSA has not received information which would cause us to review whether Mr Treves continues to be fit and proper to perform the functions for which he has been retained.

The other matter covered in your letter is the report by Cazalet Consulting that suggests that Equitable Life policyholders might be better off if their policies were converted from with-profits to unit-linked policies. That is clearly a matter of judgement. It does, however, seem to us that policies could only be converted in that way, with the agreement of policyholders. Even if that were likely to be achievable in practice, which it may not, it may well be that the exercise would involve very considerable costs that might well exceed any benefits that might be achieved. We note from the information that you have provided that Equitable Life appears to have considered this as an option but has concluded it would not be viable. Of course, it is open to policyholders individually to switch from with-profits to unit-linked products at any time, if they think that is likely to be in their interests, although we understand a financial adjuster would normally apply to such transfers.

I will now turn to the points you have raised in the two letters you addressed to Howard Davies, to which he has asked me to reply.
You raised five specific points in your letter of 29 November 2002 and I shall respond to them in the order they appear in your letter.
The first two issues refer to specific events in the past. As you know, the FSA commissioned an independent review led by Ronnie Baird, Director, Internal Audit and Quality Control at the FSA, to see what lessons could be learnt from the events at Equitable Life. The report of that review was published last year and, in the light of its findings, I was commissioned to lead a project to consider how the FSA would regulate insurance firms in future. My initial report to the Economic Secretary to the Treasury outlining our proposals for change was submitted in November 2001. The report included our response to the recommendations in the Baird Report. In October 2002, we published The Future Regulation of Insurance - A Progress Report, which sets out the further steps we have taken to strengthen insurance regulation, and our plans for completing the project's programme of work. All those publications are available on the FSA's website. I do not think there is anything I can usefully add to the information that is already available on those matters. Of course the issues you refer to may also be considered by the reviews being carried out by Lord Penrose and the Parliamentary Commissioner and I cannot prejudge any comments that they might make when their reports are published.

In the context of the second point, you have however raised a number of issues that I can respond to on the compromise scheme. Last December, we published a detailed statement in which we explained why we thought Equitable Life's compromise scheme offered a fair exchange for the rights and potential claims policyholders were being asked to give up. That scheme offered policyholders certain uplifts to their policy values in exchange for giving up either the right to take a GAR or the right to pursue a mis-selling claim in relation to the GARs. A clear majority of policyholders supported the proposals which were subsequently approved by the court. Policyholders who left the with-profits fund before the scheme became effective were not bound by it. Their legal rights are therefore unaffected by the scheme and so if they were missold, they still have the right to take their claims to the Ombudsman or to the Courts, and Equitable Life remains liable to pay any compensation that might be awarded. Equitable Life is now proposing to try to reach a settlement with former policyholders with respect to any claims that they may have.

Your third point criticises the FSA for not requiring Equitable Life to "resolve" the GIR issue. Many policies issued by Equitable Life contain GIRs. They are a contractual right under the relevant policies and the FSA does not have the powers to remove those rights, nor to require anyone else to remove them. Clearly it would be open to Equitable Life to offer to buy out the GIR rights, if it thought that was an appropriate course of action.

Your fourth point is about the adequacy of information given to policyholders by Equitable Life, which is a point I have already dealt with above.

The last point you raised in that letter was on the powers of the members to influence and control the affairs of the Society. We have made it plain in previous discussions that the FSA does not have the powers to achieve what you are seeking. While there may be some circumstances in which our powers under the Financial Services and Markets Act might be relevant to the governance of the Society, the purposes for which we may exercise the powers are clearly limited. At the end of the day, subject to any statutory limitations and requirements, it is for the members of a company to decide upon the form of its constitution. We have seen no evidence that Equitable Life is any different from any other company in that respect.

Finally, I turn to your letter of 13 December 2002. That does not appear to raise any issues that I have not already addressed above.