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 secondand centralrecommendation
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 periodgoing
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 periodgoing 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
|