Examination of witnesses (Questions 240
THURSDAY 15 FEBRUARY 2001
240. You have set up this inquiry: your press
release announcing it, which was issued on 22 December, says that
the Board of the FSA has decided to provide itself with an independent
account, and then it goes on to say that the reporting team is
to be led by the FSA's director of internal audit. Do you not
see the inherent contradiction in that statement?
(Sir Howard Davies) No, I do not actually, because
the director of internal audit is quite separate from the financial
supervision areas, has undertaken other investigations of a very
sharp-pencilled kind into practices internally. He has an external
team working to him and he has access to the Board dominated by
non-executive directors. We felt that this was an appropriate
and proportionate response in the circumstances, and that it was
consistent with our strategy to be a regulator that learns lessons,
if you like, and to be open and transparent that we should offer
to do that. That does not preclude other people from doing other
things, indeed the Institute of Actuaries is looking at the actuarial
side, there is a look at the accounting side, and there is of
course this Committee's own investigation. So we were not seeking
to cut off any other inquiries but we thought as a board, and
our non-executives thought as a board, that they needed to have
advice to them on what lessons we should learn and what changes
they should make, and that seems to me to be an appropriate response
by our board.
241. Surely you are aware as an institution
you are under intense scrutiny in this matter? It is a very, very
high profile case, is it not, and the FSA is not that long established.
Nevertheless, given that context, your independent investigation
is being carried out by your own director of internal audit. It
just does not ring true. Does it not leave a credibility question?
(Sir Howard Davies) We are looking into our own activities
and I think this will be a scrupulous and independent investigation
of those activities.
242. How can it be independent?
(Sir Howard Davies) I have explained the termsI
am not sure I can say them againunder which this is done,
and the fact it reports to the board, which is all appointed by
the Chancellor and is dominated by non-executives, and I think
that is reasonable. I am not saying that someone else could not
appoint an independent inquiry, that is a matter for other people.
I am not sure that the FSA can easily announce an independent
inquiry into the activities of other regulators in the past or
the activities of people not in its control. In looking at our
piece of the jigsaw, which is one piece of the jigsaw, we think
we should set the example by doing that.
243. You will publish your findings?
(Sir Howard Davies) Yes, we will.
244. Mr Roberts, I wonder if I could ask you
a question, because you were at the DTI doing insurance regulation,
and then you were at the Treasury doing insurance regulation,
and now you are at the FSA doing insurance regulation. When did
you first become aware of the reserving problem at Equitable Life,
that there was a possible reserving problem at Equitable Life?
(Mr Roberts) I became head of the Insurance Division
at the Treasury in February 1998. It was shortly after that that
the Government Actuary's Department on our behalf conducted the
review which Sir Howard has described. It was out of that review
that we got a clear picture of the scale of the exposure of the
industry generally and the individual companies within it, and
of the various ways in which companies were handling it. So I
guess it was, and I cannot remember exactly, in the late summer,
early autumn, that we became acutely aware that the Equitable
was in a very much more exposed position than anyone else. It
was at that stage that we started discussions with the Equitable
about what the appropriate way for reserving against this was.
245. Mr Allen's letter of 5 November 1998, to
which reference has already been made, refers to "seeking
ministerial approval for a letter". Of course we know that
letter was sent and therefore ministerial approval was given;
was there any other involvement with ministers on this particular
issue prior to that point in November 1998?
(Mr Roberts) I think that really must be a question
you should put to ministers, not to me.
246. The Committee here, of course, is in a
little difficulty, as you will see, because, Mr Roberts, as you
will accept, you are one of the very few points of continuity
in the changes of administration of regulation.
(Sir Howard Davies) Could I say, Mr Cousins, that
we obviously had to reflect on this point and I fear we have entered
into unchartered constitutional waters here.
247. Indeed you have.
(Sir Howard Davies) We have a former civil servant
who exercised functions in the Civil Service, who is now continuing
to exercise functions outside the Civil Service. What we have
attempted to do this morning is to give you a flavour of how the
continuity of approach was engineered, of the roots of the regulatory
problem that we inherited and how those roots had grown, if you
like, and I fear that we may have done as much as we can to help
you on that. I think it would be difficult, and there are constraints
on former civil servants, about revealing advice to ministers
and debates with ministers and precise ministerial involvement
in that matter, but we have, I hope, tried to give you a flavour
of that, that there was a high degree of continuity and I hope
that has been helpful to the Committee.
248. Sir Howard, I agree with you, we are in
a new constitutional situation in this respect. That point had
actually occurred to me. You say you have given us a flavour,
of course what you have given us in fact is a taste.
(Sir Howard Davies) I will look up the dictionary
and see the distinction!
249. Colleagues will express the kind of reaction
they have in their own way, of course. The decision has been made
that your inquiry will not in fact go back into the history of
this matter when regulation was the responsibility of the DTI
and the Treasury except for background. Was that your decision
or was it the Government's decision?
(Sir Howard Davies) That was a decision made actually
in discussion with the Treasury, because we said we cannot sensibly
review our own inheritance and what we did unless we described
the background up to the point at which we took it on. So we agreed
with the Treasury that it would be appropriate and we would be
entitled to give the context up to that point. I think that was
helpful and I think will make the report more helpful than it
otherwise would have been. I think I have to rest on the point
that I do not think we can answer for particular things which
were or were not done during that period when ministers were responsible;
I do not think we can do that and I fear Mr Roberts cannot help
you with that today. But it will in our inquiry give a description
of that process without commenting on the merits of it, if you
like, but then we will look at the merits and demerits of what
we did subsequently.
250. I do not make a particularly heavy point
about this, but since, as you say, this is new constitutional
ground, let us be clear about it, I am interpreting your last
reply as meaning that effectively you are putting a block on any
further questions from me to Mr Roberts on this point?
(Sir Howard Davies) That is aggressive language and
I would never have dreamt to use it to the Committee.
251. Not at all.
(Sir Howard Davies) What I am saying is, I think Mr
Roberts will have difficulty in answering direct questions about
what ministers might or might not have said, ministerial involvement,
in that period, although we have tried our best to give you an
explanation of the thought processes and the work leading up to
our assumption of responsibility.
252. But you will agree that we have tracked
this matter back to the late autumn of 1998? That point is not
in disagreement between us?
(Sir Howard Davies) We have tracked it back to somewhat
earlier than that, in the sense that the thought process which
went into the decision to have the Government Actuary's Department
review of guaranteed annuities and their impact on the market
in general and subsequently on Equitable in particular is tracked
back to my chart on interest rates, and therefore I think you
have the essence of the story from the beginning of 1998, indeed
from when Mr Roberts took over.
253. You have made it clear to us that you are
going to look at the issue of with-profits funds and the information
which is given to policyholders about the management of their
funds and about the terms of their policies, particularly on the
issue of (a) free assets and (b) terminal bonuses. You have given
us a clear indication you are going to clean up the act of the
life assurance industry with regard to those issues.
(Sir Howard Davies) We will certainly be looking at
those issues, I can give you that assurance. Obviously if we wanted
to change our regulations, we will have to proceed with consultation,
et cetera, but those issues are on the agenda certainly.
254. In answer to an earlier question you seemed
to me to cast some doubt on whether you had the legal authority
to direct companies to correct their advice to policyholders if
you felt it was inaccurate. Could I ask you to consider that point
again? Do you have that power or do you not?
(Sir Howard Davies) I think that the issue is that
there are PIA rules which bite on what is disclosed to people
at the point of sale. Obviously it is open to us, by consultation
and subject to consistency with the Act, to change those PIA rules.
The doubt I expressed is whether, given the regulatory environment
in place at the time, I could have overridden the PIA rules and
required them to do something which was not
255. My question is about now.
(Sir Howard Davies) Now we can review and revise the
PIA rules and agree different types of disclosure at the point
of sale. That would be the mechanism by which we would do it.
256. And you are clear now you have that authority?
(Sir Howard Davies) I have to tell you, Mr Cousins,
it is not as clear as that because as a matter of fact at the
moment the PIA Board still has that authority.
257. But as soon as the Act is implemented?
(Sir Howard Davies) Yes, of course.
258. You have referred earlier to the fact you
were threatened, or the FSA was threatened, with judicial review
by Equitable Life over this question of reserving policies. When
(Sir Howard Davies) Around the turn of the year. I
cannot remember the precise date, it would have been around the
end of 1998.
259. The end of 1998?
(Sir Howard Davies) Yes, it would have been December
1998, and Equitable took their own legal advice which they thought
contradicted our view on the appropriate reserving for guaranteed