APPENDIX 14
Supplementary Memorandum by Mr David Browning,
Equitable Members' Action Group (EMAG)
(This communication is intended as a follow-up
to the Select Committee hearing into ELAS held on 15 February
2001, taking regard to the evidence presented at that hearing.
EMAG made a written submission before the hearing, which would
have been circulated to committee members, as well as individual
submissions by EMAG members, notably those by Alex Henney, Andrew
Pike, and Christopher Whitmey.)
EMAG welcomes the fact that much of the hearing
focused on what policyholders were being told about the implications
of the Guaranteed Annuity Rate ("GAR") issue. It was
manifest from evidence presented that there was a gap between
the public image of ELAS as a solid, well-funded mutual assurer,
and the underlying reality of the situation. ELAS had a potential
problem with GARs which was recognised by the Treasury, at least
from the time in 1998 when the Government Actuaries Department
conducted its survey of insurers' GAR exposure. The Committee
heard from ELAS representatives that the Society was relying upon
advice given to it by its lawyers and by its regulators that it
was entitled to pursue its differential approach (based on the
concept of "asset share") to the setting of terminal
bonus. The Financial Services Authority ("FSA") representatives
said in effect that the way the Society managed itself was largely
a matter of commercial judgment, and that it had had no reason
to query the sense of what ELAS were doing, ie relying upon legal
"opinion" rather than legal "fact" in its
handling of the GAR issue. It seems fair to say that both parties
were contributing to a situation where an assumption was being
made about a matter of contract law compliance. This assumption
underpinned both the reserving requirements imposed upon the Society,
and the public utterances of ELAS about the GAR issue. This situation
was allowed to go unchallenged until the litigation process was
commenced in 1999.
It is important to understand what that process
involved. A group of litigants brought an action against ELAS
which challenged the Society's right to allocate different terminal
bonuses according to whether benefits were taken in GAR or non-GAR
form. The litigants were not asking for, or implying that they
would agree to settle for, a halfway-house solution based on the
concept of "ring-fencing", ie a different approach based
on classes of policyholder. What they were asking for was what
they eventually achieved, ie the HoL ruling that any differentiation
of terminal bonuses as between GAR and non-GAR annuitants was
wrong.
It emerged during the course of evidence that
ELAS and FSA had agreed an "exit strategy" based on
possible outcomes of the HoL hearing, which included a contingency
plan to cover the possibility of a complete victory for the GAR
litigants. The HoL decision was handed down on 22 July. Press
coverage at the time referred to the announcement of a sale process
by ELAS within minutes of the judgment being announced. On 27
July the Society told a meeting of its sales representatives held
in London that ELAS had been given legal advice covering six possible
scenarios for the outcome, one of which equated to what had actually
transpired. The FSA, at the TSC hearing on 15 February 2001, did
not give a date for the agreement of the "exit strategy",
but implied that it was some time between the Court of Appeal
verdict (21 January 2000) and 22 July 2000. All of this indicates
that the depiction of the actual outcome as a "remote possibility",
referred to repeatedly by ELAS representatives, is inadequate
as an excuse for the opacity of the information given to policyholders,
both existing and potential, certainly since the initiation of
the Court process in January 1999.
In February 2000, after the Court of Appeal
had overturned the High Court judgment of September 1999, the
then Managing Director of ELAS made the following statement: "Contrary
to many of the reports which have appeared in the press, there
would be no significant costs imposed upon the Society if the
Court of Appeal's decision were upheld in the House of Lords.
The speculation regarding financial difficulties and costs to
be borne by with-profits policyholders is therefore unfounded.
Your Society remains, and will continue to remain, financially
secure". (letter to policyholders from Alan Nash, ELAS Managing
Director and Actuary, 1 February 2000). Mr. Nash was making this
confident assertion on the premise that the litigants had only
won a partial victory in the Court of Appeal; one of the three
judges had indicated that "ring-fencing" was a possible
means by which ELAS could apply differential bonuses. But this
was only one judge's view; and ELAS themselves stated that the
main reason for taking the case to the Lords was to achieve "clarity",
precisely because the three Appeal Court judges had all given
different judgments, one upholding the High Court's judgment,
two rejecting it, but on different reasonings.
During 1999, potential policyholders who asked
ELAS sales reps about the impending court case had been told that
it was a narrow technical matter which was being blown up out
of proportion by the press; the sums at stake were insignificant
in relation to the total value of the with-profits fund; and,
in any case, any potential GAR liability was covered by "re-insurance"
arrangements. These statements were patently misleading. Policyholders
were not told of the £1.6 billion which ELAS were compelled
to establish as additional reserves for its GAR contracts at the
end of 1998; and the re-insurance arrangements were, as ELAS's
deposition to the TSC made clear, irrelevant. They were not related
to the differential bonus issue; they were not a "hedge"
against the possibility of GAR litigants winning their case. (There
is indeed a case to be made that ALL policyholders who bought
with-profits policies after July 1988 were misled, because they
were not told of their potential exposure to the risk of having
to bolster up the GAR-holders' contractual rights, if indeed those
rights were to be upheld in a court of law).
To sum up:—
1. Taken together at face value, the depositions
and statements made to the Committee by both ELAS and FSA representatives
could be interpreted as saying that no-one was to blame for that
fact that things turned out as they did. Furthermore, policyholders
could have found out all that they needed to know to make reasoned
decisions applicable to their individual circumstances by asking
for, and reading with understanding, the 400+ page statutory Treasury
Return as submitted in February 2000, plus stories appearing in
the press. Our comments: Firstly, the document mentioned is virtually
incomprehensible to a lay person without professional mediation;
secondly, ELAS were, as we have seen, in practice denying the
validity of press comments on the situational problems ELAS were
confronting.
2. It should be self-evident that the only
rationale for the existence of organisations like ELAS and the
associated regulatory authorities is to serve the interests of
policyholders. There was a comprehensive failure to achieve this,
and claims for compensation must be looked at seriously where
they can be shown to be appropriate.
3. Equitable did not pay commissions for
introducing business to third parties. That may have been laudable,
in that it kept costs down; but such a philosophy puts a critical
degree of responsibility upon the in-house sales force to tell
potential clients the truth, and not a "spun" version
of the facts designed to serve the organisation's perceived commercial
interests rather than those of the client. The FSA's monitoring
role in such situations needs to be conducted with extra vigilance.
5 March 2001
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