Select Committee on Treasury Minutes of Evidence

Exmination of Witnesses (Questions 240-259)



Mr Mudie

  240. You describe this company as arrogant and yet you are prepared to put up with them not telling you that they had not signed the reinsurance, that they made the reinsurance with a company that the FSA would not support because it was not under your jurisdiction. That is in the Baird Report. Lastly, they did not tell you that if the terminal bonuses were changed the reinsurance disappeared. These are not technical matters. That reinsurance contract enabled you to get the Section 68 Order by telephone on the basis that they had covered. The majority of the cover was that reinsurance. If there was ever a dodgy insurance that surely was. I am amazed that you accept their duplicity with such calmness—equanimity, as Mr Tyrie says.
  (Sir Howard Davies) At least there is cross-party agreement on grammar and semantics. Of the points you make there was a point, as you say, at which the contract had not been signed and we were operating on the assumption that it had been signed, but subsequently it was and in the terms that we had assumed. The second point relates to IERC which is regulated elsewhere. It is true to say that it would be regulated differently if it were a UK company but it is a large company. The parent is GE in fact. It is not a small operation, it is not a reinsurer which is not a company of substance. The third point on the terminal bonus is that we were aware that the reinsurance treaty would have to be renegotiated were the company's terminal bonus policy to be found—

  241. That is not what Baird says. On more than one occasion he points out that the FSA did not know about the terminal bonus clause, which is a key clause.
  (Sir Howard Davies) Can you point me to it?

  Chairman: Come back to that when you have found it.

Kali Mountford

  242. I am thinking to the future here. When you are talking about this relationship that you think you ought to have with companies, and you also mentioned other companies whose reserves are not perhaps what you would like them to be, would you now, looking for sensible solutions, be looking at reinsurance in relation to those companies? What I am trying to find out is do we have another one?
  (Sir Howard Davies) As I have tried to explain, although not quite in answer to that question, is that we do not believe that there are other companies with large guaranteed liabilities which would require reserving which is not currently in place. We are however looking carefully at reinsurance policies in the market in order to get a better understanding of the nature of those policies and whether they are really delivering what they purport to deliver. That is something which we, as a result of what has been revealed in the Baird inquiry, are doing as a matter of some urgency around the market at the present time.

  243. You have told us that you have got new proposals to make but meanwhile have you already tightened up?
  (Sir Howard Davies) Yes, in relation to some individual companies we have.

Mr Beard

  244. Before this insurance contract was signed, it was included in the reserve of Equitable Life and yet had those reserves been called upon the money would not have been there. What do you call a position like that?
  (Sir Howard Davies) I am not sure that that is the case, that they were included. The point about the reinsurance contract was that it was in order to meet the solvency requirements and the reserving requirements that we put in place; it was not in order to meet Companies Act solvency requirements. The company remained solvent without that policy. This was to do with satisfying the regulator that it met its required minimum margin above its solvency. I am not sure that there was a position—I hope there was not a position—in which the company was not meeting its required minimum margin without the reinsurance contract while the reinsurance contract had not been signed. I am not aware that that was ever the case.


  245. Sir Howard, Mr Mudie was referring to page 211, paragraph 6.8.2, where it says: "However, in its regulatory return Equitable Life did not disclose that the reinsurance cover effectively remained in place."
  (Sir Howard Davies) Yes, that is the case, we knew it but it was not disclosed. The criticism is not a criticism that we were not aware that that was the case but that the regulatory returns did not disclose that that was the case. We were aware that those were the terms of the policy.

Mr Fallon

  246. But you could have required them to disclose them?
  (Sir Howard Davies) I think we could have required them to do it and the Baird Report says that we should have done.


  247. Sir Howard, we have spent quite a bit of time on this but I think the members of the Committee are a bit incredulous that it would appear that the FSA are relying on companies bringing them bad news. We know that many people do not bring people bad news in a voluntary sense, so they need to be, in your phrase that you have used regularly this morning, proactive. It is surely urgent in cases like this. It does appear perhaps just a little bit naive to accept these points when it has such major implications. There a balance to be maintained between the customer having confidence in their regulator to look after their interests and not giving the impression that every company is rock solid. There is that area that has to be fashioned and I feel again it is an area that we have to come back to because there are some alarming comments that have been raised as a result of your answers here.
  (Sir Howard Davies) If I could try to distinguish between the issue of the reinsurance contract which, as I have said, I would like write to the Chair about, and I have some difficulty with some of the questions because of the commercial issues to which I referred, as far as the general character of the relationship is concerned which we have and which we seek to have with firms, I would say that I do not think that it is naive to rely on people to bring us bad news in the context of the principles which I have described because firms are very firmly aware now that whatever regulatory breach they may have undertaken, if they do not tell us about it they will undertake a second one, which is that they have not been open with their regulator. We have in the securities area taken a number of cases where we have prosecuted or disciplined firms, both firms and senior managers of firms, on the grounds that they were not open with their regulator simply because, unless they are open with their regulator, problems can get out of hand and it is absolutely crucial that the regulator is able to act urgently. Most firms in the market are fully aware of that and are very much aware of the need to bring bad news to us, as you say. There will always be a few who do not bring bad news to us, but I do not think it is naive to base your regime on that assumption, particularly if it is buttressed, as I have said, by a clear principle defined in very stark terms and which itself is enforceable.

  248. So we can assume that you will discipline some people from Equitable Life then?
  (Sir Howard Davies) I could not comment on individual cases.

  249. You will be proactive?
  (Sir Howard Davies) We will be proactive.

Mr Cousins

  250. Sir Howard, would you describe the Equitable's material and information to both its policyholders and its potential policyholders in the period in question, 1999/2000, as being fair, clear and not misleading in either design or content?
  (Sir Howard Davies) I could not answer for absolutely every communication on those grounds so I could not give you a blanket undertaking that that was true in all cases, no.

  251. What is your impression?
  (Sir Howard Davies) I think that there were occasions when the company would have been well advised to set out more clearly the risks that it was running in the court case.

  252. Can I draw your attention to the Baird Report, paragraph 6.21.8 which describes the activities of the FSA as, as it were, the successor to the Personal Investment Authority, where it says that you never properly considered the nature of the advice that should be given to non-GAR policy holders about the liability for GARs, nor did you contact Equitable Life to make enquiries about what advice had been given about this or to discuss it further with the prudential arm after getting advice to the effect that the company could not promise asset share and investors would have to be warned that they could get back less? Those are the terms of the Baird Report. You failed as a conduct of business regulator, did you not?
  (Sir Howard Davies) I would not accept the term "failure" in an absolute way. I think this report draws attention to things that we might have done that we did not do.

  253. You failed as a conduct of business regulator, did you not, Sir Howard? It is absolutely clear from paragraph 6.21.8.
  (Sir Howard Davies) I have given you my best answer to that.

  254. If you look at the conclusions of Baird he refers to a culture in the FSA as a conduct of business regulator in which there is "little appetite and capacity to examine the wider implications of an issue" and "a reluctance to pursue any matter without clear evidence of a breach in the rules". It is page 231. That is failure as a conduct of business regulator, is it not?
  (Sir Howard Davies) I have answered the question about failure, Mr Baird—Mr Cousins, sorry. That is the review team's description of the culture within IBPIA and I am sure that all the people who were responsible for this would not accept that description, but that is the review team's assessment. We certainly take note of that assessment and we are responding to it, I hope, in an appropriate way, though I have to say that the sort of people involved would not accept that that was the culture that they were operating in.

  255. What action have you taken against Equitable Life as a conduct of business regulator?
  (Sir Howard Davies) We have taken specific action in relation to income draw-down policies where we believe that there is a case of mis-selling and where they have had to provide specifically for that. That is the specific enforcement action that we have taken, and also in the case of pensions mis-selling.

  256. You did not stop them advertising after the court case, did you?
  (Sir Howard Davies) No, we did not, and the Baird Report does not conclude that we should have done.

  257. If you look at the account that is given of the FSA as a conduct of business regulator (and there is not time now to pursue our way through it) it is clear that as a conduct of business regulator you simply did not have the information and never sought it to carry out your duties properly.
  (Sir Howard Davies) Which bits of information are you thinking about?

  258. It is summarised in 6.21.8.
  (Sir Howard Davies) I have accepted that it would have been better had we gathered that information from the company, certainly.

  259. You cannot give this Committee an assurance that you could have done something as a conduct of business regulator because it is absolutely crystal clear that you never sought the relevant information. That is summarised at 6.21.8. You never asked for it.
  (Sir Howard Davies) I am certainly not disagreeing with what is in paragraph 6.21.8, certainly.

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