11th Aug 2001 - Daily Telegraph article by Paul Braithwaite

What has the FSA done to protect Equitable Life policyholders since closure of the fund? EMAG's view:

I'd like to examine the FSA's visible behaviour in relation to the Equitable Life over the last seven months. Since the closure of the Society's with-profits fund on December 7th, 2000 it was policyholders' "reasonable expectation" that the FSA would be ultra-vigilant on their behalf. In reality, the FSA gave a false sense of security and this has cost policyholders dear. If the IFA had acted, billions could have been saved and confidence would not now be in tatters.

At closure, Equitable's with-profits fund was a big one, with nearly £27bn invested on behalf of a million policyholders. Because it is a mutually owned, smoothed with-profits fund, members were not privy to any financial detail. Since it was a direct-selling Society, few policyholders were aware of persistently paper-thin free asset ratio. There has never been the remotest chance that member/owners could exercise sway over their self-serving mutual board, in the way that institutional investors do every day within PLCs. Transparency is a word that successive heads of Equitable and the FSA use a lot, but there has never been any.

By way of contrast, the FSA had access every day to all the numbers. It had the resources both to understand the ramification of no new policies and to quantify the effects of various levels of funds departing. And it should have been continuously monitoring asset-backing.

After the fund closed, the FSA issued written instructions to IFAs and lent hard on them to discourage comment on the vulnerable Equitable, thus intimidating IFAs into virtual impotency.

The FSA is charged with vetting directors of life companies and ensuring that a satisfactory team is in place. The last and discredited board of Equitable indicated its intention to resign en masse on December 20th. The Society was without an effective board for four months until Vanni Treves announced his new team in April.

During that time Chris Headdon, who was never endorsed by the FSA as chief executive, negotiated a job for himself and the sale of all of the assets of the Society to Halifax, without recourse to the members. The FSA stood back, condoning with supportive noises. When challenged the answer it gave was, "It is beyond our remit."

One of the FSA's listed aims on its farcical website is "to maintain efficient, orderly and clear financial markets and help consumers achieve a fair deal." Throughout 2001 Equitable has failed to respond within reasonable time to written enquiries. Replies have taken between 6 and 10 weeks andtelephone calls have involved intolerably long delays. Policyholders are now being told that they will have to wait for valuations until October. The FSA also has taken similar lengths of time to respond on questions relating to the Equitable and its written replies have been platitudinous and unhelpful.

The official explanation of the cause of July 16th's shock net reduction of 20% in policy values was primarily the 20% fall over 18 months in the stockmarket. However, our experts calculate that because the H. of L. obliged the Society to invest more in gilts, this accounts for only 6%of the reduction. I believe the real explanation was that Equitable's first ever independent "appointed actuary" Peter Nowell, who started work in April, identified that the underlying assets were inadequate for known liabilities.

But the fundamentals can hardly have changed in 2001. Why then did the FSA not intervene months earlier? It could have ensured that the thousands of policyholders who left in the first half of 2001 would not have received, as it is has now been admitted, more than their appropriate asset share. Those who departed are thousands of pounds richer than those who stayed. Loyalty has certainly not been rewarded.

Loyalty was asked of members at the slick Equitable AGM on May 23rd.. . Charles Thomson, actuary and newly promoted chief executive, made reassuring noises that the Society was on a sound footing to the assembled press and 1500 members. But both Thomson and the FSA must have known by then that the message communicated was misleading and that a correction was long overdue.

Why did they neither redress Thomson's March 8th interim bonus declaration of 8%, when both knew it was unsustainable and would, once again, have to be restrospectively withdrawn? Throughout this year the FSA and Equitable's management have been close and mutually supportive. Did both sides, regulator and regulated, lose sight of their primary duty to policyholders? The timing of Equitable's own "black Monday" is, at the very least, suspect. Is it really coincidence that the announcement was delayed for months until just before Parliamentary recess and the holidays?

Whilst policyholders have suffered an "annus horribilis", the Treasury has maintained distance from the Equitable Life debacle, expressing the cynical view that it is a matter for the members and their board!

This despite the excellent interim 10th report of March 27th by the Treasury Select Committee (TSC), a very enlightened read, which clearly identified that a number of serious regulatory "issues" go back to 1993. Whilst we expect that the TSC will take up that Equitable study in October it may prove to be not soon enough.

There is a gross inequity here that leaves many well-educated voters wounded and disillusioned with both pensions and the regulator. They believed, incorrectly, that there was a mantle of protection afforded by the FSA as watchdog.

Given this litany of inaction, EMAG is deeply suspicious to learn that Treasury ministers have ruled that the FSA's report into its own role (!) in the Equitable will not be allowed to take in the period since closure. Nearly a million policyholders deserved better from the FSA - particularly during the last seven months, now deemed to be "under the radar". This looks and smells like political chicanery. If the Treasury wishes to see the pension industry survive this scandal it needs to face up to its ultimate responsibility for repeated regulatory failures at the Equitable and intervene.

Paul Braithwaite
Chairman EMAG