Select Committee on Public Administration Second Report


Conclusions and recommendations


Introduction

1.  We had thought that the Government would publish its response to the Ombudsman's report on Equitable Life in time for us to consider it as part of our inquiry. We now understand that it will be available only very shortly before the House rises for Christmas. We have therefore decided to publish this Report as speedily as possible, so that debate on the Government's response—and possibly even the response itself—can be informed by our views. Whether we need to return to these issues in the New Year will depend on what the Government has to say—but if it gives us any cause for concern, we will not hesitate to do so. (Paragraph 4)

2.  There were more than 1,500,000 members of Equitable Life at the time it was forced to close to new business in December 2000. Over the last eight years many of those members and their families have suffered great anxiety as policy values were cut and pension payments reduced. We acknowledge the determination of all those individuals who have campaigned tirelessly to find out what went wrong and to seek recompense from those responsible. Many are no longer alive, and will be unable to benefit personally from any compensation. We share both a deep sense of frustration and continuing outrage that the situation has remained unresolved for so long. (Paragraph 5)

The Ombudsman's report

3.  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. (Paragraph 17)

4.  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. (Paragraph 18)

The case for compensation

5.  We strongly support the Ombudsman's recommendation for the creation of a compensation scheme to pay for the loss that has been suffered by Equitable Life's members as a result of maladministration. Where regulators have been shown to fail so thoroughly, compensation should be a duty, not a matter of choice. However, like the Ombudsman, we are acutely aware of the substantial sums of money involved. This calls for a careful balance to be struck between the interests of the taxpayer, on the one hand, against the competing need to be fair to the large number of policyholders affected, on the other. We take full account of the current and extreme pressure on the public purse. But at the same time the regulators were installed to promote confidence in us all to save for retirement. They were given extensive powers to carry out their task. Not only did the regulators fail, but they failed over a prolonged period and at a fundamental level. The impact has been severe for many of those who were worst affected; it would be unacceptable for current financial pressure to override failings which took place seven or more years ago. (Paragraph 47)

6.  We fear that a failure to compensate could further undermine the incentive to save for retirement and could weaken trust in the regulators. While we acknowledge concerns that the threat of compensation may make regulators over-cautious in the future, we do not accept this will happen. The payment of compensation should, if anything, sharpen minds and encourage the effective use of their powers. Neither do we accept that compensation would set a difficult precedent. Each case must be decided on its merits, just as happened in the case of Barlow Clowes and the Ombudsman's many other previous investigations. (Paragraph 48)

7.  It would also be wrong for the Government to refuse compensation on the basis of Lord Penrose's conclusion that Equitable Life was "principally … the author of its own misfortunes". This often quoted phrase must not mask Lord Penrose's further conclusion that it was regulatory failure which permitted Equitable Life's management to carry on undermining the interests of its members for so long. We also take into account that Lord Penrose was not tasked with determining issues of regulatory failure or, more particularly, the case for compensation. This was the task of the Ombudsman and we stand behind her well-considered views. (Paragraph 49)

8.  The decision to compensate must not, however, be the equivalent of signing a blank cheque on taxpayers' behalf. It is essential that the public purse benefits from an appropriate measure of protection. In particular, the emphasis must be upon compensating individuals only for that loss that is fairly attributable to regulatory failure. The impact of internal mismanagement must be taken into account. It is on this basis that we reject the suggestion that compensation would be the equivalent of turning the State into the guarantor of a failed business; in contrast it would be a case of the State making good its own serious failure. We also highlight the Ombudsman's conclusion that not all policyholders suffered loss; this should not be a case of compensation for all. (Paragraph 50)

A compensation scheme

9.  We endorse the Ombudsman's proposal for a compensation scheme that is independent, transparent and simple. It is only fair that the difficult assessments which have to be made are carried out at arm's length from Government and based on principles that are publicly available. Like the Ombudsman and several of the witnesses who appeared before us, we believe that this will require an independent compensation tribunal to be established. The first task of the tribunal must be to determine and then publish the principles and procedures that will be used to calculate compensation. We welcome the commitment of the current board of Equitable Life to provide full and prompt assistance both in relation to this task and subsequently. (Paragraph 53)

10.  We are concerned that there is an inherent tension between speed and accuracy in the way that a compensation scheme can measure loss. In ordinary circumstances it would, in our view, be inappropriate to depart from the basic presumption that loss must be accurately assessed. But the main priority must be prompt redress given that policyholders have already been waiting for almost a decade and substantial numbers have either died or are advancing in years. Justice further delayed will mean justice denied to even more people. Where possible, we urge the compensation tribunal to reconcile the twin goals of speed and accuracy; we take comfort from Equitable Life's belief that a sensible compromise can be achieved. (Paragraph 59)

11.  An accurate assessment of loss would require policyholders to establish whether they relied upon misleading information or advice. This causes obvious difficulties; the relevant events may have taken place many years ago and substantial numbers of policyholders are either ill, infirm or deceased. A number of alternative approaches have been suggested, which we urge the Compensation Tribunal to consider before placing onerous requirements on policyholders. In our view the circumstances of the policyholders and the delays of recent years require the compensation scheme to avoid placing a burden on individual policyholders wherever this is possible. (Paragraph 63)

12.  The fairness of requiring taxpayers to compensate Equitable Life's policyholders firmly depends upon making sure that public funds do not pay for loss that is fairly attributable to the poor performance of the stock market or to the mismanagement of Equitable Life's former directors that could not have been prevented by adequate regulation. The aim should be to restore individuals to the position they would have been in had maladministration not occurred. (Paragraph 65)

13.  We agree with the Ombudsman that any element of loss that is accountable to general market underperformance during the period under investigation should be discounted by assessing each individual's relative loss. This would be by comparing the performance of Equitable Life against an appropriate competitor or group of competitors. The compensation tribunal will need carefully but promptly to decide in which of the many possible ways this should be done. (Paragraph 69)

14.  One of the most difficult tasks is determining the best way to take into account the principal responsibility of Equitable Life's former management. We have already concluded that this should not be a reason for refusing compensation. It is, however, clear that some of the policyholders suffered loss that was caused both by regulatory failure and mismanagement. We commend Equitable Members' Action Group for accepting that compensation payments should be discounted to reflect this issue, primarily due to the amount of taxpayers money at stake. Yet we remain unconvinced that their proposal for a 10% discount represents either a fair or a principled approach. The core difficulty is that neither the Ombudsman nor any other investigation has had a sufficiently broad remit to apportion responsibility between the regulators and Equitable Life's former managers and advisors. In other words, no one is ideally placed to achieve fairness to the taxpayer by apportioning blame (and therefore requiring it pay) for that share of loss that is fairly attributable to regulatory failure (taking into account all compensation paid by Equitable Life to date). (Paragraph 77)

15.  At this late stage, we believe the pragmatic response is to require the compensation tribunal to make a determination on the appropriate share of blame. While this is not an easy role for a new tribunal to assume, the outcome would at the very least benefit from being independent and transparent. We emphasise that this issue is not about regulators being able to escape responsibility. On the contrary, it is about ensuring that the taxpayer provides compensation that fairly represents the extent to which regulatory failure was to blame for any losses suffered. (Paragraph 78)

16.  We are not in a position to gauge whether the Ombudsman's two year timetable to implement the compensation scheme is viable or is setting the Government up to fail. There is, however, a grave danger that any further delay will turn the last decade of regulatory failure into this decade's even greater failure to provide adequate redress. Regulation is never an easy job and mistakes, even serious ones, will occasionally be made, but the real test for government is how it then responds. In this case the Government must treat the smooth and rapid progress of the compensation scheme as a matter of high priority. We intend to monitor this progress carefully. (Paragraph 81)

17.  It would not be appropriate to compensate only those policyholders and annuitants who are experiencing financial hardship; the payment of compensation is not a matter of charity but a requirement of justice to redress a wrong. However, we consider that there is scope to reduce the financial pressure on those who are struggling the most, including the eldest and those in ill-health. Specifically, we recommend that priority or interim payments are made to individuals in those circumstances. We hope that the representatives of Equitable Life's members will be able to assist in identifying those most in need; in any event, hardship payments must not delay the payment of compensation to all those who are eligible. (Paragraph 84)

18.  It would be reasonable for the compensation tribunal to consider a cap on compensation, as a way of limiting the impact on the public purse. We doubt, however, that a cap on the total amount of compensation to be paid could be applied without causing either significant unfairness to some of those who might benefit, or delay to the majority. We would be particularly concerned if a cap of any kind penalised those with modest investments or those worst affected. (Paragraph 88)

Lessons for the future

19.  The Government is responsible for failing to establish a comprehensive and fit for purpose investigation into the Equitable Life affair. Not only has this failure caused unnecessary expense, but worse still it has resulted in years of delay, anxiety and unanswered questions. The Government must review the way in which serious failures of this kind are investigated in the future. In the meantime, the Government has reason to apologise not only for the maladministration identified by the Ombudsman, but also for the delay and frustration caused by its piecemeal approach. (Paragraph 93)

20.  The "central story" of the Ombudsman's investigation is the failure of regulators to exercise their powers to ensure that a company with a sound reputation was in fact observing minimum standards. It is not for us to assess whether a failure to learn this lesson has contributed in whole or part to the crisis that is currently being experienced worldwide in the banking sector. Nonetheless, we urge the Government to take this opportunity to consider carefully - and to set out in its response to this Report - what lessons need to be learned from the criticisms that have been (and continue to be) levelled against the regulators. This includes the need for absolute clarity as to what can and cannot be expected from the system of financial regulation. (Paragraph 102)

21.  The Financial Services Authority no longer falls within the jurisdiction of the Ombudsman. The courts are also unable to award compensation against the Authority, except where bad faith is proven on its part. The Ombudsman's candid assessment of the Financial Services Authority leaves us with a question for the Government: can we be assured that if an investor is failed by the Financial Services Authority in the future that it will be held accountable, to enable lessons to be learned and, if appropriate, any loss to be made good? If not, the time may have come to reconsider how our key regulators are held to account. The Government must also heed the adage that prevention is better than cure: in particular, there is a need for reflection upon whether more could be done in Government, Parliament, and the National Audit Office to maintain an overview of regulators as a way of mitigating the risk of serious regulatory failure in the future. (Paragraph 110)

22.  We struggle to understand how the former directors and advisors of Equitable Life have walked away without making good any of the losses that have been sustained. Quite apart from any issue of regulatory failure, this represents a serious lack of accountability on the part of those who were viewed as principally to blame. We ask the Government to reflect upon whether this would have happened in other leading jurisdictions and, if not, to consider what must be done to prevent it happening again. (Paragraph 113)

Conclusion

23.  We urge the Government to act without further delay and to accept the Ombudsman's findings of maladministration. She is Parliament's Ombudsman and it is imperative that the Government respects her conclusions. There are valid arguments to be had about the scale of compensation and the way that such cases should be handled in the future, but we would be deeply concerned if the Government chose to act as judge on its own behalf by refusing to accept that maladministration took place. This would undermine the ability to learn lessons from the Equitable Life affair. If it were to happen, we consider it would be necessary to hold a debate on the floor of the House to allow Members to discuss these issues and re-establish the Parliamentary Commissioner's role. (Paragraph 117)


 
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