ANNEX I
A Paper Prepared by Mr Jack Denbin
A LAWYER'S VIEW
1. The Equity Policy Holders Group (hereinafter
for ease of reference called "EPHAG"), was formed subsequent
to the decision of the House of Lords upholding the claim of the
policy holders who have guaranteed annuities. The original aim
was to monitor the sale of the Society on behalf of the members.
When the sale fell through, the aim was changed to monitoring
the Society on behalf of the non-GAR policyholders.
2. EPHAG has in excess of 6,000 members,
and the number is growing.
3. We wish to qualify our submissions by
explaining:
(1) The Authors have never before prepared
a submission to be placed before the Treasury Committee or indeed
any Committee of the House of Commons;
(2) The facts which are in our possession
are sparse;
(3) We respectfully seek to draw inferences
and to invite the Committee to include in their enquiries such
of the points that we have raised as they consider appropriate.
4. In setting out the facts as known to
us we realise that we may state matters that are obvious or known
to the Committee, however we are unaware of the extent of their
information and seek to err on the side of caution and apologise,
in advance, for any burdening of the Committee of matters well
known to them or which they consider obvious. The facts as we
know them are:
(1) The Society wrote guaranteed annuities
from 1956 to 1988;
(2) In 1993 a gap between interest rates
and rates guaranteed in the annuities began to appear, this divergence
increased as interest rates fell;
(3) In about 1998, some holders of guaranteed
annuities brought a class action in order to establish their entitlement;
they were successful in the Court of Appeal and the House of Lords;
(4) The upshot was that the Society has estimated
that this will give rise to a deficit of £1.5 billion in
the With Profits Fund;
(5) In order to overcome this deficit the
Society put itself up for sale, but failed to find a buyer;
(6) Alan Nash and the Board resigned;
(7) Thereafter it closed to new business
and has sought to sell parts of its operations; at the time of
writing these efforts have only resulted in partial success;
(8) We have met representatives of the Board
of the Society on two occasions. The following points emerged:
(a) The Board claimed that it was only
the decision of the House of Lords that gave rise to the massive
shortfall;
(b) Whilst the result of the House of Lords had
been previously identified by the Society the chances of it occurring
were considered to be remote;
(c) Prior to the above decision the reserves
had been considered adequate;
(d) There was some reinsurance in place;
(e) Efforts were being made to cap the open-ended
liability to the guaranteed annuitants;
(f) The 10 per cent deduction on those leaving
the Society reflected their proportion of loss which otherwise
would be carried by those policyholders who remained;
(g) The guaranteed annuities only applied to
single lives, and were further restricted by compliance with other
conditions, thus the uptake was relatively low;
(h) The figure of £1.5 billion was the best
estimate of the liability;
(i) The Board were satisfied that they had interpreted
the decision of the House of Lords correctly.
(9) It emerged that a memorandum from the
Treasury to the FSA (or its predecessor), that it had identified
in about 1998 a deficit in the funds of the Society;
(10) We have met representatives of the FSA
on one occasion and the following points emerged:
(11) Up to the decision to close to new business
the Society was aggressively advertising and soliciting new business,
which efforts included large advertisements in the press and mail
shots, without any mention of liabilities either actual or contingent.
5. It is clear that we are woefully short
of facts and we set out some matters which may be relevant to
their Inquiry:
(a) What steps did the Board take to;
(i) Investigate the position of the growing shortfall
in general, assess the liability, obtain all necessary and relevant
professional advice;
(ii) Place reinsurance;
(iii) Make provisions in the fund and show this
in the accounts;
(iv) Make disclosures to Members and potential
members;
(2) What were the reasons for the failure
of the sale of the Society as a going concern;
(3) What will be the impact on the Fund of
movements in interest rates;
(4) What would be the impact of capping the
liabilities of the guaranteed annuitants on the remaining policyholders;
(5) What effective steps did the Treasury
take, when and what were they;
(6) What effective steps did the Regulator
take, when and what were the effects;
6. The inferences which we seek to make
are:
(1) Little or no provision was made when
the shortfall first emerged, nor was any effective provision made
prior to the House of Lords decision, which is at least negligent
if not misfeasance;
(2) The statement of Mr Nash immediately
after the decision that, there was a shortfall of £1.5 billion
and that the Society would have to put itself up for sale indicates
that this contingency had been identified and quantified;
(3) The lack of disclosure to policyholders
from 1993 of the growing liability is at least negligent, but
could be regarded as misrepresentation or even fraudulent;
(4) Various individuals may well seek to
bring actions based on the facts, matters and circumstances of
their own individual case;
(5) The Treasury and the Regulator have failed
to safeguard the interests of the non-guaranteed annuitants;
(6) A substantial number of members who are
relying on the Society have been misled or betrayed, and will
or have, suffered loss.
7. We respectively invite the Committee
to enquire into those matters that they consider to require investigation
which are set out in paragraphs five and six herein.
8. We shall be happy to provide such amplifications
and explanations as we can if requested by the Committee to so
do.
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