Written evidence from Sir John Chadwick
Thank you for your letter.
The approach which led me to give the advice
contained in my Advice to Government—and the reasons which
for that approach—are, I think, fully set out in the document
itself. It would not be appropriate for me to add to, or detract
from, that Advice. Nevertheless, within that constraint, I will
come before the Select Committee (as you request) in order to
give such assistance as I can.
You ask me to set out the specific matters on
which I disagree with the views expressed by the Parliamentary
Ombudsman in the Report on her investigation into the prudential
regulation of Equitable Life. The Advice identifies three principal
areas in which our respective views differ. Those are: (i) the
extent to which the Society's published regulatory returns in
respect of the years 1990 to 2000 would have differed if regulatory
maladministration had not occurred; (ii) the effect which the
different information which would have appeared in those regulatory
returns (absent maladministration) would have had on decisions
made by policyholders; and (iii) whether it would be practicable
to operate a payment scheme which required policyholders to establish,
on an individual basis, that they relied (directly or indirectly)
on the Society's published regulatory returns.
The reasons why we differ can be found in the
Advice. In summary:
(i) There are, I think, two principal reasons
why we have taken different views as to the extent to which the
Society's published regulatory returns in respect of the years
1990 to 2000 would have differed if regulatory maladministration
had not occurred. First, the Terms of Reference under which I
was appointed to advise the Government required me to disregard
those of the Ombudsman's findings of maladministration and injustice
which the Government did not accept. The effect of that requirement
was that the Ombudsman reached her conclusions on the basis of
findings of maladministration which were more extensive than those
on which I based my advice. Second, it was not within the Ombudsman's
remit to consider—and there is nothing in the Report to
suggest that she did consider—how Equitable Life and its
management would have reacted to the concerns that would have
been raised by GAD and the prudential regulator if the maladministration
which she identified had not occurred. My Terms of Reference,
by contrast, required me to consider what steps would have been
taken by the Society in response to those concerns and to take
those steps into account in advising as to the information that
would have been likely to have appeared in the published regulatory
returns.
In particular, I was asked to advise as to the
extent to which the regulatory returns in respect of the years
1990 to 1996 would have been different if the maladministration
accepted by the Government had not occurred (Annex A, at pages
210-211 of my Advice; and see paragraph 3.2 of my Advice). For
the reasons explained in my Advice (in particular, at paragraphs
2.68 to 2.77 and 3.5) I took the view that I should extend that
enquiry to the regulatory returns in respect of the years 1997
to 2000.
In addressing the question "to what extent
would the regulatory returns for the years 1990 to 2000 have been
different if the maladministration which is the subject of the
Ombudsman's second, fourth, fifth and sixth Findings had not occurred",
I sought advice from actuaries, Towers Watson. The advice which
I received is found in Section 4 of the report appended to my
Advice to Government. I sought advice from a panel of independent
actuaries with experience in the management of United Kingdom
life companies on the question whether the assumptions which Towers
Watson had made in reaching the conclusions in Section 4 of their
report were reasonable in the circumstances. The report of that
panel can be found at Annex C to my Advice.
(ii) The difference of view as to what information
would have appeared in the Society's regulatory returns (absent
maladministration) gives rise to the difference of view as to
the effect which such information would have had on decisions
made by policyholders: in particular, on decisions whether to
invest, or remain invested, in Equitable Life policies. The Ombudsman
has taken the view—expressed in her letter dated 20 August
2009 (to which reference is made in paragraphs 7.42 to 7.47 of
the Advice—that "absent the serial maladministration
… from July 1991 onwards, no reasonable investor would have
joined or remained with Equitable Life throughout that period—going
instead to another life insurance company." For the reasons
which I have set out in Part 7 of the Advice, I have found it
impossible to accept that view.
(iii) Paragraphs 5.25 to 5.29 of the Advice set
out the reasons why I have taken the view that a payment scheme
based on the need to establish, on an individual basis, that a
policyholder relied on the Society's regulatory returns must be
seen as unacceptable in practice. It was that view which led me
to consider (in Part 6 of the Advice) how losses could be assessed
on some other basis (not involving the need for each individual
claimant to establish reliance). That was a question which the
Ombudsman did not find it necessary to address.
You have asked for my views as to the Ombudsman's
concern that I have misinterpreted central parts of the conclusions
in her Report. In Part 2 of the Advice 1 have set out—at
some length—an analysis of all the Ombudsman's findings
of maladministration and injustice (including those findings which
the Government has not accepted). There is nothing in the Ombudsman's
letter of 26 July 2010 from which I can identify those of her
findings which I am said to have misinterpreted.
It may be that her concern relates to my rejection
of the view which she expressed, not in her Report, but in her
subsequent letter of 20 August 2009. I have explained, at paragraphs
7.42 to 7.46 of the Advice—and, at greater length, at Annex
H to the Advice—why I have found it impossible to give weight
to that view. Put shortly, I am satisfied that that view is not
consistent with the findings of maladministration which the Ombudsman
made in her Report; is not consistent with the findings of maladministration
and injustice which the Government accepted: and is difficult
to reconcile with the approach the Ombudsman herself took to the
evidence before the Select Committee in late 2008 and early 2009.
As I have said, the Government did not accept
all of the findings which the Ombudsman made in the Report which
she laid before Parliament in July 2008. Nor did it accept her
recommendations as to the basis of a compensation scheme. My Terms
of Reference were first set out as Annex A to the Government's
Response (Cm 7538) to the Ombudsman's Report. In her subsequent
Report "Injustice unremedied: the Government's response on
Equitable Life" (5 May 2009) the Ombudsman expressed the
view (at paragraphs 64 and 72) that, whatever the outcome of my
work, the proposal made by the Government in its Response would
fail to provide a remedy for the injustice which she had identified.
Given that view of my Terms of Reference, it is, perhaps, unsurprising
that the Ombudsman has concluded that my Advice provides an "unsafe
and unsound basis on which to proceed".
The Ombudsman and I have exchanged correspondence;
and have met to discuss issues arising in relation to my task.
That correspondence can be found in the volumes of Supplementary
Material appended to my Advice: in particular at Sections IID,
IVC, and XIIA. It can be seen from the letters dated respectively
25 February and 1 March 2010 (at Section XIIA of the Supplementary
Material) that the Ombudsman—for reasons which I accept—was
not willing to provide to me a copy of the advice which she had
received from her actuarial adviser, Mr Leandro FIA, and on which,
it seems, she based her conclusions as to the extent to which
the Society's published regulatory returns would have differed
if the maladministration which she identified had not occurred.
Without sight of that advice there was, as it seemed to me, little
or no prospect that our difference of view on that important issue—or
on the related issue as to the effect that different information
in the regulatory returns would have had on policyholders' decisions—could
be resolved.
I have not met the Parliamentary Ombudsman since
delivering my Advice to Government on 16 July 2010. I have taken
the view that my role in relation to Equitable Life ended with
the completion of the task which I was appointed to undertake.
September 2010
|
