Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 80-84)



  80. You were told on the 4 July from Equitable that they raised this possibility.
  (Sir Howard Davies) Yes.

  81. And yet you find it is not until the 18 July, with two days to go before the ruling, that, according to the Baird Report, there starts to be some discussion inside the FSA about making a contingency plan in case it goes that way. Is that a correct interpretation?
  (Sir Howard Davies) There was a note to me and certainly Michael Foot and I, who sit next to each other, discussed this issue and there was corridor discussion about what we expected the Equitable to do. The issue for us was in those circumstances would we need to close the Society to new business, which was what we believed would then be necessary. As it happened, the Society had reached its own conclusion that it would put itself up for sale. We also had to consider whether in those circumstances we should close it to new business and we decided that we would not do that because we believed that would damage the interests of policyholders because the company was much more likely to achieve a successful sale if it was sold as a going concern.

  82. Can I just remind you finally of the Service Level Agreement that exists between yourself and the Treasury dating back to 1997? Paragraph 248 of that says that the FSA will therefore pursue its supervisory objectives by aiming to minimise the risk of failure by identifying early signs of trouble and taking preventative action. Do you think you have lived up to that in respect of Equitable Life?
  (Sir Howard Davies) You may be surprised by this conclusion, Mr Plaskitt, but I think we did. I think we did identify—or technically speaking the Treasury identified (they are the same people)—back in 1998 that Equitable was in difficulty and pursued a line in terms of the reserving for these guarantees which was meant to anticipate if you like a ruling that they could not do what they were aiming to do in terms of the bonuses and that these guarantees actually had value. They had been attempting to do that. My conclusion however is that by 1999 this was too late. As the report said, by that time the die was cast and it was not possible to generate the kind of reserves needed to cope with the adverse judgment of the House of Lords acting only from the beginning of 1999. That would have had to be done several years before in the form of lower bonus policies and setting up higher reserves to cope with the cost of guaranteed annuities.

  83. But I am having difficulty understanding how you can feel that you have lived up to this because it is also around identifying early signs of trouble. We have seen in the Baird Report several instances where those early signs were sent to you and on one of them, as you have already said, you took no action.
  (Sir Howard Davies) I do not think there was any useful action to be taken. I would come back to the conclusion that in spite of all the steps that we took, particularly on the reserves, it was not possible at that stage for a society which had been operated for many years with a very low level of reserves and which had launched a court case to do anything materially to affect the eventual outcome. Clearly there were some examples in this case and I completely acknowledge that there are examples in this report of management and administration which one would like to have done better on and indeed that is why we have set all this out and why we have made a lot of changes, but I do not think that they add up to a conclusion that we could have done something to prevent the eventual outcome which we did not do, and I do not think that conclusion is in the report.


  84. Sir Howard, as you know, the evidence session was from 10.30 until a quarter to 12 and we have run out of time with an extensive number of questions. We would be pleased if at some later stage you could return and we could continue this evidence session. Thank you very much. Before you leave, the last Committee inquiry was concerned about a number of issues and one of the members is interested in asking Martin Roberts to come back along with you. I think it was Mr Cousins. Perhaps you could give consideration to that for the next session.
  (Sir Howard Davies) Certainly.

  Chairman: Thank you very much indeed.

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