Background to efforts to secure fair compensation
Here you will find information about the Ombudsman’s role in the Equitable Life affair, along with a summary of her findings and the recommendations made. You will also find a summary of the key events since publication of her report, including the decisions taken by the former and current Governments as to compensation and the role played by Parliament in holding the Government to account for those decisions.
- What is Equitable Life?
- The role of the Ombudsman
- The Ombudsman’s investigations and recommendations
- The Governments’ responses
- The Ombudsman’s view
- The role of the Public Administration Select Committee
What is Equitable Life?
Equitable Life was founded in 1762 and is generally thought to be the oldest surviving mutual life assurance company in the world. In the 1990s the company found it increasingly difficult to meet the guarantees it had given to its policyholders. The company introduced a differential terminal bonus policy to address the issue but was forced to honour certain guarantees in full by a ruling of the House of Lords in July 2000. The ruling, along with a number of other factors, meant that the financial position of the company was particularly weak and so it attempted to sell the business to obtain capital support. Having failed to find a buyer for its business, Equitable Life closed to new business in December 2000.
Since then, the values of Equitable Life policies have been cut significantly and the pensions paid out by the company have been reduced repeatedly, leaving policyholders with significant financial losses.
Following Equitable Life’s closure to new business, there have been a number of reviews, inquiries, complaints and litigation which, separately, looked at the actions of the various parties involved in the affair (which included the company, its former directors and actuaries, the auditors and the regulators). Despite the large number of reviews into the affair, few were capable of, or directed at, determining fault and obtaining compensation for policyholders and people receiving an annuity from the company.
The role of the Ombudsman
The Parliamentary and Health Service Ombudsman exists to provide a service to the public by undertaking independent investigations into complaints that government departments, a range of other public bodies in the UK, and the NHS in England have not acted properly or fairly or have provided a poor service.
The Ombudsman aims to bring benefits to the wider public through influencing improvements in public services and informing public policy. You can find out more about the Ombudsman’s role here.
Throughout the Equitable Life affair, the Ombudsman’s involvement has been limited to investigating the actions of the prudential regulators of Equitable Life in the period prior to 1 December 2001. After that point the regulatory regime changed and legal responsibility for financial regulation was transferred to the Financial Services Authority (FSA). The Ombudsman has no power to investigate the actions of the FSA after that date, nor does she, or has she ever had, the power to investigate the actions of the conduct of business regulator (which oversaw the sale of policies and annuities) or the company itself.
The Ombudsman's investigations and recomendations
The Ombudsman first began to receive complaints about the regulation of Equitable Life in January 2001. Following the publication of an internal FSA report later that year, the previous Ombudsman decided to carry out an investigation which was limited to examining events that took place between 1 January 1999 and 8 December 2000. The report of that investigation was published in June 2003 (The Prudential Regulation of Equitable Life).
Following the completion of the Penrose Inquiry (which had been established by the Government to enquire into the circumstances leading to the situation at Equitable Life), the Ombudsman conducted a consultation on whether, given the limits to her remit and the subject matter of the complaints, she should conduct a further investigation. The results of that consultation and the reasons why the Ombudsman had decided to conduct a second investigation were published in July 2004 (A Further Investigation of the Prudential Regulation of Equitable Life?).
In July 2004 the Ombudsman launched this second, more comprehensive investigation into the actions of the public bodies responsible for the regulation of Equitable Life. This was followed by an extension of her jurisdiction to bring the Government Actuary’s Department within her remit.
The report of this investigation, Equitable Life: a decade of regulatory failure, was published in July 2008. The report made ten individual findings of maladministration and upheld the general complaint that the regulators had failed for more than a decade to exercise their functions properly and that this ‘serial regulatory failure’ had led to injustice to Equitable Life policyholders and annuitants. The report found that policyholders and annuitants had suffered financial loss, lost opportunities to make informed savings and investment decisions, and a justifiable sense of outrage.
The Ombudsman’s report made two recommendations:
- that, in recognition of the justifiable sense of outrage that those who had complained to her feel about the maladministration in the form of serial regulatory failure identified in her report, the Government should apologise for that failure; and
- 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 her report and providing appropriate compensation.
The Ombudsman recommended that the compensation scheme should aim to restore anyone who had suffered a greater loss, relative to that which they would have suffered had they invested in a comparable scheme elsewhere, to the position they would have been in had they invested elsewhere.
The Ombudsman also recognised, however, that it would be legitimate to take into account the public interest and the potential impact of any compensation on the public purse when deciding the level of compensation payments. The report emphasised that this decision would be a matter for Parliament and Government, not the Ombudsman.
The Government's responses
In January 2009 the former Government apologised to policyholders but rejected the Ombudsman’s recommendation that compensation for relative losses should be paid. Instead, Sir John Chadwick was asked to develop proposals for a limited scheme to make ex gratia payments only to those most ‘disproportionately’ affected by the Equitable Life affair. Sir John’s terms of reference reflected the fact that the Government had rejected many of the Ombudsman’s findings of maladministration and injustice.
In response to the Government’s approach, the Ombudsman published a follow-up report, Injustice Unremedied: The Government’s response on Equitable Life in May 2009, which informed Parliament that the Government’s response to her report meant that no adequate remedy for the injustice suffered by policyholders would be forthcoming.
A new Coalition Government was elected prior to the publication of the Chadwick Report. The Coalition’s programme, reflecting earlier manifesto commitments of both coalition parties, committed the new Government to implementing the 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 Chadwick Report
was published in July 2010. The Report included a provisional estimate of the relative losses of Equitable Life policyholders in the range of £4-4.8 billion.
With regard to the amount of compensation that should be paid, Sir John recommended that compensation should be capped at the ‘absolute loss’ which had been suffered. A further reduction was proposed to reflect Sir John’s assessment of what policyholders would have done had there been no regulatory failure. The Report concluded that compensation should be paid for only 20-25% of the loss suffered by policyholders.
The new Government said that it would consider Sir John’s advice and representations by interested parties before making an announcement, as part of the Comprehensive Spending Review in October 2010.
On 20 October 2010, the Government announced as part of its Spending Review, that it will make available £1.5 billion for the compensation of Equitable Life policyholders. The Government confirmed that it accepted the Ombudsman's findings in full.
The Government has also appointed an Independent Commission on Equitable Life Payments and asked the commission to reach a conclusion on the design of the compensation scheme by the end of January 2011. The first compensation payments began to be made in June 2011.
The Ombudsman’s view
The Ombudsman wrote a letter to all MPs
(36kb) in July 2010. She welcomed the appointment of an independent commission, the calculation of relative loss and the clear timetable set out, but highlighted her concerns about the approach to redress contained in the Chadwick Report. The Ombudsman said that the Report would be an unsafe and unsound basis on which to implement her recommendation because it:
- started from a different place to her report,
- proceeded on a different basis,
- took a different view on what would have happened had there been no regulatory failure,
- took a narrower approach to redress, and
- took a very different approach to the calculation of compensation.
The Ombudsman’s recommendation remains that all Equitable Life policyholders should be compensated for any relative loss they have suffered. The Ombudsman has not qualified that recommendation in any way beyond recognising that Parliament should decide how to balance fairness to policyholders with the impact that paying compensation would have on the public purse.
The Ombudsman says that fair compensation would require the following key steps:
- determining relative loss, using an appropriate comparator to measure the ‘gap’ between the performance of the comparator and that of Equitable Life
- deciding what compensation should be paid, with due regard to the wider question of affordability; and
- paying all eligible policyholders.
The role of the Public Administration Select Committee
The role of the Public Administration Select Committee (PASC) is to examine the quality and standards of administration within the Civil Service and to scrutinise the reports of the Ombudsman.
In the previous Parliament, PASC looked into the former Government’s response to the Ombudsman’s report and published two reports - Justice Delayed (pdf) and Justice Denied? - that were critical of the Government.
In the current Parliament, PASC has conducted a further inquiry, looking at the Government’s proposals about how compensation would be taken forward. As part of its inquiry, the Ombudsman gave evidence and submitted a Memorandum to PASC outlining her views on what is required to secure fair compensation. PASC published its report on 15 October 2010.
The report welcomes the fact that the Government accepts all ten findings of maladministration made by the Ombudsman and highlights that PASC agrees with the Ombudsman that Sir John Chadwick’s approach would be an unsafe and unsound basis on which to proceed.
