Memorandum by Dr David E Bland, OBE
FSA AND EQUITABLE LIFE ASSURANCE
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
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
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