Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum by Dr David E Bland, OBE


  The point of principle to be presented is crucial to the evaluation of the appropriateness [or otherwise] of the actions of the FSA throughout the year 2000 in respect of Equitable Life.

  If the actions of the FSA were inappropriate in the view of the Committee, in the light of the proposition considered in this submission, this raises significant questions about the competence of the regulator even before "N2" (the date on which the Financial Services and Markets Act 2000 comes into force).

  The Directors of Equitable Life were encouraged to continue trading, and to receive premium income, through most of 2000 although the size of the potential deficit was known. Arrangements should have been in place to cope with an adverse verdict by the final tribunal, even while the case on the allocation of bonuses was proceeding to the Lords. Instead, the Directors were apparently encouraged to act as if their case was won: and when it was lost, they were still encouraged to try to trade their way to solvency.

  The route preferred by the FSA was for Equitable Life to achieve a combination of new policy sales and a capital injection by some other insurer, on the assumption that the purchaser would mitigate the debt of Equitable Life by diluting the security of its existing policy holders and the assets of its shareholders.

  At precisely the same time as the FSA was encouraging the Directors of Equitable Life to take this course [and was reportedly also encouraging other Life Assurers to dilute their security by a takeover of Equitable Life], the Jaffray Case was proceeding. That case related to Lloyd's of London. The allegation of the plaintiffs was that "insiders" to Lloyd's had done in the early nineteen eighties precisely what the FSA was encouraging Equitable Life to do in the year 2000: namely deliberately to take on new business and seek injections of capital in order to trade through a significant concealed deficit.

  It was explicit in the argument of the Jaffray plaintiffs' case that if it could be proved that Lloyd's did act in that manner, their conduct had been recklessly reprehensible. The court found that it was not proven that the Lloyd's Council, nor any group of Lloyd's members nor any Committee, had conspired to attract custom or capital in order to mitigate the debts that would otherwise fall on themselves. It was implicit throughout the trial, and in the judgement, that if such a conspiracy had existed it would have been wrong.

  The issue of policy therefore is this: given that the FSA, as the Lloyd's regulator, was fully informed of the Jaffray Case was it acting responsibly or reasonably in encouraging Equitable Life to act wilfully and deliberately in a manner exactly analogous to that which the alleged conspirators in Lloyd's had acted? And was it appropriate to use the regulator's influence upon other insurers to solicit their dilution of their own assets in order to mitigate the indebtedness of Equitable Life, in the light of their awareness of the Jaffray case?

  It may be the view of the Committee that it was appropriate in the nineteen eighties for Lloyd's, or members of Lloyd's, to seek to mitigate their own indebtedness in the way that the Jaffray plaintiffs asserted. In that case, the FSA also acted properly and reasonably in 2000 in seeking a capital injection for Equitable Life [that would necessarily have reduced the security of the investors' insurance fund, and would probably have diminished the value of shares in the company that purchased Equitable Life].

  If, on the other hand, the view of the Committee is that it would have been wrong for Lloyd's [or Lloyd's members] to attract capital to dilute their own debt it must equally be inappropriate for the FSA to apply the same solution to Equitable Life in 2000. In that case, the effectiveness of the new regulator is seriously open to challenges even before N2.

  The key issue is whether "caveat emptor" applies in the purchase of insurance and assurance policies and/or in the purchase of shares [or other forms of investment] in insurance and assurance organisations; and whether the involvement of a regulator vitiates the principle on the grounds that the potential investor could believe that extraordinary support would follow if they accommodated the regulator's wish to accept responsibility for a dangerous investment.

1 February 2001

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