Memorandum by the Consumers' Association
Consumers' Association (CA) welcomes the Treasury
Select Committee's inquiry into Equitable Life and the Life Assurance
The inquiry is both necessary and timely given
the current problems of the Equitable and the release of CA's
reportProfits at the consumers' expensewhich tackles
the £400 billion with-profits life fund sector. The life
and pensions industry manages £765 billion worth of funds
on behalf of consumers in the UK, with just over half, £400
billion, held in "with-profits" funds. The findings
of our report are damning analyses of how life insurance companies
are being run and regulated against the best interests of currently
10 million with-profits policyholders.
I enclose evidence to support both concerns.
I enclose a series of questions that CA had
previously sent to the regulator. The FSA has since responded.
But due to the FSA's internal inquiry a number of the answers
remain outstanding. We believe these questions form an important
part of assessing what lessons are to be learnt.
As you will see from page 17 of CA's report
[Not printed], historically the legislation and regulation of
life funds has centred on the prudential supervision of the life
funds. Life insurance companies are now authorised and regulated
by the FSA, and as part of that authorisation process companies
have to meet certain criteria specified in the insurance legislation
with regards to sound and prudent management of the assets and
liabilities of a fund. The rules appear to be stringent and rigorous
with the purpose of ensuring that the funds are solventin
other words, that there are sufficient assets to meet the liabilities.
A strong prudential regulation regime is necessary given the size
of the assets involved.
Despite the clearly identified prudential supervision
regime, this has not prevented Equitable Life getting into trouble
over the issue of guaranteed annuities. Equitable has been forced
to close its funds to new business, affecting potential returns
for around one million policyholders. CA is firmly of the opinion
that a review needs to occur to see how this situation occurred.
Why did management not make provision for the liabilities which
were readily identifiable? And, what action was the regulator
taking to make sure the Equitable's management was taking suitable
action to protect policyholders. We do not believe it is enough
for the regulator to start its inquiry from January 1999 when
the FSA assumed responsibility in this area. The regulatory problems
are likely to have occurred well before this date. We would like
to see a wider inquiry that took on board the role of the previous
insurance regulators from the Board of Trade to the Department
of Trade and Industry to the Treasury as well as the FSA.
To conclude, I enclose a copy of CA's letter
to Michael Foot, Managing Director and Head of Financial Supervision
which details CA's specific questions.
I enclose five documents [not printed] for your
attention, which aims to tackle the £400 billion with-profits
1. Copies of the CA's report published 6
February 2001. This includes an Executive Summary outlining all
the issues together with recommendations for cleaning up this
2. CA's press release that accompanied the
3. Newspaper coverage that followed the
release of the report.
4. With-Profits Life Funds Questions and
Answers as posted on CA's web-site (www.which.net/campaigns)
5. A letter sent by CA to Melanie Johnson,
MP Economic Secretary, copies to the FSA and the Chancellor, outlining
our concerns following the release of our report.
The report clearly demonstrates that the Treasury
must step in to provide strategic direction to the life sector
and take the lead role in cleaning up with-profits funds. We call
on the Treasury to set up an independent public inquiry to tackle
the recommendations made in our report. We believe that failure
to do so will leave 10 million current policyholders unprotected
and lead to a further decline in consumer confidence in this sector.
CA is firmly of the view that the sector can ill-afford further
problems following the pension and endowment mis-selling difficulties,
and the Equitable and AXA Orphan Assets cases.
CA's call for an independent public inquiry,
as specifically mentioned in our letter to Melanie Johnson MP,
is not to undermine the role of the FSA. We recognise that FSA
has a key role to play and we welcome its published 2001/2002
priorities where it commits to devoting additional resources to
regulating the insurance industry and to conduct a review of with-profits.
But when reflecting on the recommendations of our report (page
eight and nine of the Executive Summary), there are clearly some
issues which are outside of the scope of the FSA. For example,
changes to insurance legislation and the extension Charges, Access
and Terms (CAT) standards to with-profits.
Only the Treasury can drive these measures.
The Treasury may also provide strategic direction to the piecemeal
inititatives taking place by the FSA, the Association of British
Insurers (ABI), page 34 of the report, and Institute of Actuaries.
Besides these points, there is also the concern that given the
FSA's role in the AXA and Equitable Life case, the FSA cannot
be allowed to investigate itself. That would be unacceptable.
I hope you find our evidence useful for the
purposes of this inquiry.
9 February 2001
LETTER TO FINANCIAL SERVICES AUTHORITY FROM
Thank you for your fax of 8 December announcing
the decision of the Equitable Life to close its funds to new business.
This is indeed a sad occasion for such a prestigious life company
and its policyholders.
With this in mind, I thought I should write
to you to see if there are lessons to be learnt from the fate
of the Equitable. Some estimates put the number of policyholders
affected at 1 million, so I fear that this may be a serious blow
to consumer confidence in the financial services industry. Policyholders
are not party to same critical information as the regulators,
which results in unnecessary speculation, so I think it would
be helpful if the FSA could enlighten us on a number of points:
have you any plans to hold an inquiry
into the Equitable Life saga?
if not, do you plan to review the
risk management procedures that apply to life funds to establish
if perhaps more could have been done to identify and manage the
risk in this case, to minimise the chances of a similar case happening
elsewhere in the industry?
more urgently, will you be telling
consumers what action will be taken should there be a run on Equitable's
funds, and how the interests of different classes of policyholder
will be protected. I appreciate this is not the same as a run
on a bank, but nevertheless there are very real fears that Equitable
will attempt to increase the size of the market value adjuster
transfer penalty in a further attempt to dissuade policyholders
from taking their funds elsewhere;
the decision to close the fund to
new business came as a surprise and disappointment as it was hoped
that a buyer could be found. According to the press information
you kindly provided, the last of the interested parties withdrew
its proposed "offer" at the 11th hour. Did information
come to light regarding the true extent of the GAR liabilities?
Or were Equitable directors unwilling to accept the offer?
if the latter is the case, I would
be interested in your views on protecting the consumer interest
in this case. The point I am alluding to is: did the FSA take
the view that it would have been preferable for Equitable's board
to accept a "reasonable" bid from a buyer in the long-term
interests of policyholders, rather than close the fund to new
business? If the board chose not to accept advice from the FSA,
could the FSA, or indeed Ministers, not have influenced the directors
to accept a deal in the consumer interest?
was there any attempt to construct
an alternative rescue package across the industry or indeed involving
specifically, I would be interested
in your views on the effectiveness of the office of the appointed
actuary in this case;
do you think that the Equitable directors
and actuaries fully appreciated the risk of the legal action going
against them. What was the view of the FSA's legal advisers on
Equitable's assessment of the legal risk;
there is the view that, even if Equitable
had fully taken on board the risk of losing the legal action,
there was little that could have been done to implement contingency
plans given the size of the exposure to guaranteed annuities.
However, I am curious as to why, with each downward tick in long-term
interest rates, Equitable did not adopt an incremental approach
to managing its exposure. Has Equitable provided an explanation
as to why it did not try to hedge against the risk of adverse
interest rate movements much further back;
a final point is, on the back of
the Equitable case, do you have any plans to issue an update on
the guaranteed annuities as it applies across the industry? I
think that consumers would welcome some clear guidance and reassurance
on two separate issues involving guaranteed annuities:
there is the general concern
about the extent of exposure to guaranteed annuities across the
industry. What is the latest industry wide estimate for GAR liabilities?
we have also received disquieting information
about certain companies who may have persuaded policyholders to
inadvertently switch out of pension policies with guarantees attached.
This of course has the effect of reducing life company exposure
to guaranteed annuities, but also means that policyholders may
have unwittingly foregone very valuable pension guarantees. Has
the FSA come across any evidence of this?
I hope these points are helpful. I recognise
that you will be considering many of them yourself and it may
take time to respond. However, I think there are lessons to be
learned by all of us arising from this sad event and we will be
happy to co-operate in any follow up you plan.
13 December 2000