Why are answers on Equitable taking so long?

By Alex Henney, Chairman of EMAG

Published in the Financial Times: November 28th, 2003

It is now almost three years since Equitable Life closed for new business. It took the Treasury until August 31 2001 to set up an inquiry under Lord Penrose. More than two years later we still have no official answers about what went wrong with the prudential regulation of the society.

The Treasury, the Financial Services Authority, the Commons Treasury select committee, the board of Equitable and Ann Abraham, the parliamentary ombudsman, are all hiding behind the inquiry, claiming they have to wait for Penrose to report before commenting. Even when Penrose does report, we may not discover his conclusions for some time; the latest indications from Ruth Kelly, the financial secretary to the Treasury, are that a very long period will be needed after the report is delivered for checks on its legal underpinnings, and to ensure that it respects confidentiality. One would have thought a leading judge could have done that for himself.

In fact, there was no need for a 30-month study into why Equitable collapsed to identify the serial regulatory failure by the government. First, Equitable failed to reserve for guaranteed annuity options from the mid-1980s, when the actuarial methodology was developed. The regulator should have required reserving from the late 1980s, but it failed to act until 1998.

Second, throughout the 1990s Equitable declared bonuses well in excess of the value of assets to improve its marketing appeal. In consequence it was paying out departing policyholders in excess of their asset value with money from new investors. This pyramid selling left a hole of some £3bn which all policyholders who did not leave before July 2001 have paid for in savage reductions in policy values. Although the Government Actuary's Department (GAD) was aware of this practice from 1997, it did not necessarily cause any concern, and nothing was done.

Third came the coup de grâce from the House of Lords on July 20 2000, when the law lords ruled that Equitable could not use differential bonuses to offset the cost of guaranteed annuity rate claims on terminal bonuses. The FSA failed in its role under the Insurance Companies Act 1982 to protect policyholders' reasonable expectations by failing to require Equitable to reserve money, but allowing it to use financial engineering to window-dress its solvency return; by doing nothing to stop Equitable over-bonusing in 1999 (for the year 1998) and again in 2000; and by allowing it to remain open after the Lords' decision because it regarded the prospect of a sale as 99.9 per cent certain. The FSA was 100 per cent wrong, which is not surprising since it took the decision on the wing, and did not understand fully Equitable's financial weakness.

Equitable's policyholders hoped that Abraham would identify the FSA's regulatory failures and recommend government compensation. One of her predecessors, Sir Cecil Clothier, had no doubt about his role. As he put it: "I exist to hear and determine the grievances of the citizen against an administration which may have been careless of that citizen's rights." A report on the Barlow Clowes scandal by Sir Anthony Barrowclough, another of her predecessors, led to compensation. But Abraham seems made of weaker stuff. In July, she published a disappointing report on the prudential regulation of Equitable by the FSA for the years 1999-2000. The investigation took far too long (20 months) and said too little.

Her report started and ended with two factual errors about the personal financial position and diligence of the investor whose details she used as a representative case. The errors could have been corrected with a little more research. And although she was provided with evidence about the over-bonusing, and it should have been a central part of the complaint that she was investigating, the Equitable Members Action Group (EMAG) feels she failed to investigate the issue. She identified 18 issues in considering whether there had been maladministration by the FSA, and managed to absolve the regulator in every case. One reason was to claim she had no jurisdiction over the GAD, which undertook all the technical prudential work.

EMAG disagrees with her restrictive interpretation of her remit. We also disagree with her assertion that the legislators of the 1982 Insurance Companies Act intended regulation to be carried out with a "light touch". This was her implicit excuse for the FSA's failure to understand Equitable's finances properly. In fact, the legislation provides for draconian powers, and there is no doubt that the intent of the Act was to provide effective regulation. In the end one is left with the impression that Abraham excused the incompetence of the FSA in a report that lacks intellectual rigour. Emag is seeking permission to have her report subjected to judicial review. She has responded by employing, at taxpayers' expense, a City solicitor to attempt to fight taxpayers seeking redress against the government.

On Thursday, Abraham declined to answer questions from the Commons public administration committee on the pretext that the issue is sub judice. Abraham had, at least, the grace to look embarrassed about this, even though she was given a soft ride by Tony Wright, the committee chairman.

Surely investors in an organisation regulated by the government have a right to expect something better than the shambles that has followed the Equitable collapse. Surely a million policyholders are entitled to something better than the Treasury's obfuscation and the flaccid pursuit of the issue by the Treasury committee. After all, most of the MPs involved must have constituents who have suffered from this debacle. Surely citizens have a right to expect greater protection from the parliamentary ombudsman?

The greatest shame of all is that it does not have to be like this. The HIH insurance group in Australia was placed in provisional liquidation on March 15 2001 and wound up on August 27 2002. Two days later the Australian government set up a Royal commission, which reported publicly on April 4 this year, just seven months later. The judge made 61 policy recommendations and 56 possible breaches of law were referred to the authorities.

If the British authorities had responded with equal vigour to the Equitable fiasco, we could by now have had both answers and compensation. No wonder saving for retirement is going out of fashion when so many people are treated so shoddily.