MPs slam Government's 'shabby' response on Equitable Life

Over a million policyholders are believed to have been affected by Equitable Life's near-collapse in December 2000, suffering losses estimated at more than £4 billion.

In June 2008, Parliamentary Ombudsman Anne Abraham found "serial regulatory failures" in the way the mutual life assurance company was supervised.

Her report, Equitable Life: a decade of regulatory failure, identified 10 instances of maladministration resulting in five instances of injustice to policyholders. It recommended that the Government set up an independent compensation scheme to assess individual policyholder's claims.

But in its response published in January 2009, the Government accepted, on a limited basis, only four instances of injustice and it rejected many of the Ombudsman's other findings.

Instead of an independent compensation scheme for all policyholders, it announced a discretionary scheme that will make payments only to those "disproportionately affected" by losses it believes were caused by maladministration.

Last December, the Public Administration Select Committee said it would be "deeply concerned if the Government chose to act as judge on its own behalf by refusing to accept that maladministration took place".

In a new report, Justice Denied?, published on 19th March, the Committee expresses its disappointment with the Government's stance on compensation. "This may be a legally valid position, but we think that most people would consider it to be a morally unacceptable one," the report states. 

One of the main arguments against a full compensation scheme is that financial regulators should not normally be held liable in the courts for financial loss. But the Committee says this argument was introduced by the Government late in the day, in a way that was "shabby, constitutionally dubious and procedurally improper". 

"Several years into [the Parliamentary Ombudsman's] investigation, and only when it became apparent what the outcome was likely to be, the Government began to argue that compensation should not be available in cases of this kind," the report states.

"There is no dangerous precedent to be set here. The Financial Services Authority is now outside the Ombudsman's remit and has been since 2001. There are no other cases with the Ombudsman relating to financial regulation and new cases relating to the FSA could not now be brought".

The Committee believes a discretionary scheme making payments with no admission of liability is an inadequate remedy for injustice.

"Nonetheless," says the report, "it could help to improve the lot of some of those policyholders who have struggled to make ends meet since the closure of Equitable Life to new business and on this basis, if the scheme is the best available, we want it to work as well as possible".

To this end, the Committee urges the Government to provide a timetable for setting up the scheme and to remove the disproportionate impact test, which it describes as an "unnecessary complication." Confidence in the scheme will be undermined if it only pays out in a very few cases, makes unreasonable demands on policyholders to prove that they qualify, or caps payments at a very low level.

Committee Chairman Tony Wright MP said:

“I give credit to the Government for apologising, for producing a considered response, and for accepting the need for some kind of payments scheme. But the Government has produced an essentially political response to a quasi-judicial investigative report from the Ombudsman, and as a result has ended up satisfying nobody.

"We have never argued that the taxpayer should have bottomless pockets, but there is a very clear case for defined compensation where the state itself has caused injustice. The Government’s arguments seem to me to leave a gaping black hole in the way our regulators are held accountable, and this needs addressing."