Written evidence from the Parliamentary
and Health Service Ombudsman
EQUITABLE LIFE
Thank you for your recent letter inviting me
to come before the Committee to explain why I disagree with Sir
John Chadwick's proposals for the payment of compensation to Equitable
Life policyholders. I would be happy to do that and I understand
that we have now agreed a date of 14 October.
In your letter you ask me to address a number
of questions in advance of that session. This letter and the enclosed
paper are my response to those questions.
You ask why I disagree with the Chadwick proposals;
why I consider they are not the correct basis on which the Government
can meet my recommendations and make fair and transparent payments;
and to what extent I have sought to resolve my concerns about
the proposals with Sir John and the Treasury. You ask whether
I have sought to meet Sir John Chadwick to that end.
First, as I hope this letter and the enclosed
paper will make clear, I do not see that there is anything to
be gained by a meeting between me and Sir John. In any event Sir
John has made it clear to me that he does not see himself as having
a continuing role in these matters. When I wrote to Members on
26 July 2010 I sent Sir John a copy of my letter for information.
I enclose a copy of his reply.[1]
As you will see, Sir John says that, having delivered his Advice
to Government, "his task is now complete".
Secondly, as you know, I met the Financial Secretary
to the Treasury and his officials on 13 September to explain my
concerns about the Chadwick proposals. You have seen my letter
of 9 September to Mark Hoban, together with the paper enclosed
with that letter entitled, Implementing the Ombudsman's recommendation
for compensation for Equitable Life policy holders, which
sets out my concerns in some detail.
I also recently met and had a useful preliminary
discussion with Brian Pomeroy and his colleagues on the independent
commission set up to advise the Government on the design of the
compensation scheme.
That brings me to your key question: the reasons
for my disagreement with the Chadwick proposals and why I consider
they are not the correct basis on which to implement my recommendation.
In the enclosed paper I have tried to summarise,
as concisely as possible, the findings of my report and its recommendations,
the previous Government's response to my report, and the new Government's
approach as I understand it. I then explain the differences between
Sir John's approach and my own and why they are irreconcilable.
Finally, I set out what I believe now needs to happen to enable
the Government to honour its commitment to pay fair compensation
to Equitable Life policyholders, in accordance with the recommendation
in my report of July 2008.
I know that there is a lot of material to digest
here. Essentially, I think the key points are these:
— Sir John's terms of reference required
him to start from a different place, ie the previous Government's
response to my report rather than the report itself. The basis
for his advice, therefore, was not all the findings of maladministration
and injustice that I made, only those findings accepted by the
previous Government. As you know, the previous Government rejected
some of my findings, and qualified or reinterpreted others.
— Sir John's advice is predicated on a
rejection of my central recommendation for redress. I recommended
compensation to all policyholders who had suffered relative loss
as a consequence of regulatory failure. Sir John was asked to
propose limited compensation only for those people "disproportionately
affected" by the maladministration the previous Government
accepted had occurred.
— Sir John took a different view to me
about what would have happened if the maladministration had not
occurred. My recommendation for redress was based on the view
that, if the regulators had been doing their job properly and
information about the real state of Equitable Life had been in
the public domain as it should have been, people would not have
decided to invest, or add to existing investments. Sir John thought
otherwise.
— The provisional figure of between £4
and £4.8 billion for total relative losses sustained, as
calculated by actuaries, Towers Watson, appears credible. It is
broadly consistent with the amounts claimed by those who complained
to me and which informed the representations I received while
finalising my July 2008 report.
— I said in my July 2008 report that, "the
public interest is a relevant consideration and that it is appropriate
to consider the potential impact on the public purse of any payment
of compensation in this case".
— My approach to compensation involves
three steps:
— Determine the total figure for relative
losses sustained;
— Consider wider questions of affordability;
— Sir John's approach to compensation involves
five steps:
— Determine the total figure for relative
losses sustained;
— Cap the total figure for loss at a lower
amount for "absolute loss".
— Reduce the capped figure further to either
20% or 25% of absolute loss—reflecting Sir John's view of
what would have happened if the maladministration had not occurred.
— Consider wider questions of affordability;
Put simply, Sir John's Advice to Government
starts from a different place to my report, proceeds on a different
basis, takes a different view on what would have happened in the
absence of regulatory failure, takes a narrower approach to redress,
and a very different approach to the calculation of compensation.
It is for these reasons that I have described the Chadwick proposals
as an unsafe and unsound basis on which to proceed.
As I understand it, the new Government has accepted
all of my findings of maladministration and injustice. In its
publication, The Coalition: our programme for Government, it made
a commitment to implement my recommendation to make fair and transparent
payments to compensate Equitable Life policyholders, through an
independent payment scheme, for their relative loss as a consequence
of regulatory failure. I very much welcome that commitment. It
is clear, however, that Sir John's proposals are not compatible
with delivering it.
September 2010
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