Justice delayed: The Ombudsman's report on Equitable Life - Public Administration Committee Contents


Examination of Witnesses (Question Numbers 1-19)

MS ANN ABRAHAM, MR BILL RICHARDSON AND MR IAIN OGILVIE

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[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 ways—in 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 with—with 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 here—it is explored in the report in some length—about 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 people—not all people—may 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 approach.

  Ms Abraham: I do not think it is a broad brush approach; I think it is an approach which recognises that individual policy holders—indeed individual annuitants—will have had different experiences and may have had different losses. That does not mean that there not categories—to use the language that you use—of 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[2] 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 report—I must congratulate you on the thoroughness and persuasive way it is presented—there 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 on—which happened with the recent pension ones—it 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 case.

  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 investigate—I have no remit to do so—the 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 police—in this case the regulators—had 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 investigated—it is my job to do so—is 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 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. 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 for—if it argues for anything—is 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 asking—and it goes to the heart of all this—was that, knowing all this, how do you isolate out that component of responsibility—knowing that the stock market was responsible, knowing about the incompetence and duplicity of the company—that 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 failure.

  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 it.



1   1 Public Administration Select Committee, oral and written evidence, The work of the Ombudsman 2007-08, Session 2007-08, HC 1144-i. Back

2   Note from witness: although an accurate reflection of the question, this was in fact said in 2003 Back


 
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