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: 09/07/2003 - A submission to the House of Lords Select Committee by Alex Henney

9 July '03 - A submission to the House of Lords Select Committee on the accountability of the Financial Services Authority in general, and of the accountability of the government and of the Parliamentary Ombudsman regarding The Equitable debacle, Alex Henney, Chairman, Equitable Members' Action Group (EMAG)

1. The Financial Services Authority (FSA) functions under the Financial Services and Markets Act 2000 (FSMA). Subsection 2 of section 2 of the Act sets the FSA four regulatory objectives:-

  1. maintaining market confidence in the UK financial system
  2. promoting public understanding of the UK financial system
  3. securing the appropriate protection of consumers
  4. reducing financial crime

These objectives are developed in sections 3-6 of the Act.

2. The FSA should be 1) self accountable in the sense that it reports in public on its own activities, 2) accountable to Parliament, and 3) accountable to the financial customers on behalf of whom it regulates the financial services industry and who indirectly pay for its costs through their charges. Finally we look at the issue of what appears to be an attempt by the government to delay accountability for regulatory failure regarding The Equitable debacle.


3. The FSA publishes a great volume of consultation and information papers. A highlight of its self accountability was the report which the FSA's Director of Internal Audit, Mr. Ronnie Baird, prepared at the request of the government, titled "Report of the Financial Services Authority on the Review of the Regulation of The Equitable Life Assurance Society from 1 January 1999 to 8 December 2000" (the Baird Report), which Her Majesty's Government is Submitting as Evidence to the Inquiry Conducted by Lord Penrose, The Stationery Office, 16 October 2001. We have no view beyond this seemingly comprehensive and detailed document (which was produced in unusual circumstances) as to the comprehensiveness and objectivity of the documents the FSA prepares which review aspects of its performance, nor of its Annual Report.


4. Although the Treasury Select Committee has acted vigorously on a number of occasions in investigating the activities of the FSA, the National Audit Office is precluded from investigating it under the National Audit Act 1983, which empowers it to undertake efficiency studies and of government departments and various specified public bodies, and the Parliamentary Ombudsman is precluded from investigating it for maladministration after 30 November 2001 when the FSA assumed its full powers. Prior to that date it acted as agent to the Treasury on a Senior Level Agreement, and its prudential regulation came within the scope of the Parliamentary Ombudsman's powers. Members of Parliament have referred some 530 cases to the Parliamentary Ombudsman relating to The Equitable. On 16 October 2001 the Baird Report was published, and this provided the Parliamentary Ombudsman with prima facie evidence of maladministration. He decided to examine the prudential regulation 1 of The Equitable over the period 1 January 1999 to 8 December 2000 through a representative test case. The report is being published on 1 July 2003.

5. The FSA is not properly accountable to Parliament. We recommend that the National Audit Office should be empowered to undertake efficiency studies of the FSA, and that the Parliamentary Ombudsman should be empowered to investigate it for maladministration.


6. We consider two types of accountability to customers, 1) for conduct of business regulation, and 2) legal liability for loss caused by the negligence of the FSA in prudential regulation.

The FSA's performance and accountability for conduct of business decisions

7. In 1998 the FSA de facto took over responsibility for conduct of business regulation. It did nothing to investigate or protect new policyholders joining The Equitable. In 1998-99, after Equitable was attracting media criticism over its handling of policies with guaranteed annuity options, FSA files contain a minute asking "whether there is anything we should be doing in order to fulfil our regulatory obligations or at least justify our stance"2 . Another asks: "Is there at least enough for a meeting?" A third asks: "Is there anything we should be doing on this? I knew we were going to about a year ago (my delay)." The FSA's performance of doing nothing was disgraceful, and it should be held to account. But, as we shall show, there is no effective means for customers to achieve this and seek redress for the FSA's negligence of their interests.

8. We suspect that this inept performance is due in part to the composition of the board of the FSA, which, according to the Consumers' Association submission to the Committee3, is dominated by industry interests. It includes four members of the Financial Services Executive, while of the current 11 non-executive board members, over half are representatives or employees of financial service firms and one is a representative of the Bank of England. Of the remainder, two have non-financial services backgrounds and only one is a representative of a consumer organisation (National Consumer Council). This means that consumer representation is very much in a minority on the board. Furthermore:-
  • the Financial Services Authority's Consumer Panel is charged with monitoring how well the Financial Services Authority is doing in relation to its objectives to protect consumers. But members of the panel are appointed by the Financial Services Authority, which also funds the Panel and set its terms of reference

  • the Financial Ombudsman's Service is effectively a subsidiary of the FSA4
These arrangements are markedly different from those for representing the interests of gas and electricity customers, where "Energywatch" is funded separately and its members are appointed separately from the Gas and Electricity Markets Authority.

9. On a number of occasions EMAG has asked the FSA to instruct The Equitable to provide information about various aspects of The Equitable's financial situation and of the manner in which it treats policyholders, see Annex 1. (Note that the questions should be seen within the context that the Equitable was a mutual not a proprietary company). But the reply by Mr. Tiner, Managing Director of the FSA, was most unhelpful see Annex 2, and is at variance with the FSA's regulatory objectives spelt out in S4(2)(b) and S5(2)(c) of the FSMA. They lay upon the FSA "so far as reasonably possible", a duty of ensuring consumers have "appropriate" and "accurate" information. It appears to us that the FSA has endorsed a conscious policy pursued by the board of The Equitable to provide policyholders with minimal information about the financial circumstances of The Equitable in order first to encourage them through fear, uncertainty, and doubt coupled with a promise of better things to come (they are still to come) to sign up to the Compromise Settlement under S425 of the Companies Act that was published in December 2001. The second reason for providing minimal information was that at times the board seemed to wish to avoid (non-annuitant) policyholders leaving in too great numbers too rapidly. The consequence of the policy or providing minimal information has been to deprive non-annuitant members of the financial information which would have assisted them in making a more informed decision whether to stay with The Equitable or to leave5.

10. We are not surprised that the Consumers' Association (CA) wrote "the Financial Services Authority operates within…closed culture, which often denies consumers and consumer organisations such as CA access to information on the grounds of market sensitivities. CA appreciates the need to protect genuinely sensitive market information, but we are particularly concerned that the current very restrictive provisions of the Financial Services and Markets Act, without a public interest test, is a significant barrier to enforcing both corporate and regulatory accountability".

11. More profoundly, as the behaviour of the FSA after the House of Lords decision on 20 July 2000 regarding The Equitable highlighted, there is an inherent conflict of interest between the FSA's responsibility to maintain orderly markets and its responsibility to protect consumers. The Lords' decision rendered illegal the board's approach to setting differential terminal bonuses for policyholders who had (and exercised) a guaranteed annuity option, and other policyholders. The decision not only resulted in a shift in value of some £1.6bn from policyholders without guarantees to those with guarantees, it increased the level of guarantees in the fund. This significantly weakened what was already a weak fund whose solvency margin according to the Government Actuary's Department was "thin" at the end of 1999, and was propped up by financial engineering6.

12. The FSA allowed The Equitable to stay open for new business as it attempted to sell the business. The FSA clearly did not understand how weak the fund was (the Government Actuary's Department did not complete its scrutiny report for 1999 until November 2000, four months after the House of Lords' decision). It did not work out that other life assurance companies were not going to bale out Equitable policyholders by paying billions for its "badwill". The FSA's decision allowed investors to continue to join a fund that was fragile and uncertain. People were invited to invest their money on the implicit prospectus that, if The Equitable can find a buyer, then they may have reasonable expectations. If not, they would be in a mess - and they were as the adjudications published on 22 May 2003 on five lead late-joiner cases by the Financial Ombudsman's Service shows7. The episode brings out in extreme form the inherent conflict in the FSA's objectives between preserving market confidence (however undeserved), which appears to have been its overriding priority and will generally prevail - and definitely did in this case - versus that of protecting consumers. Given the lack of redress available to individual consumers of financial services under English law (see next section), the FSA is not accountable to consumers for its conduct of business decisions. We recommend that responsibility for conduct of business regulation is removed from the FSA, and the Financial Ombudsman Service is set up as an independent agency.

Legal liability of the FSA to consumers for negligent regulation

13. By S.19(1) of Schedule 1 to the FSMA "Neither the Authority nor any person who is, or is acting as, a member, officer, or member of staff of the Authority is to be liable in damages for anything done or omitted in the discharge, or purported discharge, of the Authority's functions". Prima facie this immunity appears to protect it from negligence of the type it exhibited with regards to The Equitable, because under English law it can only be sued for misfeasance of public office, which is far too high a hurdle to jump.

14. I have already touched on the FSA's negligence in its conduct of business regulation, but it was also negligent in its prudential regulation. The FSA assumed responsibility for the prudential regulation of life assurers at the beginning of 1999, so it had a year and a half to get its act together for any possible decision by the House of Lords on the legality of the board's approach to setting differential terminal bonuses. But did it? The Baird Report observed that "There is no documentary evidence that the FSA analysed the consequences, at this stage of The Equitable Life failing to find a buyer or requested information from Equitable Life on this "worst case" scenario". It also observed "We believe that closer and more informed scrutiny, at an earlier stage, of the financial implications of the possible outcomes of the Court case, which had been foreseen in the scenario planning, would have given the regulator more time to reflect on how to react appropriately to any courses of action proposed or taken by The Equitable in response to any ruling of the Court". The effect of this decision was that many people put money into The Equitable over the period 21 July to 7 December 2001 (after which The Equitable closed to new business), and consequently lost money.

15. The FSA then sat on its hands and failed to try to mitigate the obviously flawed nature of the House of Lords' decision. The case on behalf of policyholders who did not have guaranteed annuity options was not well put, and one of the judges has commented: "If the case had been put differently, and we had known the true facts, the outcome might have been different." Instead of taking action the FSA signed up to the flawed compromise proposed by The Equitable's new board, which was detrimental to the interests of the policyholders who did not have guaranteed annuity options. If the Financial Ombudsman's adjudication on five test cases of people who invested after legal proceedings commenced and withdrew before the Compromise8 stands up to The Equitable's appeal, then policyholders who did not take the FSA's advice to sign-up to the compromise endorsed by the FSA, but left The Equitable, will have fared better than those who stayed and signed the compromise. After a decade of regulatory inaction, the FSA did not come clean but papered over the cracks. Annuitants and policyholders without guaranteed annuity options therefore paid dearly for following the FSA's endorsement.

16. Under English law, policyholders have no hope of holding the FSA to account for negligence, but as explained in Annex 3 there are prospects that the evolving interpretation of the European Union Banking and Insurance Directives may lead to the FSA and (previously) the Insurance Directorate of the Department of Trade and Industry and then the Treasury being held liable to policyholders for losses resulting from their negligence.

18. We recommend that the FSA and an independent Financial Ombudsman Service are made liable when due to their negligence consumers of financial services lose some or all of the value of their deposits, investments, or policies


19. The Insurance Directorate of the Department of Trade and Industry was responsible for the prudential regulation of life assurers until 1998, when responsibility was passed to the Treasury (along with the personnel) as an interim step before passing responsibility (and most of the personnel) to the FSA on an agency basis through a service level agreement on 1 January 1999. On 1 December 2001 the FSA assumed full responsibility and powers in its own right. Until 27 April 2001, when the 23 staff concerned with the regulation of life assurers were transferred to the FSA, the Government Actuary's Department (GAD) was responsible for providing the DTI/Treasury Insurance Directorate and then the FSA with actuarial advice and in particular for undertaking annual scrutiny reports of life assurance companies. "A case study in serial regulatory failure by the government and its agent, the Financial Services Authority", one of our submissions to The Penrose Inquiry which we have provided to the Clerk to the Committee, conveys our view about the incompetence of the government as regulator.

20. On 31 August 2001, nine months after The Equitable has closed to new business, under pressure from concern expressed in the press and by various Members of Parliament, the Treasury set up an Inquiry by Lord Justice Penrose with broad terms of reference9, which perhaps involve writing a post-war history book of the life assurance industry and The Equitable. The Inquiry is not a statutory inquiry, it reports to the Treasury and it does not analyse culpability. We have met with Lord Penrose and his colleagues, and have no doubt about his wish to report thoroughly and objectively into the history of The Equitable debacle. We are, however, skeptical - if not cynical - about the motives of the Treasury in setting such broad and time consuming terms of reference. Originally it was suggested that Penrose would report by the end of 2002, now he hopes to complete his report by mid summer 2003, which will be more than three years after the House of Lords ruling that led to the demise of The Equitable. When will the Treasury publish it? How much will The Treasury edit on grounds of so called "confidentiality" to delete criticisms of regulatory failures? Was the Inquiry an attempt to delay and thereby defuse the anger of approaching million policyholders, the loss of their homes by some, and the reduction of the incomes of 50,000 with-profits (more aptly titled "with-losses") by 25% starting this February? Is this an "establishment cover up"? At very least for members of The Equitable who die in period before action (if any) is taken on Penrose's report, justice delayed is definitely justice denied.

21. We contrast the dilatory performance of the government and the slowness of its inquiry, with that of the Australian government and its inquiry into "The Failure of HIH Insurance"10. The HIH was a very large general insurance company and a life assurer which was placed in provisional liquidation on 15 March 2001, and formal winding-up orders were made on 27 August 2001, when the deficiency of the group was estimated to be between Aus$3.6bn and $5.3bn. A judge was appointed to inquire into the collapse on 29 August 2001 (not a delay of nine months as was the case for the Equitable Life), and he reported in April 2003, just over two years from the date of provisional liquidation. Furthermore the inquiry analysed culpability, and fifty six possible breaches of the law have been referred to the Australian Securities and Investments Commission and the Director of Public Prosecutions.

Annex 1

Edited version of a letter from Alex Henney to John Tiner titled "A complaint regarding the lack of information provided by the Equitable to its members" dated 12 November 2002 requesting the FSA help policyholders to get information from The Equitable

3. The original objective of the Equitable Members Action Group was: "to support with-profits members in making informed decisions on the best long-term future of members". You will see from our re-designed website www.emag.org.uk that EMAG still strives to obtain and publish information of help to all policyholders (past and present). We were thus pleased when Mr. Treves wrote in an open letter published in various newspapers on 1 March 2001 that:-

"I will communicate openly. This is our Society and members are entitled to know everything about how it is run unless open disclosure would be commercially damaging…I look forward to an atmosphere of trust and transparency between the policyholders and our Society".
4. In similar vein the Annual Report and Accounts for 2001 claimed that "The Board is committed to a policy of openness in communication with policyholders". Notwithstanding those claims, he and the chief executive, Mr. Charles Thomson, have consistently obstructed us achieving our objective. The members have been subject to obfuscation, some misinformation, and much spin for the whole period since Mr. Treves became chairman. I provide you with nine examples:
  (i) Inadequate information on the Halifax Equitable deal. Your colleague Michael Foot once told me he could see no reason why members should not be provided with information about the deal. We were provided with some information by way of the draft heads of terms, but no figures which would allow us to judge whether it was in our interests, nor the level of costs we could expect for the services that HBOS would render us. (It seems that these costs are high).
  (ii) No quantification nor background for the reduction in policy values by 16% on 16 July 2001. The information provided to the policyholders (open letter to the members of Equitable, 16 July 2001) merely stated:-
  • "Stockmarkets have fallen heavily over the last 18 months;
  • Maturity values now significantly exceed the value of the investments underlying maturing policies;
  • As a mature fund, a large number of policyholders are currently retiring and taking their benefits."
The fall of the stock market at that point accounted for only about 5% of the reduction in value of the fund - could we not have been advised of this? Why did we have to wait until December 2001 for the Independent Actuary's report in the Compromise to tell us that the fund had been 10% over-valued at 31/12/2000? And what is the relevance of the third point? Was it a euphemism for the fact that it took Mr. Thomson so long to appreciate that members who took contracted exits in the first half of 2001 received (we estimate) about £200m more than their asset share?

Mr. Treves and Mr. Thomson provided the following reasons for not providing adequate information about the value reductions:-
  • "it would be too expensive" - in the context of £4,000 million, too expensive? Given the large legal fees incurred by the Society and how much is spent on Burson Marseller to "manage" information, the response cannot be regarded as serious

  • "it would involve too much work" - yet either there was a directors' summary, which could have been provided or, as has since been claimed, the directors had no summary in which case it is difficult to see how they could have taken on a £4bn decision

  • "the press would misinterpret it" - even if that were true, it should not prevent the publication of information to which the members are entitled

  • "it would assist claims against former directors or advisers" - an incomprehensible reason

  • "the auditors would not allow it" - why not? who pays their fees? complete nonsense

  • "no other with profit office does it" - no other with profits office is in the mess in which the Equitable is
I hope you will agree with us that providing such a set of ill founded reasons to members is not compatible with the spirit, if not the ruling, of the message you are conveying in your Review.
  (iii) Omissions in the Compromise Document. We commissioned Professor David Blake to prepare a report for us entitled "An Assessment of the Adequacy And Objectivity of the Information Provided by the Board of the Equitable Life Assurance Society in Connection with the Compromise Scheme Proposals of 6 December 2001". Professor Blake asked:-
"Is the information provided the most up-to-date available? Most of the information in the above documents is now nearly six months old. In the interests of transparency and full disclosure, the following additional information is needed: a statement of affairs at November 30 providing information on:-
  • Number of policyholders (both GAR and non-GAR) still in the fund
  • Value of the fund
  • Solvency level of the fund
  • Fund available for appropriations."

Mr. Thomson rubbished Professor Blake's report, alleging in a letter to the FT that Professor Blake had not seen certain information. Professor Blake had seen the information. He also alleged that "Blake had made mistakes in all of his first five paragraphs". Despite two courteous and precise requests from Professor Blake, Mr. Thomson did not substantiate his allegation. Subsequently the Society has relied on Mr. Justice Lloyd's views on the matter - despite his lack of academic expertise in Professor Blake's field and his seeming lack of awareness of the possibility of using the press or the internet to update members inexpensively.
  (iv) The Equitable's attempt to hide its solvency return in May 2002 until after the AGM. As you know the Equitable was obliged to provide its solvency return in digitised form to the FSA by 30 April 2002. During May EMAG, the Financial Times, the Daily Mail and some consulting actuaries tried to obtain a copy of the return before the AGM on 27/5/02. All were fobbed off by the Equitable. Finally, after all postal votes would have been despatched, on 24 May we read:-

"The Financial Times was last night supplied with a full copy of the statutory solvency return after making repeated requests to Equitable. The mutual said that it had wanted to wait before distributing copies until they were available to everyone from Companies House".

At the AGM the Society's chief investment officer and finance director, Mr. Charles Bellringer incorrectly claimed that the reason for the delay in providing the solvency return was due to a delay by the FSA in providing it to Companies House, from where members and journalists could request it. Yet by virtue of Rule 9.7 of the interim "Prudential Source Book: Insurers", policyholders have a right to receive "deposited documents" once they are deposited. There was nothing stopping the Society from providing the information to those who asked for it - and we had.

One is bound to ask whether the responsible officers of the Society were trying to hide the Society's weak solvency position and its reliance on financial engineering to scrape by.
  (v) A consistent refusal to publish the number of members. We have on a number of occasions asked for - and on each occasion been refused - the number of members. We then thought that we would count the register. The Equitable made it as difficult as possible, saying we could only see it in Aylesbury for two hours a day and have access to one terminal - compare this with Mr. Treves' fine words quoted in paragraph 3 above.
  (vi) Information not provided in the Annual Report & Accounts and at the AGM. At the AGM I asked for information which was not provided in the Annual Report & Accounts. The information was not provided, and so I wrote to Mr. Treves on 13 June setting out a request for the following information:-
  • in laymen's terms an analysis of the with-profits fund's available assets together with a comparison between, on the one hand, the available assets and, on the other hand, aggregate policy values, where the latter are differentiated between guaranteed and non-guaranteed elements and the annuitants

  • a proper analysis of the fund's performance i.e. return by asset class the membership issue

  • the nature and implications of the GIR issue
You are no doubt well aware that in your reports on the With-Profits Review you clearly indicated that the first two pieces of information should be available. And I imagine you would not disagree that information about GIRs should be available as it is a material risk to the Society.
  (viii) Failure to provide information under article 65 of the Society's Memorandum and Articles of Association. You are aware that we suffered two further policy value reductions this year. Knowing that we would be provided with little or no information, we checked the Society's Memorandum and found that article 65 reads as follows:-

"The Directors shall at such intervals as they deem expedient but at least once every three years…cause an investigation to be made into the financial condition of the Society…by the Actuary…the Directors report to the Members upon the results of the valuation".

I wrote to Mr. Thomson on 5 September and drew his attention to the article and to the OED's definition of the relevant meaning of the word "report" and commented "While the Directors have made statements, they have not reported in the proper meaning of the word on the investigations made into the financial condition of the Society that led to cuts in policy value of July 2001, April 2002, July 2002. I would be obliged if you would provide the members of the Society with the reports as required by the Articles of Association by publishing them on the website."

I received the following reply from the Society's new head of press relations and corporate communications, Mr. Tony McGarahan on 16 September:

"The investigation under Article 65 is the annual valuation of the Society; published in the returns to the FSA, formerly to the Insurance Directorate. This document is on the Society's website."

On 7 October, after talking to Mr. Roger Allen, I wrote to Mr. Treves reciting the two letters and then pointing out (among other things) that:-
  • the Directors' Report dated 15th April 2002 refers to "Valuation and bonus declaration", which was obviously not the solvency return

  • Article 65 refers to a "Directors' report to members", not one to a regulatory authority and quite distinct from the Accounts prepared under Article 64. It also states "Provided that in the valuation of the assets the values thereof be not estimated beyond the market prices [if any] of the same ..." which clearly implies that future income should not be included. The solvency return includes future income

  • Mr. Allen advised me that solvency returns "are not used for valuing the assets and declaring bonuses. Valuation and bonuses are worked out from first principles. They [i.e. solvency returns] are not a tool in that process"

  • recently, another day and another (and slightly more elaborate) story from McGarahan, which is attachment 4. We are now taking legal advice on the issue
This pathetic little episode shows the depths to which the Board will go to hide information from the members.
  (viii) Recently, our general secretary sought policy clarification of whether the GIR accrues daily both for on-going contracts and for non-contractual departures. The written reply was typical: "The Society is not prepared to discuss circumstances surrounding other clients policies….I feel that no useful purpose will be served by any further correspondence on this matter." So, the Society's policy basis of accrual of GIRs remains unexplained to its members (we would have put the answer on our website).
  (ix) Basis of valuation of members leaving the fund. We have repeatedly been alerted by departing members to the refusal by the Society to provide substantiation for the payment figure received. The FSA has refused to intervene. Several such cases, when brought to the attention of quality newspapers have resulted in an immediate hike in payment and admission of mistake. Any respectable financial institution must surely provide chapter and verse on the calculation of a final fund payout?
  I could provide more evidence, but trust you will consider that I have provided enough - if not more than enough - to make the point about how the Society keeps members in the dark. The result of that policy is that policyholders are not provided with the information that they need to make informed judgments about their financial futures, while those who are annuitants have received no explanation of their prospects.

Annex 2

Edited version of a letter from John Tiner to Alex Henney dated 10 January 2003 refusing to help policyholders

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.

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 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 use 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) fives 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 of 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 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 be seen from the annual statements that all policyholders receive.

Annex 3

Prospects that European law might render the FSA liable for losses resulting from its negligence11

There are hopes that European Law will force a change in English practice, and the FSA may become liable in tort for supervisory failures. Professor Mads Andenas12 and Dr. Duncan Fairgrieve13 argue in a recent article "Misfeasance in public office, Governmental liability, and European influences"14, that "expansion of tort liability for misfeasance in public office in the House of Lords' recent [strike out] decisions in Three Rivers District Council v Bank of England15 (which is about the Bank's obligation to regulate the bank BCCI which went into liquidation in 1991) may contribute to resolving possible conflicts with the European Convention of Human Rights. It may also reduce the differences in the protection offered under English law and EU law". The authors point out that the "BCCI operated in several member states at a stage when the coordination of banking supervision was being developed at a Community level. It is well documented that BCCI was allowed to continue its business for a long period due to coordination problems between the banking supervisors in different member states. The First Banking Directive (1977) was intended to secure non-discriminatory treatment of banks from other member states…The opening up of the banking markets in the Directive was accompanied by certain safeguards to protect the interest of depositors. Depositors were to be protected by certain supervisory measures that should be undertaken by national authorities. In particular they were to protect depositors from the problems of coordination between different national banking supervisors. This was the first step in establishing a new supervisory system in the Community". In short, although the House of Lords would not allow a claim based squarely on European law, which was one of the grounds on which the claim was based, they accepted that the claim based on misfeasance (which is an English law concept) could go forward, and they expanded the elements of this tort in the light of European law by broadening the mental elements required for this tort, and ensuring these mental elements alone (based on subjective recklessness would suffice, without the need to show specific accusations of bad faith).

In France the Conseil d'Etat has held that the Commission Bancaire, the banking regulator, can be liable for damages for loss caused to investors by a collapse of a credit institution. In two decisions, the German Supreme Court has recognized that individual bank creditors including depositors represented a "protected interest", which means that depositors are protected from negligence by the regulator, and significantly another case has been referred to the European Court of Justice regarding the quantum of compensation. In Italy, Article 47 of the Italian Constitution (1948) provides that the state shall encourage and supervise saving in all its forms, and imposed a duty on the state to supervise banks in the interest of depositors. A series of recent judgments have paved the way for tort remedies against banking supervisors. The Italian Corte di Cassazione (Supreme Court) decided in two judgments that the Banca d'Italia in principle can be held liable in damages to investors and depositors for negligent supervision of banks. More recently, the Corte di Cassazione has applied the newly established damages liability to protect legitimate interests and held the securities commission Consob liable for investors' losses. Article 47 of the Italian constitution influenced the language of the Treaty of Rome, which in Article 57(2) required unanimity for the adoption of Community measures concerning the protection of savings.

The authors believe that the attempt by Parliament to protect the FSA is not consistent with the EU's Banking Directives and with practice in other EU countries. The general aim of the Second Banking Directive (1989), which sets common minimum standards for banking supervision, is to ensure that a depositor putting money in a bank enjoys the same level of regulatory protection regardless of the domicile of an EU based bank. The country of domicile will be responsible for regulating the bank across the EU. Clearly there is an inconsistency if British depositors in a French, Italian or German (and Dutch, see paragraph 18) bank can sue the French, German, Italian or Dutch regulators for loss due to regulatory negligence, but French, Italian, German or Dutch depositors in a British domiciled bank cannot sue a British regulator for negligence16. Thus if The Banking Directives are interpreted as requiring that the FSA be liable for negligence to bank depositors for loss, then in like manner the Insurance Directives can be interpreted as requiring the FSA to be liable for negligence to insurance policyholders for loss. Furthermore S5(1) of the FSMA states "The protection of consumers objective is securing the appropriate degree of protection for consumers", which arguably imposes a duty of care on the FSA.

In addition to the cases mentioned in the paper by Andenas and Fairgrieve, there has been a recent Dutch case (Rb. 's-Gravenhage 13 June 2001, NJ 2001, 445, JOR 2001, 215 (Stichting Vie d'Or a.o./Pensioen-en Verzekeringskamer-Staat-Deloitte & Touche), which concerns a Life Insurance company whose products were marketed aggressively to rich individuals. The investments made by the company were at times risky, the accounting was not clear, and the auditors were not vigilant enough. The activities were however approved by the Dutch regulator (despite warnings from private sources). When the insurance company went into liquidation, the policyholders sued the regulator and the auditors, and won compensation from the auditors but not from the Regulator and the State. The claimants and the auditors have brought an appeal against this decision and this is now pending before the Court of Appeal of The Hague. A decision is expected to be handed down in the course of this year and it is most likely that subsequently a procedure before the Supreme Court will follow.


1 The Ombudsman is not empowered to examine conduct of business regulation. [Back]

2 The quotations in paragraphs 7, 11 and 14 are from the Baird Report. The full story of regulatory incompetence by the Insurance Directorate of the Department of Trade and Industry; the Treasury; the Government Actuary's Department; and the FSA is set out in my submission to The Penrose Inquiry on behalf of The Equitable Members Action Group titled "A case study in serial regulatory failure by the government and its agent, the Financial Services Authority", which has been provided to the Clerk of the Committee. [Back]

3 Summary of the response from the Consumers' Association to the House of Lords Select Committee on the Constitution - April 2003: Accountability of Regulators to Citizens and Parliament. [Back]

4 To quote from the Revised Memorandum of Understanding between the Financial Services Authority and the Financial Ombudsman Service of July 2002:-
The FSA is responsible for:
  1. appointing and removing of the directors of the Financial Ombudsman Service (with, in the case of the chairman, the approval of the Treasury)
  2. ensuring that the Financial Ombudsman Service is at all times capable of exercising the functions conferred on it by or under the legislation
  3. approving the Financial Ombudsman Service's budget (which must include an indication of how funds are to be raised and resources deployed)
  4. approving all of the rules and standard terms relating to the compulsory and voluntary jurisdictions of the Financial Ombudsman Service
  5. making rules to determine the scope of the scheme's compulsory jurisdiction and approving the rules for the scope of the voluntary jurisdiction to be made by the Financial Ombudsman Service
  6. making rules relating to the funding of the compulsory jurisdiction of the scheme

5 Information that was withheld which would have been particularly useful to members includes:-
  • the review of The Equitable finances that led to a cut in policy values on 16 July 2001
  • The Equitable's solvency position, which was not included in the Compromise document, and which the Board tried with dissembling arguments to hide in May 2002 prior to the Annual General Meeting from journalists, consulting actuaries, and EMAG
  • the extent of overbonusing during the 1990s. Even now, although figures for 1995-99 were made available in Court, the Chief Executive of The Equitable refuses to provide figures for the year 2000 on the grounds that to do so "would not be helpful to the continuing policyholders", which is basically specious - the more so because the Penrose Inquiry will publish the figures
  • a clear analysis of the significance of the guaranteed interest rate provisions (which are in about 80% by value of the policies) on limiting the investment freedom of the fund
These figures reveal the frailty of The Equitable, and might have encouraged more policyholders to leave sooner and attempt to rebuild their policy values rather than wait for the succession of cuts in policy values that hit those who stayed.

6 The scrutiny report for 1999 by the Government Actuary's Department stated that, as far as capital risk was concerned, at first sight the solvency position looked reasonable, but the available assets of £3,861m to cover RMM of £1,114m included a future profits implicit item of £925m, disregarded the liability to repay a subordinated loan of £346m and benefited from a reduction of almost £1.1bn in the GAO reserve from the reinsurance agreement. Without these items, the available assets would be just £1511m, a less satisfactory picture for this large fund" (para 4.59.39 of the Baird Report). [Back]

7 www.financial-ombudsman.org.uk/faq/equitable. [Back]

8 Policyholders who signed the compromise lost their right to alternative redress. [Back]

9 The terms of reference are "To enquire into the circumstances leading to the current situation of the Equitable Life Assurance Society taking account of relevant life market background; to identifying any lessons to be learnt for the conduct, administration, and regulation of the life assurance business; and to give a report thereon to Treasury Ministers". [Back]

10 www.hihroyalcom.gov.au/finalreport[Back]

11 This annex has been prepared with assistance from Professors Mads Andenas, Cees van Dam and Dr. Duncan Fairgrieve all of the British Institute of International Comparative Law. [Back]

12 Director, British Institute of International and Comparative Law, London; Senior Teaching Fellow, Institute of European and Comparative Law, and Fellow, Harris Manchester College, University of Oxford. [Back]

13 Fellow in Comparative Law, British Institute of International and Comparative Law, London; Maître de Conférences invité, Université de Paris 1, Sorbonne. [Back]

14 International Comparative Law Quarterly, Volume 51, October 2000 pp.757-780. [Back]

15 Three Rivers District Council and others v Governor and Company of the Bank of England [2000] 2 WLR 1220; Three Rivers District Council and others v Governor and Company of the Bank of England [2001] UKHL 16. [Back]

16 This situation arose with BCCI depositors in France who wanted to sue the Commission Bancaire for loss due to negligent regulation. The court ruled that the collapse of the BCCI was due to fraudulent behaviour at the group headquarters in London, and was not linked to activities in France, and consequently the Commission had not been negligent. It implicitly thus suggested that the depositors seek redress from the British regulatory authority, then the Bank of England. [Back]