FSA "betrayed" Equitable victims

In the wake of disturbing revelations buried deep in the Parliamentary Ombudsman's report into the regulation of Equitable Life, policyholder action group EMAG today accused the FSA of betraying Equitable policyholders.

A new analysis by former EMAG chairman Alex Henney reveals that in July 2001 the FSA and Equitable were making preparations to put the Society into administration.

Click here to download the report.

On 25 July 2001 there was a meeting between the FSA, the Treasury and the Bank of England regarding whether there were arguments for an injection of public funds into Equitable. The note of the meeting records: '[FSA's Chairman] said that something between £3 and £5bn would make [Equitable] solvent. [FSA's Director of Insurance] said that it was difficult to assess what additional contribution to the pot might be necessary to make an S425 scheme attractive to [Equitable] policyholders. But while the insurance industry would probably not be keen on a rescue, it might be readier to consider this if the government was involved. [FSA's Chairman] said that if the government put money into the company, it would be interpreted as a problem with the past regulatory regime'.

But in a matter of days the FSA had managed to persuade itself that Equitable was still solvent after a series of emails between them and the insurer. In a few weeks its liabilities were downgraded from between £3 and £5bn to just £220m and the FSA allowed the use of a worthless reassurance treaty to paper over the hole in the Society's books.

"This forensic analysis of the PO's report reveals the truly shocking depths to which the regulators time and again, acted directly against the interests of policyholders" said Paul Braithwaite of EMAG (Equitable Members Action Group). "Throughout 2001, the FSA should have been whistle-blowing but instead they abrogated their statutory duty to protect investors. We were betrayed."

Braithwaite added: "Questions will be asked as to who was responsible in the FSA and Treasury right up to the involvement of Ministers and explanations must surely be forthcoming from the Government."

The analysis claims that the FSA did not reveal its concerns about the state of the Society's finances to policyholders and encouraged the Financial Ombudsman Service (FOS) to toe the line by supporting Equitable rather than policyholders in its handling of complaints. Later when the compromise scheme was announced the FSA stood by while policyholders were given a less than full picture about the value of the "uplifts" they were asked to accept in return for giving up their valuable legal rights.

The Parliamentary Ombudsman commented "the misleading information, about the Society's solvency position and its record of compliance with other regulatory requirements, that was produced by the FSA, acting on behalf of the prudential regulators, during the period after the Society closed to new business, constitutes maladministration".

This raises the question of whether the FSA knowingly condoned a Compromise that was based on a pledge to policyholders that could not be honoured.

The new report also suggests that at the time of the compromise, the Society did not actually have sufficient funds even to pay the uplifts being promised to members, calling into question the integrity of the compromise. The uplifts (and more) were removed by the need for a second policy fund devaluation in April 2002, within just six weeks of the uplifts being added – despite no change in the state of the stock-market between November 2001 and that devaluation.

Henney's report "How the FSA and the Treasury betrayed Equitable's policyholders" reveals the dizzying chain of events that took place in July 2001, as the Treasury, the FSA and the Equitable's directors considered putting the Society into administration but desperately sought to find a way to keep it in business.