Equitable Life - Public Administration Committee Contents


Written evidence from Equitable Life Assurance Society

1.  INTRODUCTION

  1.1  We welcome the opportunity to submit written evidence to the Public Administration Select Committee inquiry. The inquiry is an important and timely contribution to the ongoing process of getting a fair resolution for policyholders.

2.  EXECUTIVE SUMMARY

  2.1  Sir John Chadwick's advice has no place in Government's decision on payments to Equitable Life policyholders which resulted from maladministration and regulatory failure.

  2.2  The Parliamentary Ombudsman recommended that the Government should establish and fund a compensation scheme to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.

  2.3  The Coalition Government committed to implement the Ombudsman's recommendations.

  2.4  It is entirely proper that the Board of Equitable Life, our policyholders and their MPs rely on the clearly expressed views of the Parliamentary Ombudsman.

  2.5  The Ombudsman has said that Sir John Chadwick's approach cannot provide a basis for her recommendation and that his proposals are unsafe and unsound.

  2.6  Despite the Coalition Government's commitment to implement the Ombudsman's recommendation and despite the Ombudsman's condemnation of Sir John Chadwick's advice, the Coalition Government has repeatedly given Sir John's advice substantive credence.

  2.7  Relative loss should be based on the Parliamentary Ombudsman's approach and only her approach.

  2.8  Towers Watson estimated an "Aggregated Stage 2 Loss" of £4 billion to £4.8 billion which matches most closely the relative loss described by the Ombudsman.

  2.9  In regard to policyholders who should be included in the scheme, the Ombudsman has made it clear that the right approach is to treat all investors as having left Equitable Life and invested elsewhere.

  2.10  We acknowledge the Parliamentary Ombudsman's statement that it is appropriate to consider the impact of compensation on the public purse. What we do not accept is that there should be any other rationale for a haircut and, in particular, one resulting from Sir John Chadwick's advice so condemned by the Ombudsman.

3.  GOVERNMENT'S COMMITMENT

  3.1  In the Opposition Day Debate on 21 October 2009, Mark Hoban MP said: "Conservative Members have been clear throughout this process. We have said that if the Ombudsman found that there was maladministration owing to regulatory failure and that compensation was required, we would accept those findings. That was our position while we campaigned for the Ombudsman to be allowed a second investigation, that was our position when the Ombudsman published her report last year, and that is our position today." The statement was made when Minister Hoban formed part of the Conservative opposition. He went on to say "We have been clear in our support for the Ombudsman's recommendations. That is our position today and would be our position if elected at the next general election."

  3.2  The Coalition Government committed to "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." (The Coalition: Our programme for Government)

  3.3  On 22 July 2010, the Financial Secretary to the Treasury, Mark Hoban, stated to Parliament, "We are committed to implementing the Parliamentary Ombudsman's recommendation".

  3.4  We believe these commitments to have the effect that the payment scheme proposed will implement the Parliamentary Ombudsman's recommendation in full.

  3.5  It is entirely proper, therefore, that the Board of Equitable Life, our policyholders and their MPs rely on the clearly expressed views of the Parliamentary Ombudsman.

4.  PARLIAMENTARY OMBUDSMAN

  4.1.1  In the Parliamentary Ombudsman's 2008 report, she set out that: "My second—and central—recommendation is that the Government should establish and fund a compensation scheme, with a view to assessing the individual cases of those who have been affected by the events covered in this report and providing appropriate compensation." (9.27)

  4.1.2  In regard to the necessity of assessing individual cases, the Ombudsman's letter of 20 August 2009 to Sir John Chadwick said "I do not share your view that the tribunal I recommended should be established would have needed to seek to examine each finding I made in isolation in the way envisaged in the Government's response to my report and in your Proposals document". She went on to say "any limitations that you might feel constrained to impose regarding eligibility for the payments to be made to those affected by the Equitable Life affair do not derive from the nature of my findings and recommendations."

  4.2.1  In regard to quantum of loss, the Ombudsman's report went on to say that: "The aim of such a scheme should be to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred." (9.28)

  4.2.2  In regard to relative loss, the Ombudsman's report described it as "a loss that they would not have suffered had they saved or invested elsewhere" (1/14/33).

  4.2.3  Both policyholders and taxpayers alike will understand the concept of relative loss described by the Ombudsman so there needs to be a mechanism to calculate the loss that is consistent with the Ombudsman's recommendation.

  4.2.4  In their letter of 21 July 2010 to the Financial Secretary to the Treasury, Towers Watson provided an estimate of "Aggregated Stage 2 Loss" of £4 billion to £4.8 billion, defined as "the difference between the payout which would have been received … in respect of a comparable product offered by an alternative provider and the payout which has actually been received …, in respect of the Equitable Life policy". This seems to match most closely the relative loss described by the Parliamentary Ombudsman. While, we would expect the Towers Watson figure to need adjustment to reflect fully the Ombudsman's description of relative loss, we do not believe that this would involve major additional work.

  4.2.5  Relative loss should be based on the Parliamentary Ombudsman's approach and only her approach.

  4.3.1  In regard to policyholders who should be included, the Ombudsman said in her letter to Sir John of 20 August 2009 "In essence, the view expressed in my report is that, absent the serial maladministration I had determined occurred 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."

  4.3.2  Therefore, we think the right approach is to treat all investors as having left Equitable Life and invested elsewhere.

  4.4  The Ombudsman has been clear a) in her recommendation, b) in her definition of relative loss, and c) in her identification of policyholders who would have left, or not joined Equitable Life. These stand in their own right for implementation by Government.

5.  SIR JOHN CHADWICK'S REPORT

  5.1.1  In January 2009, Sir John Chadwick was commissioned to advise the previous Government. The terms of reference on which Sir John Chadwick's work is based were limited by the previous Government's rejections of some of the Ombudsman's findings.

  5.1.2  Sir John says in section 4.24 of his 2010 report "Advice to Government in relation to the proposed Equitable Life payment scheme" that the then Labour Government "decided not to accept that it would be appropriate to establish a compensation scheme in the way the Ombudsman had recommended. I have not been asked to advise how compensation under such a scheme would be awarded; and I have not been asked to advise as to whether it would be appropriate to make payments in respect of lost opportunities".

  5.1.3  Sir John goes on to say, in section 4.25 of his advice, that "I have reached the conclusion that the approach was not what the Ombudsman had in mind".

  5.2  In her letter to Members of Parliament of 26 July 2010, the Ombudsman explains that "In the light of the new Government's commitment to implement that recommendation in full, the approach embodied in the Chadwick report … cannot provide a basis for the implementation of my recommendation."

  5.3  The Ombudsman went on to say that Sir John's proposals "if acted upon, would not in any sense enable fair and transparent compensation to be delivered." Then, most importantly, she asserted that the Chadwick report "misinterprets central parts of the conclusions outlined in my July 2008 report and has ignored others". She goes on to state that "the Chadwick proposals seem to me to be an unsafe and unsound basis on which to proceed."

  5.4  Given the Parliamentary Ombudsman's condemnation, we do not consider it necessary to address the report by Sir John Chadwick. As we said in 3.5 above, it is entirely proper that the Board of Equitable Life rely on the clearly expressed views of the Parliamentary Ombudsman, precisely because the Coalition Government itself is committed to implementing the Parliamentary Ombudsman's recommendation.

  5.5   Sir John Chadwick's advice has no place in Government's decision on payments to Equitable Life policyholders which resulted from maladministration and regulatory failure.

6.  AMBIGUITY OF INTENT

  6.1  Despite the Coalition Government's commitment to implement the Ombudsman's recommendation and despite the Ombudsman's condemnation of Sir John Chadwick's advice, the Coalition Government has repeatedly given Sir John Chadwick's advice substantive credence.

  6.2  Steve Webb MP, Minister of State for Pensions, said in Parliament on 14 June 2010: "The hon. Gentleman will know that Sir John Chadwick will produce his report in July. I understand from discussions with the Treasury that a compensation package will be produced on the basis of that".

  6.3  On 26 June, Mark Hoban gave a written answer to Phil Woolas MP saying "Sir John Chadwick is advising the Treasury on the relative losses suffered by Equitable Life policyholders in relation to those accepted cases of maladministration resulting in injustice." The expression "accepted cases of maladministration" is and only is relevant under Sir John's advice. It is specifically not relevant to the Parliamentary Ombudsman's recommendation, the recommendation that the Government signed up to.

  6.4  On 22 July, Mark Hoban said "… Sir John's review is just one of the building blocks in resolving what is a complex matter…." We have not been made aware of any other building blocks, and the only one the Government refers to is the one which the Ombudsman described as "unsafe and unsound", the same Ombudsman whose recommendation that Coalition Government signed up to.

  6.5  On 8 September, the Deputy Prime minister said "… we are absolutely committed to bringing justice to the Equitable Life policyholders. These people were shamelessly, shamefully betrayed year after year by the previous Government. We have published a Bill on this, we have taken the recommendations from Sir John Chadwick, which we will consider, and we will create an independent mechanism by which justice is finally provided to the policyholders, who were so shamefully overlooked by the previous Government."

  6.6.1  The terms of reference of the Independent Commission refer to "accepted Government maladministration" in clauses 1 and 6. This effectively extends the limitations of Sir John's work to the Independent Commission.

  6.6.2  As an important aside, we would suggest Clauses 1 and 6 of the terms of reference of the Independent Commission, ought most properly to refer to "relative losses as a result of the maladministration found by the Ombudsman". Minister Hoban has expressed the view to us that this change would require "a new and lengthy period of analysis". We challenge this assertion. Such a change to their terms of reference would still allow the Commission to use Towers Watson's "Aggregated Stage 2 Loss" and their analysis of that, and apply it to implement the Ombudsman's recommendation free from the constraints set by the former Government.

  6.6.3  We also do not accept that the Commission would need to duplicate Sir John's work. Minister Hoban wrote to the Chief Executive of Equitable Life on 5 August 2010 stating that "it is vital that the commission does not unnecessarily duplicate work that has already been carried out" and that "for the commission not to have regard to Sir John's work … would be an error". However, in that letter, he acknowledged that "the calculation of relative loss is the starting point". Towers Watson's work on "Aggregated Stage 2 Loss" is well matched to the Ombudsman's description of relative loss quoted above (see 4.2.2 above) and it does not seem to need the duplication of work which he fears.

  6.7.1  These repeated references to a) Sir John Chadwick's work and b) to the term "accepted Government maladministration" stipulated by the previous Government, imply that the Coalition Government's actions may not be consistent with the commitment to implement the Parliamentary Ombudsman's recommendation.

  6.7.2  Sir John Chadwick's report was developed for the previous Government in a manner inconsistent with the Parliamentary Ombudsman's recommendation. We look to Parliament to support its Ombudsman and hold the new Government to account in delivering the Coalition commitment to implement the Parliamentary Ombudsman's recommendation.

7.  PUBLIC PURSE

  7.1  Minister Hoban has suggested that the Equitable Life has agreed with the principle of adopting a discount to reflect that not all policyholders would have left Equitable Life. This is not correct. We have never agreed this approach. We have consistently argued that such a discount is fundamentally unfair, indeed, wrong. As the PO said "absent the serial maladministration I had determined occurred 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." (see 4.3.1 above)

  7.2  What we do acknowledge is the Parliamentary Ombudsman's statement in her 2008 report. "that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case." What we do not accept is that there is any other rationale for a haircut and, in particular, one resulting from Sir John Chadwick's advice so condemned by the Ombudsman.

  7.3  In respect of the potential impact on the public purse of any payment of compensation, the Ombudsman invited Parliament to consider the issues raised in her report and for Parliament to reflect on what its response to her report should be. The Equitable Life (Payments) Bill does not refer to the amount of compensation, so that amount will not be subject to Parliamentary scrutiny as the Ombudsman intended. Consequently, Parliament needs to find a way to express its view on the amount of compensation.

8.  CONCLUSION

  8.1  Sir John Chadwick's advice has no place in Government's decision on payments to Equitable Life policyholders which resulted from maladministration and regulatory failure.

  8.2  Relative loss should be based on the Parliamentary Ombudsman's approach and only her approach.

  8.3  We acknowledge the Parliamentary Ombudsman's statement that it is appropriate to consider the impact of compensation on the public purse. What we do not accept is that there should be any other rationale for a haircut and, in particular, one resulting from Sir John Chadwick's advice so condemned by the Ombudsman.

October 2010





 
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Prepared 15 October 2010