Examination of Witnesses (Question Numbers
30 OCTOBER 2008
Q1 Chairman: Let me welcome Ann Abraham
and her colleagues Bill Richardson and Iain Ogilvie this morning.
As you know, Ann, we are going to have two halves to this meeting,
in the first half we would like to discuss your report Equitable
Life: a decade of regulatory failure. Then there will be a
shorter second half with you where we will be discussing issues
arising from your annual report. 1
Ms Abraham: All right.
Q2 Chairman: I usually ask if you
would like to say anything by way of introduction. I do not think
you have to say a great deal because we have read our way into
this and you have talked to us about it before, but if there is
anything you would like to say then by all means do so.
Ms Abraham: I had not planned
to say anything by way of introduction. As you say, the report
is itself substantial and you have my memorandum, so I was not
intending to say anything further.
Q3 Chairman: Could you just remind
us very briefly why you had to set aside the first report that
you did on Equitable Life and disregard that? It was quite different
and came to quite different conclusions from this report.
Ms Abraham: I suppose the simple
and short answer to that is that I came to that decision in the
course of my second investigation. I did not decide, as you say,
to set aside the first report and do a second investigation; I
decided to do the investigation which I have reported on now,
following a consultation on whether I should do that. I then undertook
a second investigation, which was much more wide-ranging in terms
of its timescale and in terms of its jurisdiction, because of
course the Government Actuary was brought within jurisdiction.
Therefore the second investigation was a very different one and
what I found in the course of that investigation led me to the
view that first investigation report could not stand. That is
the fundamental reason.
Q4 Chairman: I think I know the answer
to this because I have heard you say it before, but it would have
been better, would it not, if this whole saga had been the subject
of one proper comprehensive inquiry, so we could see this issue
in the round rather than the way that we had to do it in the sporadic
way over many years?
Ms Abraham: Yes.
Q5 Chairman: What is the consequence
of not having done it in the way it should have been done?
Ms Abraham: The fundamental consequence
is delay and I can only say distress to a lot of people involved.
I suspect there was more cost than there would have been had it
been done comprehensively with one inquiry.
Q6 Chairman: Your job is to look
at the regulatory system within your remit during the period in
question. You made 10 determinations of maladministration, one
against DTI, four against the Government Actuary's Department
and five against the FSA, which is why you talk about a decade
of regulatory failure. If I may say so, it is a dismally compelling
story that you set out. Then, of course, you bring us to the point
of what should happen as a result of this and you make a case
for redress consistent with your principles in these matters.
Could you tell us first of all, whether you think in making a
recommendation for redress in relation to the kind of regulatory
failure that you describe here, does take us into new territory?
Ms Abraham: I am not sure I would
agree with that. Although clearly this report is exceptional in
many waysin terms of investigation it is exceptional in
many ways and in terms of the sheer scale of evidence, the length
of time we have taken to do it, the technical detail we have had
to grapple withwith this investigation and this report
we have done exactly what we do with every investigation and every
report. We have applied the same approach and the same principles
in taking a view on whether there has been maladministration,
whether that maladministration has had injustice as a consequence
and then applying the principles of remedy that I have now articulated.
There is nothing exceptional going on here, it seems to me, in
terms of what the Ombudsman's Office does. When it comes to the
question of remedies, the sequence we always follow is to make
determinations of maladministration or not. The way we do that
is to look at what should have happened and what has happened
and whether there is a gap and if the gap is sufficiently big
for that to constitute maladministration. That is the first thing
we do. We then look to see whether any injustice has flowed from
that maladministration and sometimes there is none. However, if
there is injustice which has not yet been remedied, then we would
seek to make recommendations that would fill the remedy gap and
that is exactly what this report does. The reason I have said
in my conclusion that I think that Parliament should now debate
the question of remedy is because the Government has brought up
the question of public policy considerations and public resources.
The Government has brought up a lot of things which I am not persuaded
by and I do not believe diminish or dilute the arguments for remedy,
but I think there is a legitimate and proper public policy consideration
around the amount of public resource that might be required to
set up and run a compensation scheme here, that it is entirely
proper for Parliament to debate.
Q7 Chairman: What I am really getting
at is that unless there is an explicit understanding and agreement,
any failure of the regulatory system in whatever area it takes
place will occasion redress. Unless that understanding is in place
at the time, is it not a bit bizarre to come along afterwards
and say "Ah, but that is my understanding of what the understanding
should have been?"
Ms Abraham: I think I might turn
it round really and say that if the Government were going to say
that at the end it might have been helpful if they had said it
at the beginning, because we could have had the debate then, and
not done four years' work. I think there is something fundamental
hereit is explored in the report in some lengthabout
whether there is something about regulation which puts it in a
special place. Chapter 14 of the report actually analyses the
submissions that are made there and I have concluded that I am
not persuaded by them. Again the report makes reference to the
way that the courts have approached these issues, and whereas
I would absolutely defend my space to operate beyond that of the
courts (again the report sets out examples of that), I think I
have approached this in a way which is not simply saying that
the regulator made a few errors, there was one set of returns
that was not very good, and therefore we are automatically into
maladministration and injustice and redress. I think the report
sets the bar very high in terms of what constitutes maladministration.
Q8 Chairman: I think the way you
deal with it does demonstrate that these are not marginal issues;
they are absolutely central issues. I am not in any way arguing
about that, but I am just trying to explore this general proposition
that you seem to be developing, and the Government is resisting,
which is that regulatory failure, albeit of a kind that you describe,
triggers a redress system. Some people would say of course that
we are living through the worst banking crisis since the First
World War, plausibly said that the failure of regulation has a
part to play in that. Is the implication of that now that redress
has to kick into that? You do not have to be a sort of parsimonious
chancellor to think that that takes us into territory that perhaps
we ought not to be in.
Ms Abraham: I suppose I would
say that if Parliament or indeed Government felt that the world
of regulation was a special case and should not be subject to
the Parliamentary Ombudsman's jurisdiction, they should have framed
the legislation accordingly. In previous well-known cases in my
Office when the matter of maladministration and regulation came
to the fore, if as a result of that, it was felt that there should
be changes to the Parliamentary Commissioner Act then they should
have been brought forward. I am working with the jurisdiction
that I have been given by Parliament and there a lot of regulators
within my jurisdiction. I have applied the same approach in terms
of not second-guessing and understanding what the regulator's
role is, but the suggestion that there should be stripped out
of my jurisdiction any government body that has a regulatory function
would take a substantial number of bodies out of my jurisdiction.
Q9 Chairman: You are right to get
us to talk about this. In terms of what you are recommending about
redress and compensation, you give pointers but you do not really
go further. As I understand it you are not saying that every Equitable
Life policy holder should have compensation; you are not taking
that broad brush approach.
Ms Abraham: I would say in terms
exactly that, that I am not saying that.
Q10 Chairman: However, then you are
saying, you think it is individuals only who should be compensated
for relative loss that they may have suffered. So it is very much
an individual scheme that you are arguing for.
Ms Abraham: Yes.
Q11 Chairman: Does that mean that
you are not prepared to talk about, as it were, categories of
policy holders? Some people have put to us the case that there
are categories of policy holders that need to be seen as a category
and simply dealing with individuals does not catch that.
Ms Abraham: I think what I am
saying is that these are relative losses that some peoplenot
all peoplemay have suffered. They can only be calculated
on an individual basis with reference to the individual circumstances.
That is what the report is saying. It might be helpful if I understood
what sort of categories we are talking about.
Q12 Chairman: We have had representations
from somebody who represents with-profit annuitants, and he objects
to your report because he says that annuitants must not be lumped
together with other policy holders. These are the people who have
really suffered the losses and it should not be a broad brush
Ms Abraham: I do not think it
is a broad brush approach; I think it is an approach which recognises
that individual policy holdersindeed individual annuitantswill
have had different experiences and may have had different losses.
That does not mean that there not categoriesto use the
language that you useof people who were there at a given
time, who made decisions at a key point, who were trapped. People's
circumstances will have been different and I am not saying that
there are x-millions of people all of whom will have a different
result. Actually there will be some people who share experiences
because of the timing of the decisions they made and what was
happening during those periods. I do not think these things are
necessarily either/or, that is what I am saying.
Q13 Chairman: Can you envisage a
scheme that is able to deal with that kind of individual complexity?
Ms Abraham: I think I can, yes.
Q14 Paul Flynn: In 2005
you said, amongst other things, that you did "not believe
that anything would be gained from my further intervention, nor
do I believe I could meet the expectations of policyholders in
terms of the remedies they are seeking. Starting another inquiry
would give `false hope' to policyholders". Equitable Life
policies that are maturing this year, many of them are only a
couple of points behind the values of Standard Life or other companies.
Is it not true that all policies have lost about 50% of their
value in the last 10 years? People writing to us have the impression
that all of that is going to be made up in compensation, losses
made by the changes on the Stock Exchange. Have you given false
hope to those policy holders?
Ms Abraham: No, because my report
does not say that and my report very clearly, I believe, says
something very different to that. I can only think that if people
have taken that from my report, then they have not read it.
Q15 Paul Flynn: Do you read the blogs
on this and the comments being made?
Ms Abraham: No.
Q16 Paul Flynn: Are you familiar
with what is being said on these matters? I think you might find
it instructive of how your approach is being interpreted. Could
I declare a financial interest in this? Like many others in Parliament,
I have a family interest here. Reading through the reportI
must congratulate you on the thoroughness and persuasive way it
is presentedthere is an impression of a kind of Equitable
Life that it is incompetent at best, reckless in many cases, and
behaves in extraordinary ways but the blame is put on those policing
them, the FSA, the GAD and the DTI who are investigating them.
The imperfections in them are the ones that are highlighted. The
actual source of the problem, of the losses made, was almost entirely
the responsibility of Equitable Life originally. How do you separate
the losses made by the stock market and so on from the losses
that have resulted from the numbers of cases of maladministration
you identify? How do you expect any compensation to be worked
out that would be confined to compensating for the government
bodies? Is there not a danger here that the people you put the
blame onwhich happened with the recent pension onesit
always turns out that the Government are the only people who can
pay billions of pounds in compensation. There are no commercial
firms who can do it. We had this with ASW pensions and the other
ones, the burden of blame was placed on the Government in each
Ms Abraham: There are a number
of points there, maybe I can separate them. This may sound trite
but I think it is true; it should not be a surprise that when
I make recommendations for compensation, that I recommend that
it is the government body or the Government that should pay that
compensation because it is my job to investigate government departments.
I do not investigate insurance companies; I do not investigate
local authorities; I do not investigateI have no remit
to do sothe private sector providers. Of course, if I made
recommendations for compensation following a finding of injustice
caused by maladministration, then I am going to make that to the
government body concerned, whether it is the Child Support Agency
or Her Majesty's Revenue and Customs. That is what I do. I think,
though, that there are two further points. You say how do you
work this out, how do you separate out what was going on in the
market generally from what was going on in these individual cases.
The report itself identifies two possible methodologies and that
is all set out. We have talked about relative losses; we make
reference to the way in which the Financial Ombudsman approaches
such cases in mis-selling circumstances and that is all set out
in detail in the report. So there is methodology on offer here
and I am satisfied that that methodology can work. You talked
about the police and who are the perpetrators here, I have not
investigated the Equitable Life Insurance Society and I would
be ultra vires if I did. It comes back to the piecemeal,
fragmented approach to this whole affair and I wish, as I am sure
many others do, that there had been a properly constituted inquiry
which would have looked at all of these circumstances in the round
and been able to take a view on what went wrong, on who was responsible
and, if it were felt appropriate, to recommend appropriate redress.
I did what it is my job to do. I did what people asked me to do
when I consulted on this matter and I investigated the regulator.
I did that because I was the only person who could do that. Therefore
to say, was all of this not down to the Society, really comes
at it from a different end of the telescope, so multi-faceted
in some way. This point about the Society being the author of
its own misfortunes, I really would like to address if I may.
I would like to quote something from Lord Penrose's report because
I think it has been quoted by others but, as is often the case,
it is a partial quote. What Lord Penrose actually said about lessons
for the future (this is on page 745 of his report so we may not
all have got there) is: "principally, the Society was author
of its own misfortunes. Regulatory system failures were secondary
factors. The jurisdiction to adjudicate on regulatory failure
in duty is not mine. Even less is it for me to comment on how
government should respond if it were to acknowledge that there
had been regulatory failure. But it may be appropriate to comment
that the practices of the Society's management could not have
been sustained over a material part of the 1990s had there been
in place an appropriate regulatory structure adapted to the requirements
of a changing industry that happened to manifest themselves in
an extreme form in the case of Equitable Life." To pick up
some of the language that has been used, whether or not Lord Penrose
was saying that Equitable's management were the villains here,
I think he was also saying, if the policein this case the
regulatorshad been doing their job properly they would
have been caught a lot earlier. I am not saying that the Society
were the villains; I have not investigated that. What I have investigatedit
is my job to do sois the regulator and I said that there
were three general consequences of that maladministration, first
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 criticala growing exposure to guarantees, the differential
terminal bonus policyand 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. That is the
dual role. So I may be coming from a different perspective here
than Lord Penrose because the jurisdiction to adjudicate on regulatory
failure is mine in terms of maladministration but I do not think
I am saying anything very different from him.
Q17 Paul Flynn: What effect do you
think your report will have on the future of regulation? Clearly
the errors you pointed out and the problems of the regulators
are very serious ones. Do you think in future we are going to
have regulators who are afraid to do anything, who are going to
be excessively cautious in their decisions because of the possibility
of billions of pounds being demanded in compensation from them,
even when they are investigating the errors of others and making
errors themselves? Do you not think your report, if it does turn
out to be involving compensation of £4 or £5 billion,
is likely to damage the whole future of regulation?
Ms Abraham: I would like to think
it would have the opposite effect. At one point in this investigation
when we were thinking about what we would call this report we
had a working title of The Reluctant Regulator and at the
end of the day that seemed a bit flippant. In fact in the latter
stages the regulator was anything but reluctant as the report
has said. However, it seems to me that actually what this report
argues forif it argues for anythingis more effective,
stronger regulation which actually means that regulators know
and understand their duties, know and understand their powers,
know when they should consider using those powers and use them
when it is appropriate to do so.
Q18 Chairman: I do not think you
have quite answered Paul in that first question because what he
was askingand it goes to the heart of all thiswas
that, knowing all this, how do you isolate out that component
of responsibilityknowing that the stock market was responsible,
knowing about the incompetence and duplicity of the companythat
you describe as regulatory failure and therefore should trigger
compensation? I do not think you have explained how you can work
out the quantum of responsibility that kicks in because of regulatory
Ms Abraham: I will say again,
I have not investigated the other players here; I have investigated
the bodies in jurisdiction. I have looked at what their duties
were in law and I have looked at what they did and did not do
against the regulatory framework which was put in place by Parliament
to deliver the outcomes that it stated it would do. If you ask
me how do you separate out what was going on in the industry as
a whole by taking an individual and saying that if that money
had been invested in a comparable fund with an average competitor
over that period, then I can separate out the difference that
was going because of being involved with Equitable. That is what
the report sets out a methodology to do. I think what you are
asking me to do is a sort of contributory negligence equation.
Q19 Chairman: Unless you know how
you are going to determine that share of responsibility you cannot
begin to devise any kind of redress system can you?
Ms Abraham: I am not sure I see
it that way. I think that the regulators were there with a job
to do. I will say again, I have not investigated this side of
1 1 Public Administration Select Committee, oral and
written evidence, The work of the Ombudsman 2007-08, Session
2007-08, HC 1144-i. Back
Note from witness: although an accurate reflection of the question,
this was in fact said in 2003 Back