DELIVERING FAIR COMPENSATION TO EQUITABLE
LIFE POLICYHOLDERS
A paper by the Parliamentary and Health Service
Ombudsman
INTRODUCTION
1. On 20 October 2010, the Government will
announce as part of the Comprehensive Spending Review the amount
which will be made available to fund an independent compensation
scheme for Equitable Life policyholders.
2. The Public Administration Select Committee
is taking evidence on recent developments related to Equitable
Life in advance of that announcement. The purpose of this paper
is to assist the Committee to understand my position regarding
the delivery of fair and transparent compensation.
BACKGROUND
3. Equitable Life was founded in 1762 and
is generally accepted to be the oldest surviving mutual life assurance
company in the world. It closed to new business on 8 December
2000 with immediate effect. Since then, the values of the policies
held by people who had saved or invested with Equitable Life have
been subject to significant cuts and the pensions paid out by
the company have been reduced on a number of occasions. These
cuts and reductions were a reflection of the factors which had
led the company to close.
4. The closure of the company prompted complaints
to be made alleging that there had been significant failures in
regulation which had played a part in the events which led to
the company closing. Following a number of inquiries and reports,
in July 2004 I launched an investigation into the actions of the
public bodies responsible for the prudential regulation of the
company during the period prior to 1 December 2001.
MY REPORT
AND RECOMMENDATIONS
5. On 16 July 2008, I laid before Parliament
the report containing the results of that investigation, entitled
Equitable Life: a decade of regulatory failure. I made
ten individual findings of maladministration and upheld a general
complaint that the regulators failed for considerably longer than
a decade properly to exercise their functions in respect of Equitable
Life.
6. I determined that this "serial
regulatory failure" had led to injustice to those policyholders
who had complained to me. That injustice took the form of financial
loss, lost opportunities to make informed savings and investment
decisions, and a justifiable sense of outrage.
7. In line with my general practice, I made
recommendations which aimed to provide an appropriate remedy to
put right that injustice. Those recommendations were, first, that
the Government should apologise for the maladministration which
had occurred and, secondly, that the Government should establish
and fund an independent compensation scheme with a view to paying
compensation to those affected by the maladministration I had
found had occurred.
8. I recommended that the aim of such a
compensation scheme should be to restore anyone who had suffered
a greater loss, relative to that which they would have suffered
had they invested in a comparable scheme with another company,
to the position they would have been in had they invested in that
other company.
9. In making this recommendation for compensation
to be paid for the relative losses which policyholders had suffered,
I recognised that it raised issues concerning the public interest
and the potential impact that acceptance of the recommendation
to establish a compensation scheme might have on the public purse.
I said that it would be appropriate to take this into account
when deciding how to respond to that recommendation.
10. Decisions as to whether such a compensation
scheme would be in the public interest and as to how public resources
should be spent are matters for Parliament and Government and
not for me. I therefore invited both Parliament and Government
to consider further the issues that were raised by my report and
by my recommendation.
THE PREVIOUS
GOVERNMENT'S
RESPONSE TO
MY REPORT
11. In its January 2009 response to my report,
the previous Government apologised to policyholders but rejected
my recommendation that compensation for relative losses should
be paid. Instead, it commissioned Sir John Chadwick to provide
advice as to the development of a limited scheme to make ex
gratia payments only to those most "disproportionately"
affected by the Equitable Life affair.
12. In producing his advice, Sir John's
Terms of Reference required him to follow the terms of the previous
Government's response to my report. This involved the rejection,
reinterpretation, or qualification of many of my findings of maladministration
and injustice. In particular, he was to "disregard"
those of my findings which the previous Government had not accepted.
13. Judicial review proceedings launched
by the Equitable Members Action Group (EMAG) challenged the legality
of the previous Government's response to my report. The Divisional
Court held that the Government had had no cogent reasons for its
rejection of some of my findings of maladministration. That response
was thus unlawful.
14. As a result of this judgment, Sir John's
terms of reference were amended. Those amended terms of reference
were still predicated on a rejection of my recommendation for
redress and Sir John was still required to proceed on the basis
of that part of the Government's response which had not been ruled
unlawful by the courts.
15. The previous Government's response to
my report was also subject to consideration by the Committee's
predecessor, which published two reports—Justice Delayed
and Justice Denied?—that were critical of that
response.
THE NEW
GOVERNMENT'S
APPROACH
16. With the election of a new Government,
the position changed. In paragraph 23 of The Coalition: our
programme for Government, the new Government said, mirroring
earlier manifesto commitments, that:
We will implement the Parliamentary and Health
Ombudsman's recommendation to make fair and transparent payments
to Equitable Life policy holders, through an independent payment
scheme, for their relative loss as a consequence of regulatory
failure.
17. Legislation has been introduced to provide
authority for the payment of compensation, and an independent
commission has been appointed to advise on the design of a scheme
to make compensation payments within a clear timetable.
THE CHADWICK
REPORT AND
RECENT DEVELOPMENTS
18. The Chadwick Report commissioned by
the previous Government was published in July 2010. This contained
a provisional estimate of the relative losses which had occurred.
These were calculated by Towers Watson, actuaries appointed by
the Treasury to assist Sir John, as being in the range of £4
billion to £4.8 billion. This 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.
On that basis it appears to me to be a credible estimate.
19. In line with his terms of reference,
Sir John also gave advice on the proportion of those losses which
he considered it would be appropriate to apportion to the regulators,
the classes of policyholders which had suffered the greatest impact,
and the factors which should be taken into account when determining
whether "disproportionate impact" had been suffered.
20. In relation to the amount of compensation
that should be made available to policyholders, Sir John recommended
that compensation should be capped at the "absolute loss"
which had been suffered. No such cap was suggested in my report.
21. He also advised that the amount of compensation
should be reduced further to reflect his assessment—which
differed from mine—of what policyholders would have done
had no regulatory failure occurred. This approach resulted in
advice that compensation of 25% of the absolute loss suffered
by with-profits annuitants should be paid, with payments of 20%
of their losses to be made to all other policyholders.
22. Analyses undertaken by Equitable Life
and by the representatives of policyholders have estimated that
the approach embodied in the Chadwick Report would lead to only
10% of relative losses being made good. They have also questioned
many of the assumptions which Sir John made in coming to his advice.
23. In a statement to the House on 22 July
2010, the Financial Secretary to the Treasury explained that the
Government would reflect on Sir John's advice and would listen
to representations by interested parties while further work was
done to produce a final estimate of the relative losses which
had been suffered. That final estimate and the amount to be made
available for compensation to remedy those losses will be announced
on 20 October 2010 as part of the Comprehensive Spending Review.
24. I wrote to all Members of Parliament
on 26 July 2010. I welcomed many of the next steps announced by
the Government and the work being done to calculate the relative
losses sustained by Equitable Life policyholders. However, I also
explained that basing the design or funding of the compensation
scheme on the proposals set out within the Chadwick Report would
not enable fair or transparent compensation to be provided and
could not constitute the implementation of my recommendation.
WHY THE
CHADWICK PROPOSALS
ARE INCOMPATIBLE
WITH IMPLEMENTING
MY RECOMMENDATION
25. I recommended fair compensation to all
Equitable Life policyholders to remedy the relative losses they
have sustained, to be delivered by an independent scheme in a
transparent, simple and speedy manner. As explained above, the
new Government has said that it will implement that recommendation.
26. As I have already explained in my July
2010 letter to Members of Parliament, implementation of my recommendation
cannot be secured through the adoption of the approach embodied
within the Chadwick Report.
27. I will now explain my reasons for taking
this view. My fundamental point is that the approach embodied
within the Chadwick Report has been overtaken by events, given
the commitment by the new Government to implement my recommendation
in full.
28. Sir John, in fulfilling his Terms of
Reference, was undertaking a task that was substantively different
to what is necessary to implement my recommendation. In his own
words, referring in paragraph 7.66 of his Report to my approach
as contrasted with the basis on which he had proceeded, "we
have reached different answers because we have addressed different
questions".
29. The annex to this paper shows the differences
which exist between the approaches embodied respectively within
my report and the Chadwick Report.
30. In addition, the analysis which Sir
John undertook was grounded in a view of my report which is inconsistent
with what my report actually says. This can be illustrated by
three key examples:
— The Chadwick Report proceeds on the basis
that I intended that individuals should only be eligible for compensation
to the extent that they could show that they were covered by each
of the individual findings of maladministration and injustice
and had relied on an individual basis on the regulatory returns.
My recommendation, however, was not qualified
in any such way, and covered all those who had suffered relative
loss.
— The Chadwick Report suggests that I had
recommended that a compensation scheme should be established which
was based on the assessment of each individual transaction made
by every Equitable Life policyholder, seeking to identify specific
losses related to each financial transaction made.
But I have never suggested that this would be
appropriate or practical. It nevertheless became the founding
basis for what Sir John described as my "report-based
approach" to which he devoted a whole section of his
advice.
— The Chadwick Report contends that I had
rejected the approach embodied by submissions made by EMAG and
others as to how to design a compensation scheme.
In fact, I left open the best way to design a
compensation scheme—neither endorsing nor rejecting any
of the various possible approaches—leaving the determination
of this question as a matter for the independent commission to
do openly and taking into account the views of stakeholders.
31. In summary, Sir John's Advice to Government
misunderstands and misinterprets my report in a number of important
respects; starts from a different place to my report as a result
of the very different basis on which it was commissioned; 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 consider the Chadwick
proposals to be an unsafe and unsound basis on which to proceed.
THE STEPS
REQUIRED TO
IMPLEMENT MY
RECOMMENDATION
32. My recommendation was that compensation
should be paid to all Equitable Life policyholders for any relative
loss they have sustained. I did not qualify that recommendation
in any way beyond recognising that Parliament had to decide how
to balance fairness to policyholders with the impact that paying
compensation would have on the public purse.
33. Implementing my recommendation through
the provision of fair compensation would require the following
steps to be undertaken in an open and transparent manner:
— First, determining relative losses—through
the identification of an appropriate comparator or comparators
against which to judge the relative performance of Equitable Life
and by then measuring the "gap" between the performance
of this comparator or comparators and the performance of Equitable
Life in relation to the different classes of policy or annuity.
A provisional estimate of £4 to £4.8
billion has been calculated by Towers Watson, the actuaries appointed
by the Treasury to assist Sir John.
— Secondly, deciding what compensation
should be paid—by setting out what percentage of relative
loss should be made good in order to balance fairness to policyholders
with the effects of the provision of compensation on the public
purse.
This is under consideration as part of the Government's
Comprehensive Spending Review.
— Finally, paying each eligible policyholder—using
whatever formula results from the above steps and the data which
the Government now has about the affected policyholders.
An independent commission has been appointed
to recommend to Government how best to fairly allocate the funds
provided following the Comprehensive Spending Review.
CONCLUSION
34. I very much welcome the new Government's
acceptance of my findings of maladministration and injustice and
its commitment to implement my recommendation to compensate Equitable
Life policyholders for their relative loss as a consequence of
serial regulatory failure. It is clear, however that the Chadwick
proposals are not compatible with delivering that commitment.
35. I will be happy to assist the Committee
in its consideration of these issues.
THE OMBUDSMAN'S RECOMMENDATION AND THE CHADWICK
REPORT
| The Ombudsman's approach
| The Chadwick approach |
Starting point | The Ombudsman's report.
| The former Government's response to the Ombudsman's report.
|
| Basis | All the findings of maladministration and injustice set out in the Ombudsman's report.
| Only those findings accepted by the former Government—some rejected, others qualified or reinterpreted, some ignored.
|
| Redress | The Ombudsman's recommendation.
Compensation to all policyholders for the relative losses they have suffered—this would be fair and reasonable in the circumstances of the case and would address all of the different forms of injustice which had resulted from all of the many types of maladministration which had occurred.
| Rejection of the Ombudsman's recommendation.
Limited ex gratia payments to be made only to those "disproportionately affected" by the maladministration which the former Government accepted had occurred.
|
| Approach to compensation | (1) determine relative losses sustained
(2) consider wider questions of affordability
(3) pay all claims
| (1) determine relative losses sustained
(2) cap loss figure at a lower figure for "absolute loss"
(3) reduce capped figure to either 20 or 25% of loss (reflecting assumptions about what would have happened had no regulatory failure occurred)
(4) consider wider questions of affordability
(5) pay claims
|
| |
|
| 
