Select Committee on Public Administration Second Report


2  The Ombudsman's report

6. The Parliamentary Ombudsman's report, Equitable Life: A decade of regulatory failure, investigated 898 complaints in respect of 1,008 people referred to her Office by Members of Parliament. The Ombudsman also received direct representations on behalf of a further 1,480 people. The investigation "centred on allegations of regulatory failure on the part of the public bodies responsible for the prudential regulation of [Equitable Life] in the period prior to 1 December 2001".[2] Prudential regulation of life insurance companies, such as Equitable Life, was governed by the Insurance Companies Act 1982: "[s]uch regulation primarily related to the supervision of the solvency of life insurance companies and their ability to meet and continue to meet their liabilities to policyholders and to fulfil the reasonable expectations of policyholders or potential policyholders".[3]

Maladministration

7. The Ombudsman's report made ten determinations of maladministration—one against the Department of Trade and Industry (DTI), four against the Government Actuary's Department (GAD), and five against the Financial Services Authority (FSA)—with each representing a failure that "fell far short of acceptable standards of good administration" most notably in the way that the public bodies scrutinised the annual returns submitted by Equitable Life.[4] In particular:

  • The DTI, which was responsible for prudential regulation prior to 5 January 1998, failed to insist on Equitable Life's Appointed Actuary stepping down upon his appointment as the new Chief Executive and then allowed the situation to continue between July 1991 to July 1997. During this period "there was effectively no 'whistle-blower'" within the Society;[5]
  • GAD, which was responsible for providing actuarial assistance to the prudential regulators throughout the period under investigation, failed to question the affordability of bonus payments or the legitimacy of certain discount valuations that were set out in Equitable Life's regulatory returns for 1990 to 1993;
  • GAD failed to question Equitable Life about the differential terminal bonus policy that was originally included in the 1993 returns; it also failed to inform the regulator about the new policy, which later became the subject of decisive litigation;
  • GAD failed adequately to resolve various issues arising in the 1994 to 1996 returns, including the absence of reserves to meet the guaranteed annuity rates and the affordability of bonus declarations made by Equitable Life;
  • GAD failed to question valuations included in the 1995 returns that affected whether Equitable Life met the minimum level of financial strength that was required to continue in business;
  • The FSA, which took over the regulation of Equitable Life, initially on behalf of the Treasury, in January 1999, wrongly permitted a re-insurance agreement to be taken into account in the 1998 returns without a necessary concession being made about its value;
  • The FSA failed to require Equitable Life to make proper disclosure in the 1998 and 1999 returns about the risk of losing the litigation that had then begun in relation to the differential bonus policy;
  • The FSA failed to record its reasons for allowing Equitable Life to remain open to new business after it lost the litigation in the House of Lords;
  • The FSA's decision to allow Equitable Life to remain open to new business after losing the litigation was taken on an unsound basis;
  • Finally, the FSA produced misleading information about the solvency of Equitable Life and its compliance with regulatory requirements in the period between the loss of the litigation and its closure to new business.[6]

8. The findings of maladministration have been divided by the Ombudsman into three distinct periods. The earliest period of regulation under DTI and GAD was described by the Ombudsman as "passive, reactive and complacent".[7] The next period, in which the FSA took charge in the lead up to Equitable Life's closure to new business, was regarded by her as "largely ineffective and often inappropriate", while post-closure the prudential regulators were considered to be "largely effective but, when giving information to the Society's policyholders and to others about the situation Equitable was in, the FSA provided information which was inaccurate and misleading".[8]

Injustice

9. The Ombudsman's statutory remit requires her to consider whether any of the findings of maladministration resulted in injustice to the individuals who made the complaints.[9] In this respect, the Ombudsman identified three general consequences arising from the acts of maladministration:

    [F]irst that there were unreliable returns in the public domain; people should have been entitled to rely on those returns and because of the regulator's failure those returns were unreliable. The second consequence was both the regulator's and the Society's lost opportunities to address at an early stage issues which eventually became critical - a growing exposure to guarantees, the differential terminal bonus policy - and things could have taken a different course. The third consequence was that regulators made decisions that did not have sufficient regard to the range of powers they possessed, not only did they not use the powers they could have used, they often did not even consider using them.[10]

10. These considerations led the Ombudsman to make five detailed determinations of injustice arising from financial loss, lost opportunities and a "justifiable sense of outrage". These determinations were:

    (i) that injustice was sustained by any policyholder who can show that they relied on the information contained in the Society's returns for 1990 to 1996 and who suffered either a financial loss or a lost opportunity to take an informed decision about their financial affairs as a result of such reliance;

    (ii) that policyholders sustained injustice in the form of the loss of opportunities in the period between July 1991 and April 1999 to take informed decisions about their financial affairs in full knowledge of the exposure of the Society to guaranteed annuity rates and of the risks that such exposure generated;

    (iii) that all those who joined the Society or who paid a further premium that was not contractually required in the period after 1 May 1999 have sustained injustice in the form both of any financial loss they may have suffered and also in the form of lost opportunities to take informed decisions about their financial affairs;

    (iv) that those individuals who can show, having regard to their particular circumstances, that they relied on deficient information provided by the FSA in the post-closure period, that such reliance was reasonable in the circumstances, and that it led to a financial or other loss have sustained injustice; and

    (v) that all those who have complained to me have sustained injustice in the form of a justifiable sense of outrage at the failings of the system of prudential regulation that are epitomised by my findings of maladministration relating to the prudential regulation of the Society during the period prior to its closure to new business.[11]

Remedy

11. Prior to publishing her report, the Ombudsman outlined her general approach to redressing injustice in Principles for Remedy.[12] The Ombudsman's overall aim is to ensure that the relevant public body restores people to the position they would have been in, had maladministration not occurred. In the circumstances of this case, the Ombudsman made two recommendations for remedy; first, an apology by the public bodies concerned and, second, the prompt creation of a compensation scheme:

    My first recommendation is that, in recognition of the justifiable sense of outrage that those who have complained to me feel about the maladministration in the form of the serial regulatory failure identified in this report, the public bodies should apologise to those people for that failure.[13]

    My second - and central - recommendation is that the Government should establish and fund a compensation scheme with a view to assessing the individual cases of those who have been affected by the events covered in this report and providing appropriate compensation.[14]

Reaction

12. The Ombudsman's report received a strong welcome from Equitable Members Action Group (EMAG), which stated: "We have nothing but praise for the quality of the work that Ann Abraham has done"[15] and "After so many whitewashes, cover-ups, and delaying actions, EMAG congratulates the [Parliamentary Ombudsman] upon having the courage and integrity simply to tell the truth".[16]

13. Equitable Life's Chair, Vanni Treves, is also reported as saying that the Ombudsman's "reasoning and recommendations are beyond argument".[17] The board of directors has added: "If the Government fails to respond positively to a report from Parliament's own Ombudsman—a report which so thoroughly and unequivocally describes a 'decade of regulatory failure'—we will fail to understand and to explain to our policyholders what the point of the role of the Ombudsman is".[18]

14. The report has not received universal support. For instance, Sir Howard Davies, who was Chair of the Financial Services Authority at the relevant time, has rejected the findings made against the FSA;[19] other commentators and interested parties are divided over the case for compensation more generally.[20]

15. We had hoped to receive the Treasury's response to the Ombudsman's report in time for us to consider it as part of our inquiry. The report has been publicly available since July 2008 and we are aware that the public bodies have been working on their approach to the issue of compensation since at least February 2008.[21] The Economic Secretary to the Treasury has previously promised the House a response "in the autumn".[22] Ian Pearson MP, the current occupant of that post, has since told us that a response will be made as part of an oral statement to the House of Commons on or if possible before 18 December 2008. He also stated that the Ombudsman's report raised "very complex and technical" issues forming part of a "unique set of circumstances", which the Government is committed to examining fully.[23] He disagreed that a period of four months to reply represented unreasonable delay in the circumstances, but acknowledged the concern of policyholders that the situation had been going on "for far too long".[24]

16. In particular, Equitable Members' Action Group has estimated that around 15 members of Equitable Life are dying each day, with more than 30,000 having died since Equitable Life closed to new business in 2000. The new board of Equitable Life has stated: "It is certainly disappointing and some would say unconscionable that after a further three and a half months [i.e. now four and a half months since the Ombudsman's report] there is still no response".[25]

17. We congratulate the Ombudsman on her comprehensive and compelling report, Equitable Life: a decade of regulatory failure. The report paints a damning picture of the prudential regulation of Equitable Life throughout the 1990's and early 2000's. In short, the members of Equitable Life were seriously let down by the Financial Services Authority, the (then) Department of Trade and Industry, and the Government Actuary's Department. We support her recommendation for a full and unreserved apology from those public bodies concerned.

18. It is disappointing that the publication of the Government's response has been delayed. While the Ombudsman's report raises complex issues, the Government has had sight of her report for many months. There can be few cases more deserving of a prompt response than the present, particularly given the increasing age of the policyholders and the length of time that they have waited already. We do, however, welcome the fact that the Government seems to be treating the Ombudsman's report with the seriousness it deserves, and we look forward to the publication within the next few days of a what we trust will be a thorough and well-reasoned response.

19. The remaining sections of this report are primarily concerned with exploring the Ombudsman's second - and central - recommendation for the creation of a compensation scheme. Our report then goes on to consider the lessons that must be learned from the Equitable Life affair.

20. Allegations have been raised with us which fall outside the scope of the Ombudsman's report—in particular, that the failings of the prudential regulators went beyond maladministration and involved misfeasance in public office. These are not issues that we have been able to investigate or on which we can reach a considered judgement.


2   Ombudsman's report, Summary, para 1.4 Back

3   Ombudsman's report, Summary, para 2.14 Back

4   Ombudsman's report, Summary, para 6.3 Back

5   Ombudsman's report, Summary, para 7.4 Back

6   Ombudsman's report, Part 1, Chapter 11; Summary, Section 6 Back

7   Ombudsman's report, Part 1, Chapter 13, para 151 Back

8   Ombudsman's report, Part 1, Chapter 13, paras 156 and 159 Back

9   Parliamentary Commissioner Act 1967 Back

10   Q16; see also Ombudsman's report, Chapter 13, para 59 Back

11   Ombudsman's report, Part One, Chapter 13, para 181 Back

12   October 2007, available at www.ombudsman.org.uk/improving-services/principles/remedy/index.html Back

13   Ombudsman's report, Part One, Chapter 14, para 136 Back

14   Ombudsman's report, Part One, Chapter 14, para 138 Back

15   Q50 (Paul Braithwaite) Back

16   The Parliamentary Ombudsman's Report on Equitable Life, EMAG's comments, available at www.emag.org.uk/documents/EMAGsubmissionp02.pdf Back

17   'Compensation Call Over Equitable', BBC Online, 17 July 2008, available at http://news.bbc.co.uk/1/hi/business/7510129.stm  Back

18   EQL 03, para 2.8  Back

19   Q237, 247 Back

20   Ombudsman's report, Part 1, Chapter 3 Back

21   Ombudsman's report, Part 1, Chapter 14, para 13 Back

22   HC Deb 17 July 2008 Column 40WS Back

23   Oral evidence taken before the Committee from Ian Pearson MP on 9 December 2008, transcript due to be published as HC 41-i (2008-09) Back

24   As above Back

25   EQL 03 Back


 
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Prepared 15 December 2008