But policyholders will have to wait until at least the autumn to
find out if the Government agrees with the Ombudsman's report,
published last week. The total cost of potential claims has been
estimated at over £4 billion. Ultimately, any bill for compensation
would have to be met by taxpayers.
The report, Equitable Life: a decade of regulatory
failure, is the product of an eight-year investigation by
Parliamentary Ombudsman Ann Abraham. It is the latest in a string
of enquiries that have looked into different aspects of the
Equitable Life saga since it closed its doors to new business in
December 2000.
Equitable's problems began in the early 1990s when its directors
realised the Society could not meet guaranteed annuity rates (GARs)
included in certain with-profits retirement policies.
A GAR is a promise to pay out an annuity at a particular rate
when the policyholder retires. But low inflation and low interest
rates meant GARs had become significantly higher than current
annuity rates.
In 1993, the directors adopted a resolution to allocate bonuses
at different rates to different policyholders, which effectively
meant they paid lower bonuses to policyholders with annuity rate
guarantees. In July 2000, the House of Lords ruled that this
practice was unlawful, leaving Equitable with a £1.5 billion
liability.
In December that year, the Society closed its with-profits fund
to new business and over the following months drastically reduced
bonuses for all policyholders. Since then it has sold off most of
its operations.
Regulatory failure
The Parliamentary Ombudsman's investigation focused on the
actions and omissions of the regulators at the time.
"My findings in this report show that the prudential regulation
of the Society during the relevant period failed – and failed
comprehensively" she concluded. "That was not a system failure, but
a failure properly to implement in the particular case of the
Society the system of regulation that Parliament had enacted".
Maladministration meant regulators were unable to verify
Equitable's financial condition for over a decade. Regulatory
returns were published without amendment, even though serious
questions about the Society's true position remained
unresolved.
When matters of concern were identified, the regulators gave
little or no consideration as to whether they should take steps to
intervene, leading to a series of missed opportunities. Overall,
the report found, such actions as were taken "were largely
ineffective and often inappropriate".
"The great respect in which the Society was generally held and
the reputation it had developed over many years are the only
rationalisations that I have been able to find which might explain
the passive, reactive and complacent approach to the supervision of
the Society as is evident from the acts and omissions of the
prudential regulators and [the Government Actuary's Department]
during the period prior to 20 June 1998".
Even after the House of Lords' decision was published, the FSA
(which took over as regulator in January 1999) provided information
on Equitable's situation which was "inaccurate and misleading".
Compensation
The ombudsman's first recommendation is for the public bodies
concerned to apologise to policyholders, who have a "justifiable
sense of outrage that those operating the system of prudential
regulation so comprehensively failed".
Her second is that the Government should set up and fund a
compensation scheme to assess the individual claims of all those
affected. Given the time that has already passed, she would like to
see this established within six months of the decision to do so –
and its work completed within two years.
On a more general note, the ombudsman noted the absence of a
single, comprehensive enquiry into Equitable Life and strongly
criticised the piecemeal nature of the various investigations that
have taken place since 2001.
"Whatever else results from the publication of this report, I
hope that I never again have to draw Parliament's attention to such
a disjointed process for resolving complaints that have affected so
many of the constituents of almost every Member [of
Parliament]."
Chancellor Alistair Darling will respond formally to the report
in the autumn.
When he does, he may be cautious about setting a precedent for
compensation in other cases where it is claimed regulators have
failed to take action early enough to prevent financial
institutions getting into difficulties.
Life insurance expert Bruno Geiringer of Pinsent Masons,
however, hopes Darling will adopt the report's recommendations.
"There are parallels between the findings of maladministration
in the regulation of Equitable Life and criticism of the regulators
in other high profile cases, such as Barlow Clowes, Vehicle &
General and even Northern Rock," he said. "Thankfully, such
instances are rare. I hope the Government will accept the
ombudsman's proposals for compensation without arguing about
setting bad precedents and consider them a small-ish price to pay
when compared to the overwhelming need to ensure a safe and just
savings platform."
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