However, there were insufficient grounds to overturn the Government’s discretionary compensation scheme for policyholders, the court said.
The court was hearing an application for judicial review of the Government’s response to a report on the role of the regulators in the near-collapse of the UK’s oldest mutual life assurance company. The action was brought by the Equitable Members' Action Group (EMAG), which represents about 21,000 current and former Equitable Life policyholders.
After a series of disastrous management decisions, Equitable Life closed its with-profits fund to new business in December 2000. Over the following months, it slashed the value of policy funds, drastically reducing annuity payments for policyholders.
In her report of 16th July 2008, Parliamentary Ombudsman Ann Abraham identified ten instances of maladministration in the way Equitable Life was supervised by the authorities and concluded that in six of those cases the maladministration had resulted in injustice.
She recommended that the public bodies concerned apologise for these regulatory failures and that the Government set up an independent compensation scheme to assess individual policyholder's claims.
In its response published on 15th January 2009, the Government accepted some findings of maladministration and injustice and explained the basis on which it did so, but it rejected others.
It also rejected the idea of an independent compensation fund. Instead it proposed an alternative scheme that would make discretionary payments to individuals who had suffered a "disproportionate impact" attributable to those instances of maladministration it accepted took place. It appointed Sir John Chadwick, a former Lord Justice of the Court of Appeal, to advise on the scheme.
EMAG argued that the Government had failed to put forward cogent reasons for dismissing the Ombudsman’s findings and that it acted unlawfully in rejecting the recommendation for a comprehensive compensation scheme. It also claimed that the terms of reference given to Sir John Chadwick were unlawful or unintelligible.
On 15th October, the court held that the Government could only reject the Ombudsman’s findings for cogent reasons, i.e. for reasons other than merely a preference for its own view. The Government had failed to do this in a number of instances, in particular in relation to regulatory returns filed by Equitable Life during the 1990s.
The Ombudsman concluded that the regulator had failed to ask and resolve questions which arose from those returns and that this had made the information unreliable. The Government's response concentrated on the narrow question of compliance. But the court agreed with EMAG that the Government had ignored the wider context in which the Ombudsman’s findings were made and that its response lacked cogency.
The judge did not agree with all of EMAG’s arguments, however. For instance, EMAG claimed that the FSA should have published concerns raised internally in October 2001 about Equitable Life’s solvency. But the court agreed that there were obvious dangers in a regulator airing private doubts or concerns until it had sufficient information to satisfy itself those concerns were well founded.
The court also concluded that the only ground for challenging the Government’s discretionary compensation scheme or the terms of reference given to Sir John Chadwick was irrationality. EMAG’s criticisms failed to satisfy this test.
EMAG has nevertheless hailed the ruling as a significant victory, claiming that hundreds of thousands more policyholders would now be eligible for some form of compensation.
EMAG’s general secretary Paul Braithwaite said: “If EMAG’s members had not paid for this legal action there’s little doubt that, despite the Parliamentary Ombudsman’s recommendations for substantial compensation, the Government would have got away with limiting payments to a small number of Equitable’s victims for losses post 1999."
"The effect of [the] ruling is to roll back eligibility to the date originally proposed by the PO – July 1991,” he said.
Responding to the decision, Parliamentary Ombudsman Ann Abraham said she hoped that every effort would now be made to ensure a just and speedy outcome for Equitable Life policyholders.
“As I have reported to Parliament, the Government’s response to my report was deeply disappointing, providing insufficient support for the rejection of many of my findings of maladministration on the part of the regulators and my conclusions that injustice resulted from those failings," said Abraham.
“How this judgment affects the Government's proposals for an ex gratia scheme is a matter for others to consider. However, while this judgment is welcome I am very aware that the injustice suffered by many people affected by the Equitable Life affair remains unremedied so many years after the relevant events," she said.
The court refused the Government leave to appeal and has given it 28 days to decide how it will respond to the judgment.