APPENDIX 11
Memorandum by Mr David Browning, Equitable
Members' Action Group (EMAG)
INTRODUCTION
The Equitable Members' Action Group ("EMAG")
was formed in July 2000 after the House of Lords ruling on the
Guaranteed Annuity Rate ("GAR") issue. That ruling stated,
in brief, that the Equitable Life Assurance Society ("ELAS")
could not apply a differential to terminal bonuses which policy-holders
could be given depending upon whether they chose to exercise an
option to take a guaranteed level of annuity which had been written-in
to their contract(s), or chose instead an open market (ie current
market rate) option; furthermore, the Society could not apply
different (ie lower) terminal bonuses to those holding policies
containing annuity guarantees, as compared with those whose policies
did not contain a GAR term (ie policies written since July 1988).
The group seeks to represent common interests
of all classes of policy-holders with an interest in the ELAS
with-profits fund, ie both types of contract-holder, GAR &
non-GAR. The common interests can be defined as seeking member
influence on ELAS decision making; clarification of the legal
situation following the HoL rulings; pressing for full disclosure
of information relevant to members' legitimate interests from
ELAS and appropriate regulatory bodies; making representations
to such bodies as and when they are considered appropriate in
the light of developments. It is currently a subscription-based
group with a membership in the region of 1,000, and actively seeking
expansion as rapidly as possible in order to maximise its effectiveness
as a focal point and voice for policy-holders. It is independent
of any commercial interest and is entirely funded by its own efforts.
THE ISSUES:
AN OVERVIEW
This submission is being drafted in the context
of a situation where, for a historically new reason, a life assurance
society is in a state of severe crisis. The history of assurance
and insurance societies and companies over the past two hundred
years or so has thrown up, at distressingly regular intervals,
"scandals" where operations world-wide have, either
through fraud, incompetence, or regulatory failure, or a combination
of these factors, and triggered off by some particular situation
of the time, failed; or have been seen to be in danger of doing
so. Recent cases include Lloyd's of London and several Japanese
life companies. After each of these events, lessons are learned,
new controls, regulations or even laws are implemented, and all
goes quiet for a period of time. Then, invariably, some company,
somewhere, somehow, finds a new way to avoid or circumvent (perhaps
not even with wilful intent) the existing regulations or market
practice and so plunge into disaster; and the process starts all
over again.
Equitable is such a case. The task now is to
find the best achievable solution for the policyholders at large
and to close one or more doors of the stable, ie to draw appropriate
lessons for future action to prevent equivalent situations happening
again. We understand the Committee's remit is to discover facts
and make recommendations, and to this end we would commend the
following areas, of great concern to us, to be considered by the
Committee, so as to improve the regulatory environment and to
recommend sanctions where appropriate.
1. Matters of Regulation and Audit arising
before the HoL judgement
ELAS was trading with the full knowledge of
Regulator and Auditor to a very low free-asset ratio. This was
apparently considered reasonable, and presumably approved as such,
on the arguments of mutuality (the ELAS position—"we
give it all back to the policy-holders", the lack of a need
to give a return to shareholders), and of the perception that
there was no need to build up a substantial reserve fund because
the society's future liabilities were accurately and correctly
defined. What needs to be discovered is the date on which the
potential GAR liabilities were recognised by ELAS for what they
were; what ELAS management then proceeded to do about the problem;
what inter-action between the regulatory authorities and ELAS
took place concerning the problem; what steps ELAS decided to
take about informing its client base, and also its own sales force
(because they would be the people passing on the information (or
disinformation) to future prospective clients).
It is a matter of historical record that ELAS
sought to finesse the problem by reducing terminal bonuses to
people exercising the GAR option, thus leading eventually to the
litigation process which culminated in the HoL rulings. It is
less common knowledge, but none the less known to be true, that
ELAS, for reasons presumably of perceived commercial expediency,
gave assurances, both through their sales force and by public
statements in the annual reports and circular letters to policy-holders,
that the degree of exposure to which they could be subjected if
the litigation process went against them was easily manageable,
and that the ELAS with-profits fund was a safe vehicle both for
existing and potential investors. (EMAG can provide the Committee
with files of correspondence relating to individual members' experiences
which contain clear evidence of this, if required).
When, early in 2000, ELAS was telling its members
(who, it needs to be reiterated, are the Society's owners) that
its maximum exposure was £200 million if the legal process
was to end in defeat for its position on terminal bonuses, it
was at the same time filing a statutory Treasury return which
showed that it had made an allowance for planning purposes of
£1.5 billion exposure, of which £0.5 billion had been
off-set by a re-insurance arrangement. The figures in the Treasury
return are clearly not compatible with the figures released to
the public. Why was this not picked up by the regulators? (ie
the Financial Services Authority, who had prime responsibility
for this monitoring role).
To summarise: why was the low free-asset ratio
position allowed to continue by all responsible parties once the
dangers exposed by the annuity-rate Guarantees became apparent?
Why was there no concern to redirect some of the investment returns
from bonuses into reserves? Was the attitude of ELAS towards bonus
declarations predicated on the assumption that it had a continual
need to distribute high bonuses for marketing reasons, ie to stay
at or near the top of performance tables for the sector? If so,
in what sense can this attitude be justified in terms of the interests
of existing members? How was the mis-selling to non-GAR members
after 1988 countenanced? (mis-selling, because these post-1988
members had no means of knowing the risk they ran of having their
funds depleted in order to pay off future GAR liabilities; moreover,
it was a persistent practice of ELAS to persuade them that they
ran no such risk: the risk was supposedly non-existent).
The defence mechanism which ELAS adopted, of
planned terminal bonus adjustment, ie the differential treatment
of GAR and non-GAR holders, appears devoid both of commercial
caution and of regulatory wisdom; yet there is evidence that before
1999 ELAS was given support in adopting this tactic by the Treasury.
How could the Treasury have given support for a position which,
in the final outcome, five law lords so comprehensively rejected?
On the principle that "somewhere the buck must stop",
what consideration is being given to possible compensation issues?
At the time of writing this submission, indications are that losses
to policy-holders resulting from the debacle are exceedingly unlikely
to be restored in their entirety by some outside bidder. The need
for government recognition of the case for compensatory payments
is an urgent requirement. If regulatory bodies are shown to have
been remiss in their monitoring and oversight of ELAS, then policy-holders
are entitled to expect that appropriate levels of financial compensation
will be made available.
2. Post HoL Judgement
Who authorised the continued marketing of with-profits
policies by ELAS? Why was a complete embargo not placed on the
selling of these policies? Why indeed was such an embargo not
imposed at the outset of the litigation process back in 1998,
pending a definitive settlement of the issues?
What right did ELAS have to "fine"
existing policyholders across the board by sequestering seven-months
of growth in their individual policies, irrespective of the nature
of those policies or the length of time for which they had been
held, to cover the loss of £1.5 billion (the same amount
that had been admitted in the secret Treasury statutory return
earlier in the year) in December 2000? What was the attitude or
involvement of the FSA in this action by ELAS management?
3. Corporate Governance: the culture of ELAS
and similar Life Companies
EMAG is seriously concerned at the lack of democratic
accountability and openness in the way ELAS has been allowed to
conduct its affairs. The Committee may wish to consider this aspect
as falling within its remit. Although, as a Mutual Society, ELAS
is owned by its members, any suggestion that this fact of ownership
is translatable into power and influence over the management and
decision-making processes of the Society is not borne out by the
historical record. ELAS has in the recent past opposed member
representatives seeking election to the Board as non-executive
directors (see minutes of 2000 A.G.M.), and has failed to provide
a mechanism for involving member representatives in the selection
of a new Society President, following the resignation of the present
incumbent. EMAG has been informed that new non-executive directors
are to be selected by the new President once he/she is in place;
again, no involvement of member representatives appears to be
envisaged by ELAS in this process, despite the pressing of the
case by EMAG for such involvement to the Society.
This is a deeply unsatisfactory state of affairs,
in that it apparently allows organisations like ELAS to be run
by self-perpetuating oligarchies. Obviously the point at issue
is far wider than the matter of the governance of ELAS; it relates
to the whole area of how people who own the funds in life assurance
societies exercise power and control over those who manage those
funds. ELAS provides a good example, the Committee may think,
of what can happen when members of a mutual society are denied
pertinent information and access to the decision-making processes,
which affect in a very direct way their financial interests. The
facts are that ELAS has perpetuated a culture of appointment by
powers of patronage vested in the office of Society President;
and that there has never been any discernible attempt to involve
members in a systematic way in decision-making or consultation
at any level, other than in set-piece elections at AGMs which
are stage-managed to suit the wishes of established board members.
CONCLUSION
EMAG commends for the attention of the Committee,
the well-informed contributions made to the House of Commons adjournment
debate on 19 December 2000 by Mr Richard Ottaway and Dr Vincent
Cable; and separate representations made to this Inquiry by EMAG
members, particularly those drafted by Mr Alex Henney and Mr.
Andrew Pike. We are willing to make in-person representations
to the Committee's hearings if asked to do so. We share the concerns
raised in the adjournment debate about the chain of responsibility
for the events at ELAS, in particular the roles played by Government
ministries and regulatory bodies, which at various times have
included the Department of Trade and Industry, the Treasury, the
Personal Investment Authority, and the Financial Services Authority.
Ultimate degrees of responsibility may eventually
be shown to reside in various places, but an endless sequence
of "buck-passing" will achieve little, and in the meantime
there exist over one million people (including group scheme members)
who have suffered or are fearing totally unnecessary disruption
to their individual financial prospects. This is a direct consequence
of what has been allowed to occur. That hard-working citizens
who have been attempting to make adequate provision for their
retirement should find themselves in this situation is self-evidently
unacceptable, and very hard questions have to be asked about the
culture of the personal pensions/life assurance industry and the
manner of its oversight, monitoring and regulation. EMAG welcomes
the opportunity that the Committee's Inquiry affords to raise
these questions, with a view to: the rectification of past injustice,
the seeking out of individual degrees of culpability; and the
construction of a different and better-managed future environment
for the industry to operate in.
The Equitable Members' Action Group, February
2001
EMAG committee members: Paul Braithwaite, David
Browning, John Gardner, Alex Henney, Adrian Howard-Jones, Tom
Lake, Michael Lister, Vincent Nolan.
3 February 2001
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