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

Documents: 24/04/2003 - Sir Gordon Downey's submission to the Penrose Inquiry

24 April '03 - A note to The Penrose Inquiry into the Equitable by Sir Gordon Downey

Because of my experience in financial regulation, the Chairman of EMAG has drawn my attention to that Group's second Submission to the Inquiry dated 27 March 2003. He has suggested to me that the Inquiry may also be interested to have my views.

My relevant experience is as follows:-

1972-75: Under Secretary in charge of the Home Finance Division of the Treasury dealing, together with the Bank of England, with monetary policy and financial institutions. This was the forerunner of the Group which was subsequently involved in direct regulation. My tenure covered the period of the "secondary banking crisis" of 1974.

1981-87: Comptroller and Auditor General and head of the National Audit Office, concerned with scrutinising the propriety and effectiveness of Government activities.

1989-90: Complaints Commissioner for the Securities Association and the Stock Exchange.

1990-93: Chairman of the Financial Intermediaries, Managers and Brokers Regulatory Authority (FIMBRA).

1993: Chairman of the Personal Investment Authority (PIA).

I am also an annuitant of the Equitable.


I agree entirely with EMAG's Second Submission and only wish to add three further points:

  1. I strongly support EMAG's view that the analysis needs to be taken back at least to the late 1980s. In some exchanges with the "authorities" and with the Ombudsman I have detected a wish to concentrate attention on the period from 1 January 1999 when the FSA took over responsibility for regulation. This would be quite wrong. It was the DTI and the Treasury regulators who allowed the Society:-

    • to conduct its business with inadequate reserves
    • to claim that it was selling a low-risk product, coupled with prudent management and the benefits of mutuality
    • to sell unguaranteed policies without ring-fencing GARs and without disclosing large contingent liabilities

    The role of the auditors throughout the period is also a matter of concern.

  2. The FSA inherited a mess in 1999 and needed more support from the Government than it got. Nevertheless it is true that, after the House of Lords judgement, the FSA appears to have been paralysed by the scale of the problem. Based on my experience, both in the Treasury and as a regulator, I would say that the generally understood role of a non-departmental regulator was:-

    "to enforce rules designed to protect investors from unreasonable risks; and where those rules prove defective, to harness such resources (as far as possible from the industry) as are necessary to achieve that aim and to maintain confidence".

    In the secondary banking crisis of the early 1970s, when a systemic banking collapse was feared, the Bank of England, encouraged by the Government, persuaded the "big 4" banks and other major financial institutions, in their own and the national interest, to underwrite the ailing banks so that they could be nursed back to health. This was a wholly successful operation, achieved at virtually no long-term cost.

    The contrast with the action of the FSA and the Government over the Equitable crisis is stark. It is likely that comparatively modest underwriting could have stemmed the outflow of funds and, over a period, enabled the Society either to be sold or to manage its resources effectively and build up reserves. This would have avoided the inestimable damage done to the savings industry and investor confidence, and the injustice done to Equitable policyholders. If the FSA did not have the necessary clout with the industry, it should have enlisted the support of the Government and (possibly) the Bank of England.

  3. Section 8 of the EMAG submission makes the point that, over the years, no-one but an expert could have appreciated the Equitable's financial circumstances. This is true and it was therefore doubly incumbent on the regulators to use their own actuarial expertise to fill the gap, which they clearly failed to do.

    Even worse than this, it is clear from my own experience that those taking out policies and annuities in the 1990s were not only unaware of the financial circumstances of the Society but were even unaware that GAR policies existed. The fact that these practices were permitted by the regulators is extraordinary.


It has always been my understanding that the purpose of financial regulation was to exercise prudential supervision to protect investors from unreasonable risks. Policyholders and annuitants were entitled to place reliance on that protection but that reliance has proved wholly misplaced.

I believe the Government has at least a moral obligation (no less than it did over foot and mouth disease) to provide compensation to those disadvantaged by regulatory failure. Previous Governments accepted such an obligation in cases such as Barlow Clowes and the Crown Agents. The arguments for doing so are certainly no less strong for the Equitable.