Equitable Life - Public Administration Committee Contents


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;

    — Make payments.

    — 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;

    — Make payments.

  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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