Preliminary assessments
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Introduction
1 In this Chapter, I set out some assessments which I have made in respect of disputed questions, concerning not the particular facts relevant to the Society, but what standard of regulation it would be appropriate for me to apply, when considering the actions of those charged with the prudential regulation of insurance companies during the period covered in this report.
2 Those disputed questions, which I address as matters which are preliminary to my findings of fact, relate to the nature of the applicable regulatory regime, what duties were imposed on the prudential regulators and what approach I should adopt when assessing the discharge by those regulators of their powers.
3 This Chapter is structured in the following way:
- in paragraphs 4 to 13, I summarise the key statutory functions – that is, the powers and duties – that were conferred on the prudential regulators of insurance companies. I also summarise the standard which I have applied when considering the discharge by those regulators of their functions;
- in paragraphs 14 to 28, I outline the submissions that I have received on those matters from the public bodies whose actions were subject to complaint, disputing certain aspects of the approach that I proposed to adopt to those questions; and
- in paragraphs 29 to 118, I set out my assessment of those submissions, which deal with:
- the aim and objectives of the regulatory regime, in paragraphs 29 to 47;
- the purpose of the regulatory returns, in paragraphs 48 to 57;
- the duties imposed on the prudential regulators by section 22(5) of the Insurance Companies Act 1982, in paragraphs 58 to 79;
- intervention on the grounds of the protection of PRE, in paragraphs 80 to 86;
- actuarial judgement and the regulatory margin of appreciation, in paragraphs 87 to 109; and
- the application of hindsight, in paragraphs 110 to 118.
The statutory functions of the prudential regulators and the standard of regulation that I have applied
4 In Chapter 5 of this report, I summarised the statutory and administrative framework which was relevant to the actions which have been the subject of the complaints within the terms of reference for the investigation which led to this report. This I did as part of establishing the basis on which I would determine those complaints.
5 I explained that there had been four influences on the regulatory regime which existed at the time covered by this report: the traditional approach within the United Kingdom to insurance regulation, the central place of the actuarial profession within that system of regulation, the introduction of intervention powers in the aftermath of certain high profile insurance company failures in the 1960s and 1970s, and the influence of the United Kingdom’s membership of the European Union and the creation of a Single Market for insurance.
6 I also explained that those influences had created four cornerstones of the specific regulatory regime, which together laid the foundations on which were built the way in which the prudential regulation of life insurance companies was undertaken and the powers, duties and means conferred on those responsible for undertaking that regulation.
- the concept of ‘freedom with publicity’;
- the central role of the Appointed Actuary;
- the protection of the reasonable expectations of both policyholders and potential policyholders; and
- the fulfilment of the criteria of sound and prudent management.
8 Overlaying that specific framework were certain general principles of both good administration and public law, which were applicable to the actions of any public authority.
9 The principles of good administration that I identified as being generally relevant to the complaints which formed the basis for the investigation which led to this report were getting it right and being open and accountable.
10 The principles of public law that I identified as being generally relevant to those complaints were:
- that public bodies must carry out their legal duties in accordance with the law;
- that, where public bodies have a power granted to them, they must properly consider whether to exercise that power; and
- that, when public bodies exercised a power, they must act fairly and reasonably and in accordance with any conditions imposed by law.
11 At the end of Chapter 5 of this report, I summarised the general and specific legal and administrative obligations which I considered that the prudential regulators and/or GAD had at the relevant time.
(i) a specific duty to consider whether the regulatory returns of an insurance company were complete and accurate and to communicate with such a company if those returns appeared to be inaccurate or incomplete in any respect;
(ii) specific duties to consider whether an insurance company valued its assets and determined its liabilities in accordance with the requirements of the applicable Regulations and to verify the solvency position of such a company;
(iii) a general duty to give proper consideration to the use of their powers of intervention where the circumstances had or might have arisen which gave grounds for the use of such powers;
(iv) a general duty to exercise their statutory powers in a right and proper way, in accordance with the presumed intention of the legislature which conferred those powers – in good faith, reasonably, for a proper purpose, and with procedural propriety; and
(v) a general obligation to act in accordance with established principles of good administration - by acting lawfully and in accordance with published and internal policy and guidance, by taking proper account of established good practice, by taking reasonable decisions based on all relevant considerations, by having kept proper and accurate records, and by providing information which was clear, accurate, complete and not misleading.
13 All the above established the standard which I will apply in my consideration and assessment of the facts of this case and of the way in which the prudential regulators and GAD discharged their statutory functions and other obligations.
The submissions of the public bodies
14 In their response to a draft of this report, the public bodies whose actions were the subject of complaint made submissions to me which disputed certain aspects of this approach. There are five important respects in which those bodies disputed my approach.
15 The first relates to the purpose of the regulatory returns submitted by life insurance companies to the prudential regulators and scrutinised by GAD on behalf of those regulators.
16 The second relates to the specific statutory duties imposed on the prudential regulators, pursuant to section 22(5) of the 1982 Act, to consider the returns of an insurance company and, if those returns appeared to be inaccurate or incomplete in any respect, to communicate with the company with a view to the correction of any such inaccuracies and the supply of deficiencies.
17 The third relates to the powers of the prudential regulators to intervene to protect PRE.
18 The fourth relates to a range of reasonable professional judgements on certain questions and the margin of appreciation to be afforded to those responsible for exercising regulatory functions.
19 The fifth relates to whether hindsight is permissible within my assessment of how the prudential regulators and GAD discharged their obligations.
The purpose of the regulatory returns
20 The public bodies whose actions were subject to complaint submitted to me that:
…in forming a view of an insurance company, policyholders, potential policyholders and other parties would generally have given much more consideration to material such as its Companies Act accounts, policy illustrations, bonus notices and With Profits Guides than they would to its returns to the prudential regulator.
The returns were not designed for the purpose of enabling comparative analyses to be made; nor was the information they provided relevant to an assessment of the suitability of an insurance company’s products to investors or potential investors. In contrast to the Companies Act accounts, which were sent to all policyholders, the returns were only available on request.
The duties contained in section 22(5) of the 1982 Act
21 I have been invited by the public bodies whose actions were subject to complaint to conclude that the performance of the statutory duty imposed on the prudential regulators by section 22(5) of the 1982 Act only arose where those regulators considered, acting with the advice and assistance of GAD, that an error in or omission from the returns was material.
22 Three grounds have been advanced for that submission:
- first, it was submitted that, although section 22(5) imposed a duty on the prudential regulators, that section nevertheless afforded those regulators a substantial margin of appreciation. The duty to communicate with the company only arose in circumstances where the returns ‘appear[ed]’ to be inaccurate or incomplete. The section was thus framed in a subjective form, which expressly recognised that any determination of this question involved an exercise of judgement on the part of those bodies to whom responsibility to undertake the prudential regulation of insurance companies had been delegated;
- secondly, it was submitted that, in relation to the words ‘inaccurate or incomplete’, the touchstone of accuracy and completeness was the requirements of the 1982 Act and of the applicable Regulations made under that Act. Accordingly, a company’s regulatory returns could be considered inaccurate or incomplete only if they did not comply with the relevant legislation; and
- finally, it was submitted that section 22(5) did not require the prudential regulators to secure the correction of errors or omissions which were not material. Guidance at the time had set out the prudential regulators’ view, based on legal advice, that the expression ‘inaccurate or incomplete in any respect’ in section 22(5) ought to be interpreted in a common sense way to mean ‘in any material respect’. This approach was said to be supported by well-established principles of statutory construction.
23 The public bodies told me that:
There was no obligation to follow up every point that might arise on the returns. The proper role of GAD and the prudential regulator was to exercise professional regulatory judgement to determine which points were significant in the overall context…
[The] practical application of the regulatory requirements required regulators and actuaries to use judgement in reaching decisions on which issues to pursue and the level of satisfaction needed to resolve issues in the best interests of policyholders. These judgements are necessarily made on the basis of the facts available at the time, not all the knowledge which might be available with the benefit of hindsight.
They were also made, quite properly, on the basis of the regulations, prudential and actuarial guidance, and generally accepted actuarial principles, as they stood at the time.
Intervention on the grounds of PRE
24 I have also been invited by the public bodies whose actions were under investigation to conclude that the powers of intervention conferred on the prudential regulators to intervene in the affairs of an insurance company, in order to protect PRE, were only to be used sparingly and as ‘long-stop’ powers.
25 As can be seen from paragraphs 282 to 286 of the initial response of the public bodies to the complaints, reproduced in Part 4 of this report, I have been invited to conclude that:
… the 1982 Act… made it clear… that powers of intervention on the grounds of PRE were to be extremely limited. In particular, this was spelled out by section 37(6) of the 1982 Act which made it clear that the power to take action for the purpose of protecting PRE under section 45 was a merely residual power, only to be used by the prudential regulator when other powers of intervention could not achieve the necessary goals… from 1994 onwards… the primary responsibility for monitoring PRE was placed on the Appointed Actuary…
Actuarial judgement and the regulatory margin of appreciation
26 The public bodies have submitted that my proposed approach failed sufficiently to recognise the scope for a range of reasonable judgements on the subject matter of the complaints within the terms of reference for the investigation which led to this report.
27 Those bodies have also submitted that my proposed approach failed to allow a sufficient margin of appreciation to the prudential regulators when assessing how the prudential regulation of insurance companies was undertaken at the time covered by this report.
Hindsight
28 The public bodies have submitted that I have been influenced by hindsight, in particular by ‘retrospective actuarial advice’ and by ‘knowledge of subsequent events’.
My assessment of the submissions made by the public bodies
The aims and objectives of the regulatory regime
29 Having considered the submissions that have been made to me on these matters, I am not persuaded by any of those submissions and I am satisfied that the approach that I adopt in this report is appropriate.
30 In my view, those submissions which relate to the purpose of the regulatory returns, to the duties imposed on the regulators, and to intervention on the grounds of the protection of PRE, all take a view as to the aims and objectives of the system of prudential regulation that is inconsistent with the regulatory regime as Parliament created it.
31 Moreover, I consider that the submissions on those matters which have now been made to me are inconsistent with the views expressed by those undertaking prudential regulation or the scrutiny of the regulatory returns at the time covered by my report.
32 I have noted in Chapter 5 of this report that the aim of the system of prudential regulation was to protect the interests of policyholders and potential policyholders. Securing that aim was to be done in such a way as to balance the need to take such action as was necessary to protect those interests, without interfering in the business of insurance companies to such an extent as would stifle competition and prevent innovation, thus harming consumer interests. That this was so does not appear to be a matter of contention.
33 The objectives of prudential regulation were set out in, among other places, the guidance which those regulators produced.
34 The DTI’s Policy Guidance Notes, produced in September 1991, and thus in place when those regulators were considering whether to approve the appointment of the Society’s Appointed Actuary to be also its Chief Executive - and by the time that the scrutiny of the Society’s 1990 returns was being undertaken - set out the objectives of prudential regulation.
35 After stating that the prudential regulators ‘should operate, and be seen to operate, a firm but fair regulatory regime’ and that ‘the message to the public should be that the Department is watching very carefully and is likely to err on the side of caution rather than to adopt a relaxed attitude’, those objectives were said to be:
- in relation to the carrying on of insurance business (Guideline 2.2):
The protection of policyholders and potential policyholders is paramount. - in relation to the power to withdraw authorisation from a company carrying out insurance business (Guideline 2.5):
By withdrawing a company’s authorisation in respect of new business… if we have serious concerns about their solvency position, we would be able to limit the risk to potential policyholders. - in relation to the authorisation of the controllers of insurance companies (Guideline 4.2):
To prevent persons or companies that appear to the Secretary of State not to be ‘fit and proper’ to be controllers of insurance companies from assuming such positions. - in relation to the duties imposed by section 22(5) of the 1982 Act to consider the regulatory returns submitted by insurance companies and to communicate with such a company with a view to the correction of any inaccuracies and the supply of deficiencies (Guideline 5.4):
To secure the correction of material errors and the supply of deficiencies in annual returns… in order that neither the Department nor the public, including shareholders and actual or potential policyholders, form a view of the company based on inaccurate or incomplete information. - in relation to the valuation of a life insurance company’s long-term liabilities (Guideline 6.2):
To be satisfied that the valuation of long-term liabilities is in accordance with the 1981 Regulations and is correctly reported in Schedule 4 (and Schedule 5 where appropriate) of the 1983 Regulations. In addition, to be satisfied that the required margin of solvency is covered at all times and that it appears likely that the company will continue to maintain adequate cover for its solvency margin in the future. - in relation to the general powers of intervention that Parliament conferred on the prudential regulators (Guideline 8.1) and in relation to the specific power that the prudential regulators possessed to impose notices of specified requirements on an insurance company (Guideline 8.2):
To ensure that the Secretary of State’s powers of intervention are exercised whenever it is necessary for the protection of policyholders, without companies being subject to unnecessary restrictions. - in relation to the specific power that the prudential regulators possessed to limit the premium income which an insurance company received while it was authorised to write new business (Guideline 8.5):
To limit the risk of a company becoming insolvent in the future by controlling its rate of expansion. - in relation to the specific power that the prudential regulators possessed to require an insurance company to have an actuarial investigation carried out (Guideline 8.6):
To ascertain the financial condition of a company’s long-term business and the adequacy of a company’s general business reserves. - in relation to the specific power to require the submission by an insurance company of accelerated regulatory returns (Guideline 8.7):
To ensure that the [prudential regulators have] up to date information regarding companies whose financial position may be deteriorating. - in relation to the specific power that the prudential regulators possessed to require an insurance company or other body to provide information additional to that contained within the regulatory returns (Guideline 8.8):
To ensure that the [prudential regulators are] fully informed of a company’s affairs or other aspects of its activities giving cause for concern. - in relation to what was described as ‘the power of the Secretary of State to intervene in the affairs of companies otherwise than in pursuance of statutory powers’ (Guideline 8.10):
To intervene in a company’s affairs in the most appropriate manner for protecting policyholders or potential policyholders. - in relation to the specific power that the prudential regulators possessed to modify certain provisions of the 1982 Act through the making of a section 68 Order (Guideline 9.1):
To ensure that UK authorised insurance companies comply with all relevant primary and secondary legislation, whilst recognising that in particular circumstances in relation to particular companies it may be appropriate to modify the legislative requirements… - in relation to disclosure by the prudential regulators to, and liaison with, other regulators (Guideline 10.2):
To avoid regulatory failures arising because an issue, company, or group of companies or person falls between regulators.
36 Those objectives, as set out in that guidance, were reinforced by the views expressed by the prudential regulators and GAD at the time.
37 For example, in briefing produced within the DTI in March 1983, as part of the preparations for a scrutiny of the efficiency of the supervision of insurance companies, it was explained that:
The Department of Trade is responsible for the administration of the insurance companies’ legislation, the primary objective of which is to protect consumers (i.e. policyholders and prospective policyholders) against the risk of loss or exploitation, due to insolvency, incompetence, dishonesty, or other unlawfulness of insurers… The intention is that the system of supervision should bring to notice any danger signals sufficiently early so that action can be taken to prevent the failure of a company…
38 In a presentation given by a DTI official in June 1988, it was said that there were ‘probably two major strengths in the present system: one is the extensive discretionary powers given to supervisors which enable us to take action at an early stage; another is the generally high standards of integrity and competence promoted by our “fit and proper” powers’.
39 Other presentations given by regulatory officials at this time conveyed similar messages. In a talk entitled ‘the regulatory environment’, a DTI official explained that ‘our aim… is to allow maximum freedom to the managers of insurance companies to manage in the light of their own judgement, but against the background of the careful supervision of their conduct by the Department and very full public disclosure of their company’s affairs’.
40 Briefing provided by DTI officials for Ministers in January 1990, which contained ‘points on insurance regulation’, stated that:
The aim of regulation is to create an environment which provides a fair level of protection for the policyholder but which does not inhibit competition and freedom to innovate.
41 The then Government Actuary, in a paper entitled ‘the Supervision of Life Insurance Business in the United Kingdom ’ given in 1990, said, in respect of insurance companies, that:
… information about the business they are carrying on, the assets held, income and expenditure, solvency, etc must be given in full in returns to the DTI. These are placed on public record so that anyone who wishes to may refer to them.
In principle, the information which is publicly available should be sufficient to permit another actuary to make an evaluation of the financial state of the company and to estimate the probable level of future profits which could be attributable to policyholders.
42 The balance that underpinned the system of prudential regulation was explained further in a speech, made in July 1990, by the then junior DTI Minister responsible for insurance regulation. In it, the Minister noted that:
There is a difficult area of judgement between excessive regulation and ineffective regulation… The correct balance is to provide reasonable standards within the industry within which investors can take their own judgements about the risks and rewards of their investments. The setting of the correct balance is a matter of constant vigilance and clear analysis. The Department is far from thinking that it can be purely reactive.
43 After setting out several developments that were then currently underway, the Minister said that these demonstrated ‘a pro-active and vigorous regulatory role by the Department’.
44 The powers conferred by Parliament on those responsible for operating the system of prudential regulation during the period covered by this report were, as I have explained in Chapter 5, robust and wide-ranging.
45 The objectives of that system, as those were seen at the time by those operating that system were not, in my view, grounded in a limited view as to the purpose of prudential regulation or in a philosophy or approach now characterised as ‘light touch’. Nor was that what the prudential regulators and GAD said at the time.
46 The central aim of prudential regulation was the protection of the interests and reasonable expectations of policyholders and potential policyholders.
47 It is in this context that I have made the following assessments of the submissions made by the public bodies as to the standard of regulation I should apply in this case.
The purpose of the returns
48 I consider that the submissions of the public bodies on the purpose of the regulatory returns and the uses that those returns were put to during the period covered by this report are inconsistent with the reality of the system created by Parliament.
49 I would first note that I also received a submission on this matter from the Society’s former auditors, who told me:
The purpose of the regulatory returns was to provide a prudent means of monitoring a life company’s solvency and its ability to withstand potential future adverse experience. The returns were relied on by the regulator in performing its supervisory role in relation to insurance [companies]. They also formed the primary source of information about the company’s financial status for most informed observers. By contrast, the Companies Act accounts were of limited usefulness to external observers, presenting purely historical information and giving only limited information about the room for manoeuvre available to the company in question.
50 It would thus appear that no consensus on this matter exists among those involved with the Society’s affairs at the time covered by this report. In such circumstances, I look to what those operating the system of prudential regulation said at the time.
51 I consider that, when regard is had to those statements, it is clear that the submission, scrutiny, and publication of the regulatory returns were the prime mechanisms of the prudential regulation of insurance companies at the time covered by this report.
52 I also consider that an argument that the information contained in those returns would not, or did not, influence policyholders, their advisers, the financial press, the actuarial profession, or other industry commentators could not be sustained.
53 The DTI in May 1991, in a consultation document concerning proposals to transpose the European Third Life Directive into domestic law, explained that the system of prudential regulation was:
… designed to maintain public confidence in the continuing solvency of insurers while not being over-prescriptive or burdensome on insurers. This is possible because the activities of insurers are open to enquiry by the public, and to scrutiny by DTI and others, to ensure sound and prudent management.
54 In a DTI paper published in December 1994, and entitled ‘Insurance Supervisory Powers and Practice’, the prudential regulators explained that the publication of the returns meant that:
Consequently, policyholders, competitors, brokers, market analysts, and journalists have access to the information contained in the annual DTI returns. This has resulted in a growing number of comparative analyses of data and an increasing market in insurance information – producing a more informed market in insurance products and their financial security.
55 Further insight was given by an article in the 22 July 1993 edition of Money Marketing, in which the then Government Actuary was interviewed. The article appeared under the title ‘The Government Actuary maintains that his role in examining life-office accounts means that [independent financial advisers] need not worry about the issue of financial strength’.
56 The article stated that the Government Actuary had said that, ‘by being aware that DTI criteria are being met, [independent financial advisers] should satisfy themselves that offices are well-managed and look at areas such as performance and distribution philosophy rather than at highly complex actuarial issues’. It also quoted the Government Actuary as having said:
I think differences in financial strength should not be too much of an issue to the financial adviser because, so long as the company is adequately capitalised, it is not really relevant from the point of view of the policyholder whether the security is covered twice or 10 times over. If it is covered 10 times over, it may just reflect a philosophy of stacking away surplus and not distributing it to the policyholders.
57 I do not accept that the submissions of the public bodies on this question can be sustained, when regard is had to the position as it was seen at the time by those operating the system of prudential regulation. I am satisfied that my approach is appropriate in those circumstances.The duties imposed by section 22(5) of the 1982 Act
58 In relation to the duty imposed by section 22(5) of the 1982 Act, I agree with the public bodies that, for the purposes of that duty, the accuracy and completeness of the returns was governed by the provisions of the applicable law, which prescribed in great detail what information was required to be provided within those returns and how that information was required to be calculated and disclosed.
59 However, I consider that the other grounds put forward in support of this submission are highly unpersuasive.
60 The prudential regulators were under a statutory duty ‘to communicate with the company with a view to the correction of any… inaccuracies and the supply of deficiencies’. That is the duty to which the prudential regulators were subject at the relevant time. It is what Parliament provided that they ‘shall’ do. That duty was not qualified by reference to what may or may not have been material.
61 Section 22(5) of the 1982 Act imposed a duty on the prudential regulators to do what Parliament prescribed, not a discretion to do it or not according to whether an inaccuracy or deficiency was material in the view of those regulators, whether or not those regulators acted with the advice and assistance of GAD.
62 I accept that the law does not concern itself with trifles and I would not be critical of the prudential regulators if they had not concerned themselves with trifling matters. But there is in my view no sound basis for rewriting this provision of the 1982 Act by inserting a reference to materiality.
63 I am also not persuaded that the submissions made to me by the public bodies on this matter reflect the approach which those bodies took to this question at the relevant time.
64 During the period covered by this report, there is clear evidence of the prudential regulators communicating with insurance companies, pursuant to the duty imposed by section 22(5) of the 1982 Act.
65 In respect of every year covered by this investigation, the insurance industry annual reports laid by Ministers before Parliament show that the duty to communicate to seek corrections to the returns led to the prudential regulators communicating with insurance companies on more than one hundred occasions in each year and, in most years that are relevant to this investigation, on many more occasions than this. Details are shown in Table 9a below.
66 I have reviewed the files containing the documents which record this communication during some of the years covered by this report. I have seen that the prudential regulators often undertook such communication in respect of relatively trivial matters.
67 For example, I have seen that, in one case, the prudential regulators communicated with an insurance company to seek the correction of an arithmetical error of less than £50 within the returns of a multi-million pound fund. I have seen other such examples, although that is the starkest.
68 Furthermore, the public statements of the prudential regulators made at the time suggest that those regulators accepted that a duty was imposed on them – indeed, on occasion going beyond recognition of the simple duty on the face of the 1982 Act to communicate with the relevant company with a view to the correction of the returns, extending the scope of their powers to an apparent ability to require such corrections.
69 For example, in the Annual Reports on the insurance industry that were laid before Parliament by the prudential regulators, it was said, in the reports for every year from 1988 to 1997, that ‘section 22(5) requires the [prudential regulators] to arrange for companies to correct inaccuracies in the returns submitted’. The communication envisaged by section 22(5) was thus described as a requirement.
70 Another example is the FSA’s consultation draft of the proposed Interim Prudential Sourcebook, which also described that communication as a requirement on the prudential regulators. Issued in March 2000 and said to restate the existing law, that Sourcebook contained a draft rule 9.6(5), which, it was said, restated the requirements of section 22(5) of the 1982 Act. This provided, under the heading ‘inaccurate and incomplete returns’, that:
Rule 9.6(5) (Section 22(5)) requires the FSA to consider the [returns] and, if any such documents appears to it to be inaccurate or complete, to communicate with the insurer with a view to the correction of any such inaccuracies and making good any omissions.
Source: Insurance Annual Reports, Department for Trade and Industry
71 Parliamentary answers on occasion appeared to suggest that the prudential regulators could require insurance companies to correct their returns using this provision of the 1982 Act. For example, in a written answer given on 23 April 1996, the then Minister of State at the DTI, explaining the changes which had been made as a result of the Deregulation (Insurance Companies Act 1982) Order 1996, and particularly the introduction of an ability to submit returns in electronic form, said (with added emphasis):
This measure is for the convenience of the industry and cost savings will be small, representing the difference between the cost of the production and submission of four paper copies of the return, and that of producing a diskette. The administrative cost to companies of taking corrective action, if required to do so under section 22(5) of the Act, should also be reduced.
72 The prudential regulators produced detailed guidance which dealt with this provision of the 1982 Act. Guideline 5.4 of the DTI’s Policy Guidance Notes, issued in September 1991, dealt with the correction of inaccuracies and the supply of deficiencies related to the regulatory returns.
73 After noting that section 22(5) of the 1982 Act placed an obligation on the Secretary of State to communicate with the company with a view to the correction of any inaccuracies and the supply of deficiencies where it appeared to him that any document was inaccurate or incomplete ‘in any respect’, the guideline set out the regulatory objective underpinning this provision. This was:
To secure the correction of material errors and the supply of deficiencies in annual returns… in order that neither the Department nor the public, including shareholders and actual or potential policyholders, form a view of the company based on inaccurate or incomplete information.
Supervisors should have few reservations about formally requesting companies to correct inaccuracies and/or to supply deficiencies. Errors in and omissions from a company’s return may be discovered at any stage during the examination process…
There may be occasions when it is not entirely clear whether there is an inaccuracy in a return although one may be suspected. Whilst it only has to “appear” to the Secretary of State that there is an inaccuracy or a deficiency, it may be necessary to query the point with the company before concluding there is definitely an error.
75 The guideline then set out ‘implications for our understanding of a company’s position’, noting:
Clearly, any return may be misleading if it contains material inaccuracies or is deficient. It is important that any inaccuracies or deficiencies be rectified as soon as possible. The materiality of an inaccuracy depends, inter alia, on the extent to which it affects the validity of the conclusions which may be drawn about the company.
76 The guideline then set out legal advice received, which stated that the statutory framework ‘imposes on the Secretary of State a duty to “police” the documents rather than merely to act as a depository for them’. The legal advice continued thus:
Notwithstanding the use in s22(5) of the expression “inaccurate or incomplete in any respect”, this can be interpreted in a common sense way to mean “in any material respect”.
Materiality must, however, be judged not only from the point of view of the supervisor acting on behalf of the Secretary of State, but also from the point of view of a shareholder or policyholder who applies to the company for a copy… or inspects a copy on the public record at Companies House.
Therefore, the Department must communicate with the company to secure the correction of inaccuracies and/or the supply of deficiencies. This must be the case, even though the supervisor, because of his skill and experience, may be able to see through the inaccuracy or deficiency and ascertain the true meaning if there is a risk that a policyholder or shareholder will not be able to do so.
There is no legal obligation to take up every trivial error in an annual return, provided we are satisfied that it is indeed trivial and does not hide serious compensating errors…
All errors in items which are used in solvency tests should be regarded as material unless, or until, the supervisor is satisfied that either they will not affect the results of the solvency test in current or future years, or effective supervision is possible without the test.
78 I consider that my view as to the duties imposed on the prudential regulators by section 22(5) of the 1982 Act – to consider the returns and to communicate with an insurance company to seek the rectification of errors or omissions in those returns unless those regulators had satisfied themselves that any error or omission was trivial, in the sense used within the DTI guidance, and would not mislead the reader of the returns – is the correct one. I have judged the acts and omissions of the prudential regulators and/or GAD against the standard set out in their own guidance.
79 For all these reasons, I reject the submissions by the public bodies on this question.
Intervention on the grounds of PRE
80 I also do not accept the submissions of the public bodies regarding intervention on the grounds of the protection of PRE.
81 I consider that those submissions confuse the ‘residual’ power in section 45 of the 1982 Act – the power to take any action other than those actions listed principally within sections 38 to 41 of the 1982 Act as being powers of intervention – with the grounds on which the exercise of such powers had to be considered and could be used, which were set out in section 37 of that Act.
82 The protection of PRE gave grounds for the potential use of any or all of the powers listed in sections 38 to 41 of the 1982 Act. There was nothing ‘residual’ about the protection of PRE as a basis for using those powers of intervention that the prudential regulators possessed.
83 It was only where the objective of those regulators could not be achieved through use of the other powers available to them that the ‘residual’ power – to take whatever other form of action appeared appropriate – arose. This power was residual; the ground on which it might be exercised (i.e. the protection of PRE) was not.
84 I agree with the public bodies that the Appointed Actuary had certain responsibilities in respect of PRE. However, the existence of those responsibilities cannot detract from the obligations imposed by Parliament on the prudential regulators, who acted with the advice and assistance of GAD.
85 I also accept that, under the regulatory regime which applied during the period covered by this report, there was no obligation on the prudential regulators constantly to monitor PRE or proactively to seek information from insurance companies about their marketing strategies, the contents of all of their publications, or what their sales force were telling existing or potential customers. I accept that the Government of the day decided that the protection of PRE would be largely reactive to what was found in an insurance company’s regulatory returns. That made the scrutiny process undertaken in respect of those returns even more important.
86 Where information which was before the prudential regulators called into question whether an insurance company was acting in a manner that enabled it to fulfil PRE – and that, therefore, the grounds for the exercise of one of the powers of intervention conferred on those regulators may have arisen – the prudential regulators were under an obligation to satisfy themselves, by seeking further information or otherwise, whether such grounds had arisen and, if they had, to consider whether it would be appropriate to exercise their powers.
Actuarial judgement and the regulatory margin of appreciation
87 With regard to the submissions made by the public bodies concerning actuarial judgement and the margin of appreciation to be afforded to regulators, I readily accept that two professionals, acting reasonably, might, when considering the same facts, come to different but entirely rational views.
88 At all times relevant to my investigation, the actuarial profession, in its Memorandum of Professional Conduct, emphasised that this was the case. For example, in paragraph 17 of version 6.0 of that Memorandum (effective from 14 April 1997), the profession stated:
A member should recognise that there is room for differences of opinion in relation to actuarial advice and must avoid any action that would unfairly injure the professional reputation of any other actuary. However, this is not intended to prevent criticism to the client of another actuary’s work for that client where this is properly reasoned and felt to be justified.
89 Where matters of professional judgement come into play in my consideration of the facts that an investigation has disclosed, my general approach is to consider whether the judgements in question are consistent with the relevant legal and administrative framework as it stood at the time and with then prevailing professional guidance and accepted good practice.
90 If a professional judgement is within the range which a professional could reasonably reach in all the relevant circumstances, acting with the skill and care that could reasonably be expected from a professional acting in such a capacity, I would not be critical of such a professional judgement.
91 In making the findings set out in this report, I have had regard to the fact that many relate to actuarial matters. However, I have also had regard to the key obligations of the prudential regulators and/or GAD, to which those bodies were subject. Those are grounded in the general and specific legal and administrative framework which existed at the time relevant to the events recounted in this report.
92 In that context, it is my view that the concept of actuarial judgement has limited or no application to many of the issues which I have considered.
93 I accept that, in respect of issues including the exercise of professional judgement, for example as to the prudence of a particular valuation rate of interest, so long as the conclusion reached was within the range that a professional of the relevant discipline could reasonably reach, no criticism should be made of that exercise of professional judgement.
94 However, where information which a life insurance company was required in law to provide has not in fact been provided within the regulatory returns or where a duty imposed on such a company has not been performed, it does not seem to me possible, in general, to apply the concept of a wide range of professional views to this omission; whether it occurred is a matter of fact, not of judgement.
95 And in a situation in which the prudential regulators were under a duty to communicate with an insurance company where there were apparent omissions from or errors within the regulatory returns, once it has been established that such an omission or error existed, there is no scope for professional judgement as to whether to perform a duty imposed on those regulators by Parliament.
96 Similarly, where enquiries are made of, and responses are received from, a company or its Appointed Actuary in respect of apparent breaches of the applicable Regulations or in respect of a valuation basis that appeared to be weaker than the prescribed minimum basis (or indeed on any other matter of concern which involved issues on which reasonable professionals might disagree), consideration of those responses might well involve the exercise of professional judgement.
97 GAD in those circumstances might have come to the view that the responses provided clarified matters acceptably or that they indicated a genuine and perfectly reasonable divergence of professional views.
98 However, I consider that such matters of professional judgement are irrelevant in a situation where such breaches were apparent but no action was taken. Any decision that, on the facts, no action is appropriate should be recorded at the time it was taken, together with cogent reasons for that decision.
99 My approach to this question mirrors that which was adopted at the time covered by this report. For example, GAD themselves, in exchanges concerning Equitable, made this very point.
100 As can be seen from the relevant entry in Part 3 of this report, on 3 December 1998, the Treasury and GAD met Equitable. One issue which arose at that meeting was a disputed interpretation of a particular statutory requirement concerning reserving for the liabilities associated with those of the Society’s policies which contained guaranteed annuity rates.
101 The Appointed Actuary of the Society argued that the dispute centred on a professional disagreement. But GAD said that there was no professional matter to consider and that there was:
… a distinction between the legal position as required by [the relevant Regulations] and [other matters] where there was more scope for professional judgement and interpretation.
102 GAD thus recognised and drew a distinction between those legal obligations on insurance companies and the relevant professionals which were mandatory and those powers (or matters) which were discretionary (or which were covered by professional judgement). I too would draw such a distinction and I apply that distinction to the relevant actions of the prudential regulators and GAD.
103 Similar considerations apply to questions concerning the margin of appreciation which I consider should be afforded to the prudential regulators.
104 Where a duty to act has arisen, I consider that there is no such margin. Consideration should be given at that time as to whether it would be appropriate to exercise any of the powers granted to those regulators.
105 Where the circumstances for the performance of a duty appear to have arisen but the prudential regulators have taken a reasoned decision that no such duty has in fact arisen, it is open to those regulators to take such a decision. But that decision should be recorded at the time, together with cogent reasons for their decision that no duty has in fact arisen.
106 There is a considerable margin of appreciation to be afforded to the decisions taken by the prudential regulators in relation to the exercise of their discretionary powers. So long as those decisions are taken on a proper legal and factual basis, those regulators have discretion to decide what the most appropriate form of action would be, if any.
107 However, where no consideration is given by the prudential regulators to the use of their powers (where such consideration should have been given) or where such consideration as is given proceeds on a flawed legal and/or factual basis, no margin of appreciation is to be afforded to the prudential regulators, unless the subject matter in question was determined by them at the time (or which can now be seen) to be trivial.
108 While I will pay due regard both to the scope for a range of reasonable professional views and to the margin of appreciation in relation to the exercise of discretion that should be afforded to regulators, I am satisfied that my approach to the identification of the legal and administrative obligations to which the prudential regulators and GAD were subject is appropriate.
109 I do not accept that my approach is flawed in the manner suggested by the public bodies.
Hindsight
110 I agree with the public bodies that, in making my findings of fact and determinations whether those facts constitute maladministration, I cannot have regard to hindsight.
111 Those findings and determinations must be grounded in the standards which applied at the relevant time and must be based on the information and knowledge that the relevant public body or bodies possessed at the time – or should reasonably have possessed if they had acted according to the obligations to which at the relevant time they were subject.
112 However, I reject the submission that, on this occasion, I have in any way been influenced by hindsight.
113 As I have explained in Chapter 5 of this report, having established the facts in any investigation, I assess those facts against the standards, both those of general application and those which are specific to the circumstances of the case, which applied at the time that the events complained about occurred and which governed the discharge of administrative functions by those whose actions are subject to investigation.
114 In this report, I have identified those standards having regard only to the legal and administrative framework as it existed at the time. From this, I have identified the key obligations to which the prudential regulators and/or GAD were subject at the relevant time.
115 My assessment of the acts and omissions of those regulators and/or GAD will be based on the information or knowledge that those bodies had at the relevant time or on the information that a prudential regulator and/or an actuary charged with the scrutiny of regulatory returns, acting reasonably, would have had before them.
116 My findings will thus be grounded in the applicable standards and obligations to which the prudential regulators and GAD were subject and in the information and awareness that those bodies possessed or should have possessed at the relevant time.
117 I do not accept that my seeking actuarial advice during the investigation which led to this report about matters which occurred some years ago necessarily introduces hindsight or undermines my approach.
118 So long as my assessments are grounded in the overall standard, derived from the obligations which existed at the relevant time, and only pay regard to the information that was – or should have been – before the relevant body at that time, hindsight can – and, in this case, has been – avoided.
Conclusion
119 In this Chapter, I have made some preliminary assessments in respect of disputed questions concerning the standard of regulation that it is appropriate for me to apply, when considering the actions of those charged with the prudential regulation of insurance companies during the period covered in this report.
120 I now turn to set out the results of my review of the evidence I have obtained and to make findings of fact regarding the subject matter of the complaints which have formed the basis for the investigation which led to this report.
