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: 28/10/2003 - Speech by Sir Gordon Downey to the AGM of EMAG

Speech by Sir Gordon Downey to the AGM of EMAG: 28th Oct, 2003

Mr Chairman,

I am grateful to you and your committee for allowing me to express my views on the current position.

My qualifications for doing this are:

  • First, I am a non GAR annuitant and therefore in a class which has suffered more than most. Not only have my annuity and expectations been savagely reduced but I am denied any opportunity to consider alternative courses of action.
  • Secondly, I am a former regulator. In the early 1970s I was head of the Home Finance Division of the Treasury which, amongst other things, shared with the Bank of England a responsibility for the overall well-being of the banks and major financial institutions. This included the period of the secondary banking crisis of 1974. And in the 1990s, after I had retired from public service, I became chairman of FIMBRA and, briefly, the PIA. I therefore claim to have an understanding of the purpose of financial regulation.
  • Thirdly, at two points in my career I was on officer of the House of Commons - first as Comptroller and Auditor General and secondly as Parliamentary Commissioner for Standards. Thus, I do have an insider's view of the role and expectations of Parliament.
I'd like to say a few words from the latter two perspectives. Before doing so, however, I should like to say how much I applaud the activities of EMAG itself. In my opinion, the work that has been done has been well focussed and of an exceptionally high standard. Most recently, the application for Judicial Review produced by Paul Braithwaite and Tom Lake is a devastating critique of the actions of the Parliamentary Ombudsman and a model of its kind. Similarly, the excellent papers which Alex Henney and Colin Slater put to Lord Penrose earlier this year.

So what is the purpose of the prudential side of financial regulation? The Ombudsman implies that prudential supervision is essentially a matter of ensuring that solvency requirements for life assurance companies are observed. This is nonsense. I am quite clear - and I am sure my fellow regulators would have agreed - that the equally important purpose is to ensure prudential supervision to protect policyholders from unreasonable risks and to safeguard their reasonable expectations. This is specifically provided for in the relevant legislation, which also gives the regulators ample powers to intervene to ensure prudent and responsible management.

Against that yardstick the regulators have failed miserably:
  • they allowed the Equitable to sell unguaranteed policies as low risk products, without disclosing that prior guaranteed policies existed, representing huge contingent liabilities on the common fund.
  • they permitted the publication of accounts which obscured the real position of the Society.
  • They endorsed the Society's attempts to redress the balance by paying differential bonuses, later ruled illegal.
  • They allowed the Society to "over-bonus" for a number of years, effectively taxing new investors, without their knowledge for the benefit of those enjoying prior guarantees.
  • They allowed the Society to trade with totally inadequate reserves.
If that does not amount to maladministration, I really don't know what does. Yet the Ombudsman has concluded, not only that the FSA did no wrong, but that there is no case for inquiring into the previous regulators at all. She also concluded that she had no powers to examine the role of the Government Actuaries Department (GAD), to whom the Treasury and the FSA had had substantially delegated regulatory responsibility. I have seen no evidence to support this view and cannot believe Parliament intended that the Ombudsman's role should be circumscribed by such a manoeuvre.

I have to say that I think this is a craven acceptance of a Government agenda. It was the Government who invited the FSA to undertake a review of its own actions in the period leading up to the Society's collapse. This meant that attention was focussed entirely (and I am sure deliberately) on the period after 1 January, 1999 - that is, after Government Departments were no longer directly responsible. Only when the Baird Report was clearly going to conclude that the damage had already been done by that date did the Government set up the independent Penrose Inquiry.

But how independent is it in practice? The Government set the terms of reference. Lord Penrose reports to the Treasury i.e. one of the regulators under scrutiny. He cannot compel witnesses to give evidence. The Treasury can accept or reject his recommendations, which cannot, in any case, include recommendation for compensation. There is no guarantee that the report will be published. And the remit was so wide (relating largely to the future of the life assurance industry) that I cannot help thinking that the main purpose was to kick the whole issue into the long grass. That, in any case, has been the effect as we await completion of the report two and a half years down the track.

My own view (and this is my other field of experience) is that Parliament was unwise in allowing the Government to seize the initiative. It should, I think, have insisted on its own inquiry, with Select Committee-type powers to send for "persons and papers", which would have reported to the House and for which the House could have responsibility for publication. It should have covered the period from the late 1980s onwards and should have dealt with the narrow issue of regulator responsibility and the need for compensation. I would not have expected the Parliamentary Ombudsman to have had the appetite or resource for such an inquiry and that view has been confirmed by her recent actions.

The sad fact of this saga is that with good management and a little foresight all this could have been avoided. I think back to the secondary banking crisis of 1974 which was a much bigger problem than the Equitable. Then, the Bank of England, with support from the Treasury, mobilised the resources of the financial institutions to launch a selective lifeboat which prevented, at little or no cost, the extraordinary damage to the industry and investors which has resulted from the present collapse.

For EMAG and other groups I suggest the message is clear. There are not many people out there looking after one's interests. It is therefore essential to keep up the pressure to ensure that justice is done.
This may still be a long haul.

Sir Gordon Downey