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
Search
Documents: 30/10/2001 - Report of the House of Commons Treasury Select Committe Hearing

Documents Archive

30th October 2001 - Report of the House of Commons Treasury Select Committe Hearing

A condensed record of key points made during Treasury Committee hearing into Equitable Life, on matters arising out of the recently-published Baird report (the internal inquiry mounted by the FSA into its handling of matters affecting Equitable during the period Jan. 1999 to Dec. 2000). The hearing was held on 30 Oct. 2001 in a committee room at the House of Commons; Treasury Committee M.P.s present included the following: John McFall (committee chairman) (Lab., Dumbarton); Jim Cousins (Lab., Newcastle upon Tyne Central); Michael Fallon (Con., Sevenoaks); David Laws (Lib. Dem., Yeovil); Kali Mountford ( Lab., Colne Valley); Nick Palmer (Lab., Broxtowe); James Plaskitt (Lab., Warwick & Leamington); David Ruffley (Con., Bury St. Edmunds); Andrew Tyrie (Con., Chichester). The first part of the hearing featured Howard Davies and John Tiner, representing the Financial Services Authority; the second part featured Ruth Kelly, Economic Secretary to the Treasury, and two officials, representing the Government. Several EMAG members, including Paul Braithwaite, David Browning, Margaret Felgate, and Nicholas Oglethorpe, attended the hearing.


Q. (J.McF.) As chair, did you modify Baird report before submitting to Treasury?
A. (H.D.) Chaps. 1-6 unmodified. Chap.7 (recommendations. for future) slightly modified.
Q. (J.McF.) Noticed you took drop in bonus nearly £14K for year 2000. Why? Was it to do with ELAS? Had you "taken your eye off the ball"?
A. (H.D.) Performance-related element of bonus cut for 2000 rel. to 1999 due performance & reputation of FSA issues. (Eventually admitted: yes, it was ELAS-related, although nothing to do with Baird as such - decision made in Jan. 2001).
Q.(J.McF.) True to say that ELAS had severe warnings attached from Dec. 1998, responsibility handed to FSA Jan. 1999, then FSA seems to have changed its stance once court action by ELAS got under way. (Failures identified by Baird spelt out).
A. (H.D.) Criticisms in Baird made with benefit of hindsight.. Also, FSA had limited powers of action.
Q. FSA should have become heavily involved at that time?
A. We (FSA) DID get involved; but ELAS complained at every turn. Threatened Judicial Review. Complained to ministers. Had "arrogant, superior" attitude. Didn't deal with regulator in way other firms did. We were up against constantly changing legal background. We didn't expect HoL to turn out the way it did.
Q. Are you saying ELAS could not be challenged?
A. Unfair question. We wish to be seen as an open & accountable regulator. Is Baird a finding that we have fundamentally failed p/holders? No. However, it makes uncomfortable reading; we now wish we'd acted differently, but we did our best. There was failure of management within FSA as identified by Baird. But also problems with the regulatory regime. ELAS wasn't insolvent. Its re-insurance contracts complied with the rules. But...still possible in these circs. for firms to get into trouble - and ELAS did.
Q. FSA should change its ways?
A. Yes, chap. 7 of Baird shows the way, & these changes will be made. We will do it ourselves, we aren't expecting ministers to do it for us.
Q. (Andrew Tyrie) H.D.'s bonus cut due what?
A. Reputational damage suffered by FSA in 2000. "An overall judgement - unrelated to any specific event" (H.D.)
J.T. (comment) FSA seems immune to any comeback.
Q. (Nick Palmer) Were there management errors by FSA, or does fault lie with limited remit granted FSA?
A. (H.D.) FSA didn't fail with its regulatory responsibilities. At key decision moments, FSA actions were either "right" or "reasonable in the circumstances."
Q. Is Baird an indictment of limited regulatory powers enjoyed by FSA?
A. Yes.
Q. Should ELAS have been able to write all these GARs, yet no mention of them in any regulatory returns? And are re-insurance contracts, and attribution of future profits as "assets" a good idea?
A. These can be inappropriate, and lead to opaqueness of perceptions of asset/liability balance.
Q. "Appointed Actuaries" - o.k. for them to be senior management men ? Aren't they supposed to be safeguarding p/holders?
A. No. They should be independent of board. They couldn't be if they were simultaneously C.E.O.
Q. Did FSA too willingly accept the word of ELAS on any matter?
A. Yes, we were too willing to accept ELAS versions of events & forecasts of future events.
Q. Was this regulatory failure?
A. If your're asking whether our lack of scepticism amounts to reg. failure, answer is "No".
Q. (David Laws) Baird, page 82, quotes doc. showing ELAS severely financially stressed. Appears Treas. Solicitor thought there was fair chance ELAS could lose a legal challenge to its differential bonus practice.
A. Yes, v. pessimistic views were expressed. But then ELAS went to court, without consulting or even informing FSA. This severely constrained our freedom of manoeuvre.
Q. It was a really gloomy diagnosis - severe doubts re. reserving, basic solvency?
A. Yes, we were running into a serious battle.
Q. Would you have been willing to put "new money" yourself into ELAS at this time, given all the doubts being expressed? (H.D. unwilling to give straight answer). If not for court case, FSA would have imposed its views on reserving on ELAS.
Q. 2 years went by with ELAS still touting for new business. Astonishing. What did you do to warn new prospective p/holders of potential risks of putting their money into ELAS?
A. (H.D.)"An interesting question". Reality is, either a company is authorised to carry on seeking new business, or it isn't. We can't have an in-between position. We can't make qualitative distinctions between companies.We have to satisfy ourselves that a company is solvent; ELAS was solvent.
Q. What action by FSA to ensure potential new p/holders with ELAS given relevant risk info. ?
A. Regulatory return disclosures were not inadequate.. Not FSA's responsibility to ensure people given info. on uncertain risks.
Q. (A. Tyrie) Confidence in life insurers dented?
A. (John Tiner) Latest figures show good inflows of money.
Q. Don't we need a target of zero risk of financial failure in the
sector?
A. (H.D.) We could approach this, but would involve v. constrained freedom of investment regime. Returns would be poor over long-term.
Q. (Kali Mountford) What info. did p/holders have re. their "reasonable expectations" being likely to be fulfilled?
A. We need to move to more open regulatory regime where risks in various funds are better exposed.. Working to make recs. to improve quality of objective info. accessible to p/holders.
Q. What about p/holders who have already lost out?
A. Have p/holders lost guaranteed amounts? Not sure. Otherwise, future lies with compromise scheme. Closed fund, but should be reasonably sound.
Q. (K.M.) Policyholders reasonable expectations - no legal basis for term?
A. Correct. To be replaced by term "treating customers fairly". Comprehensive definition expected next spring.
Q. (J.McF.) What were FSA reactions to various stages of legal process (i.e High Court, Court of Appeal, HoL). Acc. to Baird, sems to have been little communication. Why did FSA discount Lord Woolf (Appeal) judgement?
A. We thought Court of Appeal did make clear situation regarding impermissibility of juggling individ. bonuses. FSA thought ring-fencing was however permissible. We thought HoL upholding Appeal Court was "survivable" by ELAS.
Q. Didn't Woolf say (Jan. 2000) that differentiation wasn't permissible?
A. (as above).
Q. (J.McF) "I find it staggering that there were no FSA/ELAS interchanges between Jan. - May 2000 re. implications of court judgements. Here was a train coming down the line, and people were just walking away".
A. (H.D.) (repeated belief held re. permissibility of ring-fencing).
Q. (J.McF) "Woolf hit the nail on the head on 21.1.00?"
A. (H.D.) (disagreed).
Q. Why no communications for those 5 months?
A. Because nothing happened to justify such communication.
Q. (Andrew Ruffley) Why did you place so much credence on 'obiter dicta' contained within Appeal Court judgement? (Waller's speculations about permissibility of ring-fencing).
A. HoL handed down significantly different judgement which we did not anticipate.
Q. If you hadn't placed so much credence on Waller's opinion you would have required a review of Nash's letter of Feb. 2000, because it would have appeared to have amounted to mis-selling? Why was it not reviewed?
A. Yes, now I wish we had. At the time, ELAS didn't consult us about the letter. FSA is not in general interested in detail of comms. between insurers & p/holders. This will be corrected in the new regime.
Q. (A.R.) Do you have 100% confidence in your legal advisers within FSA - despite wrong calls they made over ELAS?
A. Yes. But I am not going to hide behind my legal advisers.
Q. (James Plaskitt) Baird p. 104 says internal FSA e-mail after Appeal Court warned HoL might endorse Woolf (i.e. no ring-fencing). What happened to it?
A. Don't know. We didn't know what HoL were going to decide. Wouldn't have been useful to work on basis of Appeal Court judgement with ongoing uncertainty about what HoL would decide.
Q. Does not service level agreement between Treasury & FSA demand that FSA identify early signs of trouble in insurance companies & take preventative action?
A. Yes. Trouble had been identified in 1998. We pressed line of reserving upon ELAS that presumed ring-fencing would be upheld.. But by 1999 it was too late; it would have had to have been done earlier. But what could have been done? Impossible to take any action that would have affected the eventual outcome.
Q.(JMcF.) We shall have to have further meetings re. ELAS.. Willing to attend? & can further officials, e.g. Martin Roberts, attend?
A. (H.D.) Yes.

(Adjournment; then Ruth Kelly, Economic Secretary to Treasury, + 2 officials, gave evidence).

Q. (JMcF.) Did Treasury call for modifications to Baird report before publication?
A. (R.K.) No. Baird is significant evidence. Valuable input into Penrose inquiry. Up to Penrose to call further evidence as he wishes.
Q. In Nov. 1998, R.K.s predecessor (Patricia Hewett) had anticipated eventual outcome of Appeal Court/HoL? What had been done?
A. She (P.H.) hadn't been happy. But life insurance industry generally needed guidance. Guidance was given - that cost of GARs should be accounted for, either implicitly or explicitly. Guidance was not predicated to any particular court challenges that might ensue. With hindsight, probably preferable that guidance hadn't been given in this way.
Q. (J.P.) Baird points up regulatory failures. Treasury willing to offer compensation?
A. Baird concerned with FSA, not with overall history of ELAS. Unwise to draw too many conclusions at this stage.
Q. What if Penrose findings suggest regulatory failure?
A. "I really understand plight p/holders are in". Purpose of Penrose: to achieve understanding of how situation had evolved. Completely independent inquiry - no direct Treasury influence upon it.
Q. If combined weight of Baird, Penrose, when published/Parlt. Ombudsman, ditto, is to suggest regulatory failure or mal-administration, will Treasury offer compensation?
A. If Ombudsman or Penrose finds grave injustice has been done, Treasury would consider issue of compensation.
Q. (David Laws) Possibility that grave regulatory failure has occurred?
A. Herbert Smith inquiry indicates possible suing opportunities already exist. Ombudsman can pursue any enquiries he sees fit.
Q. Was Treasury happy for ELAS to carry on touting for new business after mid-1998?
A. Recognised that ELAS had serious exposure to GARs, no provisioning for them, no reserves. Regulators tried to get ELAS to do something about it.
Q. Did Treasury consider stopping ELAS from taking new business?
A. Option was considered.
Q. Why did Treasury/FSA allow ELAS to carry on taking new business for another 2 years?
A. The need for new capital had been recognised. Closure would have made it difficult to achieve a sale of the business.
Q. What info. was given to p/holders while all this was going on?
A. Not part of FSA's role to give such info. to p/holders.
Q. (A.T.) FSA can't be sued unless on grounds that it has acted in bad faith?
A. Correct.
Q. (J.P.) At time of handover of responsibility for regulation from Treasury to FSA, Jan. 1999, ELAS had big 'warning flag' on its file (no other companies had such warnings attached). Did FSA receive any advice on how to handle ELAS?
A. (R.K.) We don't have the documents to hand. Penrose will be able to retrieve them. All the Treasury insurance regulators had in any case transferred across to FSA, doing same jobs.
Q. What about subsequent monitoring?
A. No. FSA's responsibilities clearly laid out. There were periodic reviews/meetings, at which ELAS would have been on the agenda.
Q. Were you satisfied with what FSA were doing?
A. We wanted a consistent approach, by professionals, rather than have the problems "second-guessed" or managed by ministers.
Q. (A.R.) As minister responsible, has FSA carried out its regulatory responsibilities re. ELAS?
A. With hindsight, diferent decisions would have been taken.
Q. Would you welcome Parlt. Ombudsman inquiring into events pre-1999?
A. (refused to answer).
Q. (Jim Cousins) Sect. 68 orders (re. permissibility of attributing future profits as "assets" for regulatory returns): approved by Treasury?
A. We delegated judgement about these to FSA. Don't know if ministers were informed. Dozens of such orders applied for across the industry during 2000.
Q. Why was ELAS application for Sect. 68 order not picked up as an odd thing when it was approved in Sept. 2000, i.e. after HoL?
A. May be looked at by Penrose.
Q. FSA "in state of tension" between conflicting aims of trying to keep ELAS going, and keeping p/holders adequately informed?
A. Yes. Personal Investment Authority has responsibility to award compensation where necessary, costs borne generally by insurance industry.
Q. Why Penrose inquiry, when initially said setting up of such an inquiry would wait upon Baird report findings?
A. Situation has changed. Baird initially set up just to investigate FSA. But concern expressed from Parliament, p/holders, Treasury Select Committee had influenced R.K. to set up an independent inquiry without waiting for Baird. Much depended on how quickly Penrose inquiry could be got up & running. It had nothing to do with proposed compromise. As things stand now, no case for Treasury "lifeboat".
Q. (Nick Palmer) Why no target date for Penrose?
A. Penrose eminently qualified. But needs to familiarise himself. Doesn't yet know what he will need. Best to let him him get on with it in his own way. He is free-standing, but fully appreciates urgency. (N.P.: "BCCI inquiry took 10 years!). R.K. believes Penrose will report before end year 2002.

* * * * * * * * * * * * * * * *

Postscript: It has been announced that there will be a further public evidence session of the Treasury Committee into the regulation of Equitable Life, on Tuesday 13 November. The purpose will be to put questions to "the Chairman and other officials of the Financial Services Authority". The hearing will be open to the public, starts at 10.30, for confirmation of venue contact House of Commons Public Information Office on 020 7219 4272 on the day before the hearing.