Determinations: Maladministration?

Introduction

1 In this Chapter, I summarise the findings of maladministration that I have set out within Chapter 11 of this report. I also set out my determinations as to whether that maladministration resulted in injustice to those who have complained to me.

2 Before doing so, I outline the nature of the concept of ‘injustice’ as it applies to the work of my Office.

The nature of injustice

3 The concepts of maladministration and injustice were not defined in the Parliamentary Commissioner Act 1967 and Parliament has left it to me, as it did with my predecessors, to develop those concepts – which I and my predecessors have done over the last 40 years.

4 However, it is clear that Parliament did not intend, when using the term ‘injustice’, to limit the concept to narrow legal definitions. Nor did Parliament intend simply to replicate the remedies that were available to citizens through proceedings in the courts.

5 The Minister who piloted what became the 1967 Act through Parliament, when explaining what was intended by the use of this term, said1:

We have not tried to define injustice by using such terms as “loss or damage”. These may have legal overtones which could be held to exclude one thing which I am particularly anxious shall remain – the sense of outrage aroused by unfair or incompetent administration, even where the complainant has suffered no actual loss.

We intend that the outraged citizen who persuades his Member to raise a problem shall have the right to an investigation, even where he has suffered no loss or damage in the legal sense of those terms, but is simply a good citizen who has nothing to lose and wishes to clear up a sense of outrage and indignation at what he believes to be maladministration…

We have left both words – maladministration and injustice – undefined in the Bill. We believe that the meaning of the words will be filled out by the practical processes of case work…

6 The courts have recognised that to be the correct approach in considering the concept of injustice as it applies to the work of my Office and to that of other Ombudsmen in the public sector:

1. in the first ‘Balchin’ case², the court held that ‘the question whether any given set of facts amounts to maladministration – or by parity of reasoning, to injustice – is for the [Ombudsman] alone’;
2. in the same case, the court held, in relation to the differences between court proceedings and Ombudsman investigations with regard to injustice, that ‘the defence familiar in legal proceedings, that because the outcome would have been the same in any event there has been no redressible wrong, does not run in an investigation by the [Ombudsman]’;
3. in the second Balchin case³, the court held that ‘the meaning of injustice is… equally capable of being limited to [financial loss] or importing considerations which are wider than financial loss’; and
4. in R v Commissioner for Local Administration ex parte S4, the court held that ‘it must be established that there has been some prejudice to the complainant before a finding of injustice can properly be made. That prejudice may be no more than the loss of an opportunity… and certainly it is not required that any particular damage be established. Indeed, it is quite plain that the word “injustice” was used with a view to indicating something wider than is covered by the concept of damage, and also perhaps to avoid the need to delve into questions of causation which might otherwise arise in certain cases’.

7 In the more than 40 years since my Office was established, Ombudsmen have found that the concept of injustice is capable of covering:

1. financial loss caused by official acts or omissions;
2. damage deriving from other causes but which has been exacerbated or prolonged by official acts or omissions;
3. the loss of opportunities to take remedial action or to pursue a course of actionthat might benefit a citizen or protect his or her position;
4. the frustration of such courses of action embarked upon by a citizen which prevent those courses of action from achieving the desired or another reasonable outcome;
5. inconvenience or distress;
6. a sense of outrage;
7. the frustration of legitimate expectations; and
8. the expenditure of unnecessary effort or money in the pursuit of an appropriate outcome.

Summary of the maladministration I have found

8 I have made ten findings of maladministration in respect of the acts and omissions of GAD and/or the prudential regulators:

• my first finding is that the failure by the DTI, as prudential regulators, (i) to insist, when approving the appointment in June 1991 of a new Chief Executive, that he should demit office as the Society’s Appointed Actuary, and (ii) during the period from 1 July 1991 to 31 July 1997, when one person held the position of the Society’s Chief Executive simultaneously with the position of its Appointed Actuary, to consider the use of their powers to seek to remove that person from such a ‘dual role’ constituted maladministration;
• my second finding is that the failure by GAD, as part of the scrutiny process, to question and seek to resolve questions within the Society’s regulatory returns for each year from 1990 to 1993, related to (i) the valuation rate of interest used to discount the Society’s liabilities and (ii) to the affordability and sustainability of the Society’s bonus declarations, constituted maladministration;
• my third finding is that the failure by GAD, when the introduction of the Society’s differential terminal bonus policy, intimated within the Society’s 1993 returns, was identified by GAD as part of their scrutiny of those returns, (i) to inform the prudential regulators about the policy, (ii) to raise the matter with the Society, or (iii) to seek to identify what the rationale was for the introduction of the policy and how it was being communicated to policyholders constituted maladministration;
• my fourth finding is that the failure by GAD, as part of the scrutiny process, to question and seek to resolve questions within the Society’s regulatory returns for each year from 1994 to 1996 – related to (i) the valuation rate of interest, (ii) the affordability and sustainability of bonus declarations, apparently arbitrary changes to the assumed retirement ages, and (iii) the holding of no explicit reserves for the liabilities associated with prospective liabilities for capital gains tax, for pensions mis-selling costs, and for guaranteed annuity rates – constituted maladministration;
• my fifth finding is that the failure by GAD (i) to ask for the information GAD needed in respect of the Society’s 1995 returns to enable them, as part of the scrutiny process, to be sure that the Society had produced a valuation that was at least as strong as the minimum required by the applicable Regulations, and (ii) to pursue the information before them that the omitted information had led to the users of the returns misconstruing the financial strength of the Society constituted maladministration;
• my sixth finding is that the failure by the FSA, acting on behalf of the prudential regulators, (i) to ensure that the financial reinsurance arrangement was not taken into account within the Society’s 1998 returns without an appropriate concession being given, and (ii) to ensure that the credit taken by the Society within its returns for 1998, 1999 and 2000 properly reflected the economic substance of that arrangement constituted maladministration;
• my seventh finding is that the failure of the FSA, acting on behalf of the prudential regulators, to pursue the issue of the proper disclosure, within the Society’s regulatory returns for 1998 and 1999, of the potential impact on the Society of it losing the Hyman litigation constituted maladministration;
• my eighth finding is that the failure by the FSA, acting on behalf of the prudential regulators, to record their decision to permit the Society to remain open to new business, following its loss of the Hyman litigation constituted maladministration;
• my ninth finding is that the unsound basis on which the decision was taken by the FSA, acting on behalf of the prudential regulators, to permit the Society to remain open to new business, following its loss of the Hyman litigation constituted maladministration; and
• my tenth finding is that the misleading information – about the Society’s solvency position and its record of compliance with other regulatory requirements – that was produced by the FSA, acting on behalf of the prudential regulators, during the period after the Society closed to new business constituted maladministration.

9 When determining in general terms whether or not any maladministration has resulted in injustice to those who have complained to me, I first identify what were the consequences of that maladministration and then I assess whether those consequences constitute an injustice for which no, or no sufficient, remedy has been provided. This I now turn to do.

The consequences of the maladministration I have determined occurred

10 What were the consequences of the ten findings of maladministration that I have determined occurred? I will set out what I consider to be both the specific consequences of each finding and also the general consequences of those findings when they are taken together.

The specific consequences of each finding

The consequences of the first finding of maladministration

11 My first finding relates to the failure by the DTI, as prudential regulators, (i) to insist, when approving the appointment in June 1991 of a new Chief Executive, that he should demit office as the Society’s Appointed Actuary, and (ii) during the period from 1 July 1991 to 31 July 1997, when one person held the position of the Society’s Chief Executive simultaneously with the position of its Appointed Actuary, to consider the use of their powers to seek to remove that person from such a ‘dual role’.

12 One consequence of that failure was that the prudential regulators and GAD became overly reliant on the information provided by one person within the Society – through his completion of the returns and through the meetings that those regulators and GAD, at which the Society was only represented by that person.

13 Another consequence was that the Society was not prompted and/or invited by the prudential regulators to address the unsatisfactory nature of the ‘dual role’, which was unacceptable in terms of the prudent management of the Society and for regulatory reasons.

14 A further – and important – consequence of this failure was that the system of prudential regulation, designed on the basis that the Appointed Actuary (with operational independence from the executive management of a life insurance company) would play a central role, instead operated in a dysfunctional manner during this period in respect of the Society.

15 The maladministration which I have found resulted in the effective operation of the system of prudential regulation in respect of the Society, and the governance of the Society, being compromised. There was effectively no ‘whistle-blower’ within the Society during this period to the detriment of the proper governance of the Society and of the prudential regulation of the Society.

The consequences of the second finding of maladministration

16 My second finding relates to the failure by GAD, as part of the scrutiny process, to question and seek to resolve questions within the Society’s regulatory returns for each year from 1990 to 1993, related to (i) the valuation rate of interest used to discount the Society’s liabilities and (ii) to the affordability and sustainability of the Society’s bonus declarations.

17 One consequence of this failure was that the prudential regulators and GAD could not be satisfied that the Society was acting prudently and with proper regard to the interests and reasonable expectations of its policyholders. Another consequence of this failure is that the Society was never asked to justify whether it could afford its bonus declarations or how it proposed to sustain the level of bonus that it declared.

18 A further consequence was that the impression was given to existing and potential policyholders that the Society was financially sound and able to pay generous bonuses, when the prudential regulators and GAD could not have been satisfied on either point.

19 That maladministration led to lost opportunities to seek further understanding as to whether the Society’s business model was inherently prudent or whether that model exposed the Society’s members to unnecessary risks.

The consequences of the third finding of maladministration

20 My third finding relates to the failure by GAD, when the introduction of the Society’s differential terminal bonus policy, intimated within the Society’s 1993 returns, was identified by GAD as part of their scrutiny of those returns, (i) to inform the prudential regulators about the policy, (ii) to raise the matter with the Society, or (iii) to seek to identify what the rationale was for the introduction of the policy and how it was being communicated to policyholders.

21 One consequence of this failure was that the prudential regulators, to whom GAD had not disclosed the introduction of the new policy, were disabled from discharging their duties. Another consequence of that failure was that the Society was not asked by the prudential regulators and/or GAD to justify its approach in the light of the reasonable expectations of its existing policyholders and/or of the contents of its advertising, which did not draw to the attention of potential policyholders (or existing policyholders, especially those considering making further contributions to policies which did not contain guaranteed annuity rates) that such a policy existed.

22 Had the prudential regulators raised the matter with the Society, in a context in which the Society was receiving complaints which challenged its application of the differential terminal bonus policy, it seems likely that the Society would have taken legal advice.

23 Had the Society done so at that time, I see no reason to conclude that the legal advice it would have received would be different from that which the Society received later in 1998. That in itself would not have changed events, although I recognise that it is possible that, having received such advice and having to deal with complaints about the differential terminal bonus policy at that time, the Society would have decided to test that policy in the Courts much sooner.

24 That, in my view, would have been all the more likely had the prudential regulators also insisted on full disclosure of the existence of the differential terminal bonus policy within the Society’s literature, which might have led to more people realising that such a policy was being applied.

25 Whatever may be the case as to that, the taking by the Society of legal advice at a much earlier stage might have had significant consequences. It might have brought a large number of people who were not eligible for compensation for mis-selling within the scope of such compensation.

26 A further consequence of the failures I have identified in this respect was that the Society took its decisions, such as not to ring-fence new entrants into a different fund, rejecting certain approaches that it received from those interested in acquiring the Society’s business and/or as to the validity of its general practices, in a context in which the Society could reasonably believe that it had secured regulatory approval – albeit tacit approval – for its new bonus policy and associated practices.

27 That maladministration resulted in the loss of a number of critical opportunities. Such lost opportunities included opportunities to test the appropriateness of the differential terminal bonus policy, to ensure that the illustrations and advertisements provided to existing and potential policyholders explained the Society’s policy and practice, and to take decisions about the future direction of the Society in full knowledge of the reserving requirements to which it was subject and to which the prudential regulators and GAD would eventually draw attention.

28 The Society was not constrained to make provision gradually over time for the costs arising each year from those requirements as those costs accumulated.

29 Maladministration also resulted in the problems which caused the Society eventually to close to new business being obscured until July 1998 and to the loss of opportunities for the Society and for the prudential regulators and/or GAD to begin to address these issues much earlier than they all eventually did.

The consequences of the fourth finding of maladministration

30 My fourth finding relates to the failure by GAD, as part of the scrutiny process, to question and seek to resolve questions within the Society’s regulatory returns for each year from 1994 to 1996, related to (i) the valuation rate of interest, (ii) the affordability and sustainability of bonus declarations, (iii) apparently arbitrary changes to the assumed retirement ages, and (iv) the holding of no explicit reserves for the liabilities associated with prospective liabilities for capital gains tax, for pensions mis-selling costs, and for guaranteed annuity rates.

31 One consequence of this failure was that an early opportunity was lost to address the issue of the Society’s practice as to reserving for guaranteed annuity rates. Another consequence was that the Society’s liabilities were considerably understated.

32 That maladministration reinforced that which I have found in relation to the introduction of the differential terminal bonus policy, in that the problems which caused the Society eventually to close to new business were further obscured and opportunities were lost to address those issues earlier than eventually happened.

The consequences of the fifth finding of maladministration

33 My fifth finding relates to the failure by GAD (i) to ask for the information GAD needed in respect of the Society’s 1995 returns to enable them, as part of the scrutiny process, to be sure that the Society had produced a valuation that was at least as strong as the minimum required by the applicable Regulations, and (ii) to pursue the information before them that the omitted information had led to the users of the returns misconstruing the financial strength of the Society.

34 One consequence of this failure was that those reading the Society’s returns during this period were capable of being misled as to the strength of the Society’s true financial position.

35 Another consequence was that those who used the information and conclusions drawn from the returns by rating agencies and other third parties – including financial advisers, industry publications, and those briefing Ministers – were led to rely on information that did not contain a complete and accurate assessment of the Society’s true position. They were thus actively misled.

36 A further consequence was that GAD were unable, with respect to the Society’s 1995 returns, to verify the financial position of the Society, as they were not able on that occasion reasonably to be satisfied that the Society’s chosen valuation method had produced a result at least as strong as the minimum prescribed in the Regulations as they lacked the information needed to be so satisfied.

37 That maladministration resulted in the reader of the returns not having the information that was before GAD and which, arguably, should have been available to all readers of the Society’s published returns. No action was taken when it was clear that those readers were misconstruing the information that was provided. Maladministration also resulted in those who expressed concerns about the Society’s solvency being reassured on grounds which were not sustainable.

The consequences of the sixth finding of maladministration

38 My sixth finding relates to the failure by the FSA, acting on behalf of the prudential regulators, (i) to ensure that the financial reinsurance arrangement was not taken into account within the Society’s 1998 returns without an appropriate concession being given, and (ii) to ensure that the credit taken by the Society within its returns for 1998, 1999 and 2000 properly reflected the economic substance of that arrangement.

39 One consequence of the acts and omissions of the FSA in this regard was that the Society was permitted to declare a bonus in March 1999. Had the Society not done so, a public warning would have been given to those considering investing in the Society for the first time or to those considering making further contributions to existing policies that the Society was in significant financial difficulty.

40 Another consequence of those acts and omissions was that the solvency position of the Society, as published in April 1999 within its 1998 returns, was misrepresented. Those reading the Society’s published 1998 returns would have been misled as to the strength of the Society’s financial position. That reinforced the misleading message as to the strength of the financial position of the Society which had been given by the declaration of a bonus a month earlier.

41 A further consequence of the acts and omissions of the FSA was that the ongoing weakness of the Society’s financial position was hidden from public view in the Society’s published returns for 1999 and 2000. Those considering their options – whether to invest, to make further contributions to existing policies, to convert a policy into an annuity, or simply to stay – were given a misleading picture of the true position faced by the Society and of its solvency position.

42 The maladministration which I have found resulted in the true financial position of the Society being concealed and misrepresented through the publication of returns which contained a misleading picture of the Society’s solvency position.

43 That maladministration also resulted in existing and potential policyholders making highly important decisions – some of which were irreversible – about their financial affairs without the benefit of information which the system of prudential regulation was designed to provide to them, in order to enable them to make informed choices.

The consequences of the seventh finding of maladministration

44 My seventh finding relates to the failure of the FSA, acting on behalf of the prudential regulators, to pursue the issue of the proper disclosure, within the Society’s regulatory returns for 1998 and 1999, of the potential impact on the Society of it losing the Hyman litigation.

45 One consequence of the acts and omissions of the FSA in this regard was that they could not be certain that the Society’s policyholders and those potential policyholders considering investing or continuing to invest in the Society were being given complete and accurate information about what were the extent and nature of the possible effects should the House of Lords deliver a judgment that was adverse to the Society. Existing and potential policyholders were thus denied information about their potential exposure to significant risk, which was an integral part of informed decision-making as to their financial options.

46 Another consequence of those acts and omissions was that both the Society and the FSA lost an opportunity to consider, either separately or together, whether the scenario planning and other work either had undertaken as preparation for managing the possible outcomes of the Hyman litigation was sufficient to address the full range of factors which had exposed the Society to the range of problems which it faced during this period.

47 The maladministration which I have found meant that the prudential regulators could not be certain that the reality that an adverse House of Lords’ judgment would crystallise for the Society was not being distorted. Any such distorted reality might inform the published returns and the other publications that the Society produced during this period. The prudential regulators could not be sure that existing and potential policyholders had the full information necessary to take informed decisions.

The consequences of the eighth finding of maladministration

48 My eighth finding relates to the failure by the FSA, acting on behalf of the prudential regulators, to record their decision to permit the Society to remain open to new business, following its loss of the Hyman litigation.

49 The consequence of that failure is that no proper and contemporaneous record exists as to the basis for that decision. The maladministration which I have found resulted in an absence of documentary evidence to support the basis for an important decision taken by the FSA.

The consequences of the ninth finding of maladministration

50 My ninth finding relates to the unsound basis on which the decision was taken by the FSA to permit the Society to remain open to new business.

51 One consequence of the failure of the FSA to give proper consideration to the range of their powers to protect the interests of both existing and potential policyholders is that those policyholders lost any opportunity to receive the benefit of the sound and robust exercise of the discretionary powers that Parliament had conferred on the prudential regulators in order to protect the interests of such policyholders.

52 Another consequence of this failure was that those who invested for the first time during this period – which could not have occurred had certain intervention action such as the withdrawal or suspension of the Society’s authorisation to write new business been taken – or who bought annuities, or who made further contributions to existing policies where there was no contractual requirement to do so, made those decisions in an environment in which accurate and complete information about the financial position of the Society was not available to them.

53 No warning had been given by the prudential regulators, as would have been provided by the exercise of intervention powers such as the withdrawal of authorisation, of the seriousness of the financial position that the Society was in.

54 A further consequence of this failure was that compensation for mis-selling, if any were provided, became an additional liability falling to be met by those existing policyholders.

55 That maladministration resulted in those ‘late joiners’ and certain other existing policyholders making decisions about their financial affairs without the accurate and complete information necessary to make those decisions on an informed basis.

The consequences of the tenth finding of maladministration

56 My tenth finding relates to the misleading information – about the Society’s solvency position and its record of compliance with other regulatory requirements – that was produced by the FSA, acting on behalf of the prudential regulators, during the period after the Society closed to new business.

57 The principal consequences of this deficient information were that reassurance was given to those who contacted the FSA to enquire about the financial position of the Society when that reassurance was not soundly based. Those who had regard to the information provided by the FSA made decisions about their financial affairs having regard to incomplete and inaccurate information provided by the FSA.

58 That maladministration resulted in misleading information about the position of the Society being provided to existing policyholders. Those policyholders were entitled, having regard to its source, to rely on that information as being accurate and not misleading.

The general consequences of the findings taken together

59 I have set out above the consequences which

I consider flow from each specific finding of maladministration which I have found to have occurred. In my view, three general consequences flow from the maladministration I have found:

• the first was that the Society’s published returns were unreliable;
• the second was that there were lost opportunities to address critical issues earlier; and
• the third was that regulatory decisions were taken on a basis which had insufficient regard to the range of powers that the prudential regulators possessed.

The published returns were unreliable

60 The first general consequence of the maladministration I have found is that the Society’s published returns for each year from 1990 to 2000 were in important respects an unreliable source of information about the financial position of the Society – about its exposure to guarantees, about the effects of its bonus policies, and about the solvency position which resulted from the determination of its liabilities and the valuation of its assets in a manner required by the applicable law.

61 By saying that the regulatory returns were unreliable, I do not in every case suggest that the Society’s returns would have been found to be deficient had appropriate questioning by the prudential regulators and/or GAD taken place. However, the prudential regulators, acting with advice and assistance from GAD, had not verified that those returns were complete, accurate and in compliance with the requirements of the law. Those regulators could thus not have been satisfied that the Society’s returns showed its true financial position and were thus reliable.

62 Those published returns materially understated the Society’s liabilities in several respects. That would have misled those seeking to assess the financial strength of the Society by considering those returns. Information in the returns was misleading and would have led those reading them to assume that the Society’s financial position was stronger than the position reported in the returns, when that was not the case.

63 Anyone investing in the Society – whether as a new investor or as someone making a further investment in it – from the second half of 1991 onwards was at risk of being misled, if they had regard to the regulatory returns, about the financial condition of the Society. The prudential regulators permitted returns to be published which those regulators could not have been satisfied revealed the Society’s true liabilities or an accurate financial position.

64 The extent of the failure to verify the Society’s financial position as shown in its returns began to become critical in the mid-1990s. Anyone reading the Society’s published returns for 1993 would not have been able from reading those returns to understand the implications of the fact that the Society had changed its bonus policy. Those reading later published returns did so without the benefit of adequate disclosure of the relevant issues which it was the responsibility of the prudential regulators and/or GAD to secure.

65 The failure by the Society and the prudential regulators and/or GAD to address relevant issues at this time was to have serious ramifications for the solvency position of the Society and for the reasonable expectations of its existing and potential policyholders.

66 From the second half of 1996 onwards, the Society’s published returns should also have – but did not – disclose that the Society was in a very weak financial position. Had the Society been required at that time by the prudential regulators and/or GAD adequately to reserve for its guarantees, which were ‘biting’ by the time that the 1995 returns were submitted, the financial position of the Society would have looked very different to those considering investing in it.

Lost opportunities to address critical issues earlier

67 The second general consequence of the maladministration which I have found is that the Society and the prudential regulators, acting with the advice and assistance of GAD, lost opportunities to address critical issues much earlier than they eventually addressed those issues.

68 In relation to the widely accepted causes of the Society’s closure to new business – a low free asset ratio, a policy of full distribution, a failure to reserve for generous and flexible guarantees, and the differential terminal bonus policy – these were all matters which the prudential regulators and/or GAD could have addressed through the scrutiny process in earlier years than 1998.

69 The Society disclosed information about those matters, although on occasion such disclosure was incomplete. Had the prudential regulators raised concerns with the Society at an earlier date, the resulting problems might have crystallised earlier and before they became so acute – thus mitigating or forestalling the impact of those problems on those who invested in the Society afterwards.

70 Some of those factors might have been ameliorated by earlier action but such action was not taken due to maladministration by the prudential regulators and/or GAD. Instead, they developed over time to become intractable. The postponed consideration of those factors and of the options open to the Society enabled the Society to continue to grow and to attract new business.

Decisions taken with insufficient regard to the powers available to the prudential regulators

71 The third general consequence of the maladministration which I have found is that, when critical decisions were taken about the Society – about whether to permit one person to hold the posts of Appointed Actuary and of Chief Executive, about the declaration of a bonus in March 1999, about the solvency position published within the Society’s returns for 1998, 1999 and 2000 (in the light of a financial reinsurance arrangement), and about whether to permit the Society to remain open to new business in the period after the House of Lords’ judgment – those decisions were taken on a basis which had insufficient regard to the range of powers that the prudential regulators possessed and which they had an obligation to consider when coming to those decisions.

72 A failure to give sufficient regard to the powers available to them led to the prudential regulators permitting a situation where, at the heart of the governance of the Society, a cornerstone of the system of prudential regulation was not in place – a situation which continued to exist for more than six years. 

73 The failure to take action in respect of the ‘dual role’ meant that the normal system of checks and balances that existed within insurance companies to mitigate the risk of imprudent business strategies was absent for the whole of the period during which were sown many of the seeds of the financial problems that the Society finally had to face.

74 When the prudential regulators and GAD did initiate appropriate action in 1998, that was negated by maladministration by the FSA in relation to the financial reinsurance arrangement entered into by the Society, with its consequent effects on the decisions by the FSA to permit the declaration of a bonus in March 1999 and in respect of the published solvency position of the Society contained within the returns that were published by 1 May 1999. 

75 The weak financial position of the Society, once action was taken by the FSA and GAD to ensure that Equitable made provision for all of their liabilities, was masked by the inclusion by the Society, without a reporting concession, within the reported position for 1998 of an offset for a financial reinsurance arrangement whose principal terms had not been agreed by the valuation date. 

76 Any prudential regulator, acting reasonably, would have recognised that, if the economic substance of the financial reinsurance arrangement were assessed, no credit at all could legitimately have been taken for that arrangement within the Society’s returns in any case. Even if that were not so, the credit taken had no rational basis and was inconsistent with the arrangement into which the Society had entered. Such a regulator would also have insisted that the Society’s returns were appropriately corrected and resubmitted.

77 The Society was permitted by the FSA to declare a bonus and to continue writing new business well beyond a time when, had no maladministration taken place, the weakness of the Society’s financial position and deep-seated problems would have been made public.

78 The failure by the FSA adequately to consider what could be done to protect those policyholders who joined the Society in the period after the House of Lords’ judgment meant that those people who invested in the Society in that period lost the opportunity to be afforded the protection that the regulatory regime envisaged and may have led to them incurring financial loss due to the fundamental imbalance inbuilt into the Society’s with-profits fund about which the prudential regulators and GAD should have known.

79 The reassurances that were given by the FSA to policyholders about the financial condition of the Society during the period following closure to new business gave them comfort which the FSA, acting reasonably, could not have provided.

80 All of the above were consequences which impacted on the policyholders and annuitants of the Society. However, those consequences also impacted on the Society itself and on third parties such as the other users of the returns.

81 Those consequences are relevant to my determination of whether injustice resulted from the maladministration that I have found. I now turn to consider that question.

Did injustice result from maladministration?

82 Do the consequences which I have determined flowed from the maladministration I have found constitute injustice to those who have complained to me? 

83 I will deal in turn with each of the specific consequences of the maladministration which I have identified but, when doing so, I will consider together the specific consequences of the findings which relate to the content of the Society’s returns in the period prior to 20 June 1998. I will address my other findings separately. 

84 I take that approach because I consider that specific elements of the content of the returns cannot be addressed in isolation from each other. The users of those returns would be looking at the financial condition of the Society (or any other insurance company) as published within the returns as a whole. 

85 Such a user would be entitled to assume that the published returns were accurate, complete, in compliance with the regulatory requirements, and not misleading. This assumption would be based on a belief – encouraged by the nature of the concept of ‘freedom with publicity’ – that the returns as a whole were not misleading and set out the true position.

Do the specific consequences constitute injustice to those who have complained to me?The ‘dual role’

86 Do the specific consequences that I have identified as being the result of my finding of maladministration in relation to the ‘dual role’ – the simultaneous holding by one person of the two posts of Appointed Actuary and Chief Executive of the Society – constitute injustice to those who have complained to me?

87 I consider that I am unable to determine this question. Such a judgement necessarily involves making findings about the actions of bodies or individuals who are not in my jurisdiction. In order to identify whether anything of substance changed once the dual role was ended, I would have to embark on an assessment of the relative merits of the persons who held the relevant posts at the Society. But I have no power to do so. I would also need to examine the commercial affairs of the Society. That I also cannot do.

88 In that context, I make no determination of this question.

The Society’s regulatory returns for 1990 to 1996

89 Do the specific consequences that I have identified as being the result of my findings of maladministration concerning the scrutiny of the returns for 1990 to 1993, the scrutiny of the returns for 1994 to 1996, and the acts and omissions of GAD in relation to the Society’s presentation of two valuations within its returns – which all relate to the unreliability of the information published within those returns for 1990 to 1996 – constitute injustice to those who have complained to me?  

90 I consider that my determination of this question must turn on the purpose of the returns and the nature of the maladministration I have found in respect of the contents of those returns.  

91 In Chapter 9 of this report, I have concluded that the purpose of this mechanism was thus twofold: to enable the prudential regulators to monitor the financial position of insurance companies and to provide those considering investing in such a company with accurate and complete information about each company, on which those investors could base their investment decisions.

92 I have found that the returns published by the Society in every year from 1990 to 1996 were unreliable as a source of information for existing and potential policyholders and their advisers. The prudential regulators and GAD did not verify the position in respect of the reserves held for the guarantees contained in many of the Society’s policies, in respect of the valuation rates of interest applied by the Society when calculating its liabilities, and in respect of the true amount of free assets that the Society possessed.  

93 All of those matters were central to any assessment of the financial condition of the Society. I have also found that the actions of GAD in relation to those matters constituted maladministration.  

94 I consider that those deficiencies and omissions undermined the ability of the users of the returns to be able to rely on the information contained within those returns as being complete, accurate, and compliant with what the law required. Given that one of the fundamental purposes of those returns was the ability to rely on this information, I consider that injustice was capable of resulting from such maladministration.  

95 In determining whether a particular individual has sustained injustice in this context, I would normally expect to see three things:  

• first, that the individual had relied on the information in question;
• secondly, that such reliance had been reasonable in the circumstances; and
• finally, that loss (either of a financial kind or the loss of an opportunity) had resulted.

96 By reliance, I do not mean that it should be expected that an individual policyholder or annuitant should now, perhaps twenty years after the relevant events, be expected to produce copies of the information or advice on which they relied. Nor do I consider that the principal means through which policyholders would have been influenced by the information contained within the Society’s regulatory returns was through them reading the returns at Companies House.  

97 In the context that I have outlined in this report, I consider that the reliance that an individual (or his or her advisers) placed on the information contained with the Society’s returns when considering their financial options could have been as a result of the comparative analyses of life insurance companies, company profiles, ratings produced by agencies, or advice derived by actuarial consultants and others from their reading those returns.  

98 Any such reliance, given the purpose of the regulatory returns and the nature of the system of prudential regulation was, in my view, reasonable.  

99 The only questions, therefore, are whether an individual relied on the information and did so to their detriment. That can only be determined at an individual level.

100 I find that injustice was sustained by any policyholder who relied on the information contained in the Society’s returns for 1990 to 1996 and who suffered either a financial loss or a lost opportunity to take an informed decision as a result of such reliance. Where a policyholder neither relied on this information nor suffered a loss of either type, I find that no injustice resulted from this maladministration.  

The intimation of the Society’s differential terminal bonus policy

101 Do the specific consequences that I have identified as being the result of my finding of maladministration related to the failure by GAD when they noted its introduction to inform the prudential regulators about the Society’s differential terminal bonus policy, or to raise the matter with the Society, or to seek to identify what the rationale was for the introduction of the policy and how it was being communicated to policyholders constitute injustice to those who have complained to me?  

102 The biggest impact of the failure to act when the differential terminal bonus policy was introduced derived from the lost opportunity to look back and to establish what problem that policy was designed to address.  

103 I have no doubt that an opportunity was lost to engage the Society in discussion about the rationale for the introduction of this new policy, about whether that policy met the reasonable expectations of the Society’s policyholders, and about whether those policyholders were being properly informed about that new policy.  

104 But what effect did this have? I consider that my determination of this question must focus on what would have happened had the maladministration not occurred. Absent that maladministration, would things have beenthe same?  

105 Had no maladministration occurred, I consider that it is, on the balance of probabilities, likely that the Society’s growing exposure to guaranteed annuity rates would have been understood much earlier, as would the Society’s related reserving practices.

106 The requirements of the prudential regulators were not made clear to the Society at an early and appropriate stage. Instead, the Society was faced in the period after July 1998 with a position in which those regulators were insisting that it established in one go reserves of approximately £1.5 billion in respect of the liabilities arising from those guarantees.  

107 Had the prudential regulators and/or GAD insisted, at the time that the differential terminal bonus policy was introduced, on full reserving for the liabilities arising from those guarantees, the financial effect on the Society of such a requirement was not likely to have been as onerous as it had become by 1998.  

108 During the period from 1994 to 1996, reserving for those guarantees would not have been difficult for the Society to accommodate over that period, as those guarantees were not always deeply ‘in the money’.  

109 During that period, the amount of the liabilities associated with those guarantees was still likely to have been manageable within the resources of the Society as, at that time, it still had open to it the possibility of using (or using to a greater extent) various methods to mitigate the impact of any reserving requirement.

110 The Society could have considered changing its investment strategy as part of its planning process or could have sought to secure the reinsurance of the relevant risks, or could have used a future profits implicit item for a higher amount. Those alternatives were not available to the Society in later years when this issue finally crystallised, as many of them had by then already been used to address other issues.  

111 Had no maladministration occurred, the Society would have been required to establish the required reserves over time and would have then had time to plan for the onset of the considerable liabilities with which they would be faced as the business which contained those guarantees matured.  

112 The other options open to the Society could then have been explored sufficiently early for them still to have been available and viable. Decisions taken by the Society – such as in relation to overtures from other companies interested in the de-mutualisation of the Society – would have been taken in a much changed environment.  

113 This had an effect on those considering investing in the Society in the period between 1990 and 1998. Those investors took decisions as to whether to invest in the Society in a context which would not have existed had maladministration not occurred.  

114 If the maladministration had not occurred, the financial position of the Society, as published in its returns, would have indicated the potential exposure of the Society to the growing liabilities that those guarantees produced. This would have been a critical factor for any potential investor to take into account when balancing the advantages and the risks of such an investment as part of taking an informed decision about their financial affairs.  

115 That the Society’s returns did not provide such an indication prevented potential policyholders from ascertaining the Society’s true position.  

116 Had the Society been required to establish reserves and had it, as a consequence, been required to take the other steps available to the Society to mitigate the growing liabilities that it faced, the picture presented of the Society’s affairs to existing and potential policyholders might also have been further transformed.

117 An earlier or more extensive use of a future profits implicit item within the Society’s returns would have been a clear indication of the weakness of its financial position. Changing investment strategy would have directly affected the returns on the Society’s assets that were available to fund bonuses. Traditional reinsurance would have been costly, thus further reducing the assets available to fund policyholder proceeds.  

118 That the Society was not required to consider those options meant that existing and potential policyholders were unable to consider all the options, with the impact that those options would necessarily have had on the Society’s financial position, when considering whether to invest further or for the first time in the Society or to purchase an annuity from it with their pension fund.  

119 Existing and potential policyholders lost the opportunity to take informed decisions about their affairs in full knowledge of all the factors related to the Society’s financial position that were relevant to such decisions.  

120 I do not consider that it is possible to conclude that financial loss resulted from this aspect of the maladministration which I have found. I am unable on the balance of probabilities to make findings about what policyholders would or might have done differently had the Society been constrained, as a result of regulatory attention at the time of the introduction of the differential terminal bonus policy, to address at an earlier date the issue of reserving for the liabilities arising from these guarantees. I therefore make no finding of injustice in the form of financial loss to policyholders in relation to this maladministration.  

121 However, I consider that the loss of opportunities to take informed decisions about their financial affairs during the period from July 1994 to April 1999 in full knowledge of the exposure of the Society to guaranteed annuity rates and of the risks that such exposure generated constitutes injustice to policyholders and I consequently make a finding that policyholders suffered such injustice as a result of maladministration.  

Financial reinsurance

122 Do the specific consequences that I have identified as being the result of my finding of maladministration related to the failure by the FSA to ensure that the financial reinsurance arrangement was not taken into account within the Society’s 1998 returns without an appropriate concession being given, and to ensure that the credit taken by the Society within its returns for 1998, 1999 and 2000 properly reflected the economic substance of that arrangement, constitute injustice to those who have complained to me?  

123 I consider that the maladministration relating to the acts and omissions of the FSA in permitting the Society to take the credit that it did for the financial reinsurance arrangement within the Society’s 1998 regulatory returns, which were available to the public by 1 May 1999, constituted a significant turning point. Those acts and omissions represent, in my view, a critical juncture in the sequence of events which I have recounted in this report.  

124 That the Society was permitted by the FSA to take any credit within its 1998 returns, without the required concession, had significant consequences. That was reinforced by the fact that the credit that was taken with the permission of the FSA totalled £809 million – despite the fact that, had regard been had, as it should have been, to the economic substance of the arrangement, no credit would have been permissible at all.

125 The Society’s 1998 returns were available to the public by 1 May 1999. Had the FSA acted, as they should have done, they would have ensured that the financial reinsurance arrangement was given no credit within those returns, with all the ramifications that this would have had on the reported financial position of the Society.  

126 I consider that, in those circumstances and on the balance of probabilities, if the Society had sought to declare either a reversionary bonus or a terminal bonus in March 1999, the FSA would have taken action to prevent the declaration from taking effect, on the grounds that such a declaration would have adverse effects for the reasonable expectations of the Society’s policyholders if it were later to be reduced.  

127 Any failure to make such a bonus declaration was recognised, at the time, to be ‘commercial suicide’ by both the regulatory bodies and the Society itself. Whether or not in fact the Society did declare a bonus, the Society’s published regulatory solvency position would have been very weak at that point. This would have occurred in a context in which the Society’s serious financial position was not yet generally known to the public.  

128 Once that financial position became known, I consider that many fewer new prospective policyholders, acting reasonably, would have taken out with-profits policies with the Society. The Society’s financial position would have become known shortly after the Society announced, as it would have had to do, that it was not declaring a bonus. If in fact it did declare a bonus, its financial position would have become known by 1 May 1999, when the Society’s 1998 returns were published.

129 I also consider that many fewer existing policyholders would have taken out a with-profits annuity, from which there was no subsequent prospect of exit.  

130 Furthermore, I consider that many fewer existing policyholders would have made further contributions to existing policies in the circumstances which would have prevailed had this maladministration not occurred.  

131 Under the applicable regulatory regime, whether to declare a bonus or to make arrangements for the reinsurance of risks were matters for the Society in the first instance. However, under that regime, how reinsurance arrangements were to be treated within the regulatory returns for the purposes of demonstrating the solvency of an insurance company – or whether the declaration of a particular bonus put the solvency position of such a company at risk – were matters of direct concern to the prudential regulators, who were under an obligation to verify the financial position of life insurance companies such as the Society.  

132 Such an insurance company was entitled to seek to protect their position. Commercial considerations would have been influential when they did so. The role of the prudential regulators was different. Their role was to protect the interests and expectations of existing and potential policyholders and to ensure that such companies acted prudently and in accordance with the obligations to which they were subject.  

133 On 24 November 1998, following an earlier meeting with the Treasury, as prudential regulators, and GAD, the Society had begun to consider what options it had in the light of the view that had been expressed by those regulators that the Society needed to take action to improve its solvency position if it wanted to declare a bonus.  

134 For any such action to have been taken into account within the Society’s 1998 returns, thus contributing to its reported solvency position, it would either have to have been in place on or before 31 December 1998 or have been at such an advanced stage of completion that a concession could reasonably have been granted by the prudential regulators by that date.

135 That gave the Society no more than six weeks – and, given the holiday period which affected the ability to take action in the markets, probably considerably less – to effect any remedial action.  

136 In that context, and given that many other options, such as ‘genuine’ reinsurance, would have been so expensive as not to be realistic in the circumstances in which it found itself at that time, the Society recognised that its main option was financial reinsurance.  

137 The alternative was to publish a very weak solvency position. I acknowledge, however, that it would, in theory, have been possible for the Society to have sought to sell equities and buy into gilts, thus improving its asset distribution for solvency purposes. That might have improved the reported position of the Society to a reasonable degree.  

138 However, given the lack at that time of public knowledge of the extent and full nature of the difficulties that the Society faced, I consider that a significant switch from equity holdings into gilts compressed into a short timescale before the end of the year might have been difficult to achieve.  

139 This ran the risk of causing additional damage to the value of the Society if it had been viewed, as a result, as a ‘distressed seller’5. A move to a more defensive investment portfolio would also have further weakened the Society’s marketing message. This would not have mitigated the public relations impact on the Society; indeed, it would have reinforced it.

140 Given that, I consider that, on the balance of probabilities, had no maladministration taken place and had no credit been permitted – as it should not have been – for the financial reinsurance arrangement within the 1998 returns, the Society would have been very publicly in such a parlous position that its ability to attract new investments would have been greatly constrained. That this did not happen had a significant impact on subsequent events.  

141 In order to put the Society’s finances on a footing that would permit it both to declare a bonus and to report a solvency position that would not alarm existing policyholders and potential investors, immediate and significant action needed to be taken.

142 It should be remembered, however, that the full extent of the issues was not, at that time, being addressed and that, had that not been so, the scale of the action required would have been considerably greater.  

143 A full assessment of the Society’s financial position, had such been undertaken, would have established that the Society was using a ‘quasi-zillmer adjustment’. As a result, the Society’s liabilities were also being understated by what was subsequently, in respect of the Society’s 1999 returns, calculated by the then auditors of the Society to be £950 million. This would have been a further issue to address.  

144 I am satisfied that 1 May 1999, by which time the Society’s precarious position would have been made fully public had no maladministration occurred, is a critical juncture – and that the acts and omissions of the prudential regulators in respect of the financial reinsurance arrangement played a central part in the ability of the Society to continue to attract business after that date.  

145 I consider that the prudential regulators failed to fulfil their obligations in respect of the way in which the financial reinsurance arrangement was treated within the Society’s returns for 1998, 1999 and 2000. Had those regulators acted properly, the attractiveness of the Society as a potential investment vehicle would have been wholly undermined. The investments which were made were undertaken in a context which was distorted as a result of maladministration.

146 I find that, in respect of all those who joined the Society or paid a further premium that was not contractually required in the period after 1 May 1999, any financial loss that they have sustained constitutes injustice in consequence of maladministration. Those affected by that maladministration have also suffered injustice in the form of lost opportunities to take informed decisions about their financial affairs.  

147 I will address questions as to whether individuals have sustained actual financial loss which has not been remedied when I address questions of remedy in Chapter 14 of this report.The potential impact of losing the Hyman litigation on the Society  

148 Do the specific consequences that I have identified as being the result of my finding of maladministration related to the failure of the FSA to pursue the issue of the proper disclosure, within the Society’s regulatory returns for 1998 and 1999, of the potential impact on the Society of it losing the Hyman litigation constitute injustice to those who have complained to me?

149 Given my finding about the injustice which flowed from the maladministration I have found in respect of the financial reinsurance arrangement, it is not necessary to determine this question, as anyone affected by this maladministration would already be covered by the finding of injustice that I have made in relation to that financial reinsurance arrangement. 150 I make no further finding on this question.The failure to record the decision to permit the Society to remain open to new business  

151 Do the specific consequences that I have identified as being the result of my finding of maladministration related to the failure by the FSA to record their decision to permit the Society to remain open to new business, following its loss of the Hyman litigation constitute injustice to those who have complained to me?  

152 While the failure to record the decision constituted maladministration, no consequences flowed from that maladministration for those who have complained to me.

153 In those circumstances, I find that this maladministration did not lead to injustice.

The basis on which the decision to permit the Society to remain open to new business was taken

154 Do the specific consequences that I have identified as being the result of my finding of maladministration related to the unsound basis on which the decision was taken by the FSA to permit the Society to remain open to new business, following its loss of the Hyman litigation, constitute injustice to those who have complained to me?

155 Given my finding about the injustice which flowed from the maladministration I have found in respect of the financial reinsurance arrangement, it is not necessary to determine this question as anyone affected by this maladministration would already be covered by the finding of injustice that I have made in relation to that financial reinsurance arrangement.

156 I make no further finding on this question.

The information provided by the FSA after closure

157 Do the specific consequences that I have identified as being the result of my final finding of maladministration – which relates to the misleading information, about the Society’s solvency position and its record of compliance with other regulatory requirements, that was produced by the FSA during the period after the Society closed to new business – constitute injustice to those who have complained to me?

158 I consider that the maladministration which I have found in relation to this official information meant that such information was unreliable as a guide to the true financial position of the Society and to its record of compliance with the regulatory requirements to which it was subject. Such unreliable information, given its source and the context in which it was given, was undoubtedly capable of causing injustice to those who received it if they acted on that information to their detriment.

159 I have explained above that, when considering whether unreliable information has led to injustice to an individual, I would expect to see that such an individual had relied on the information in question, that such reliance had been reasonable in the circumstances, and that either financial loss or the loss of an opportunity had resulted.

160 I consider that those factors should guide my consideration as to whether injustice resulted from the inaccurate and misleading information given by the FSA during the post-closure period.

161 There is, however, one difference in the context from that which pertained in respect of the unreliable information contained in the Society’s returns for 1990 to 1996 and I have had regard to this difference when considering this question.

162 In my view, anyone who had regard to the information provided by the FSA in this period could not be said to have acted reasonably if they, without further enquiry, relied on this information alone when making any decision about their financial affairs.

163 Unlike in the earlier period covered by this report, the Society was at this time widely known to be in financial difficulty. It had closed to new business and was reporting a very weak solvency position. The Society was issuing information as background to its Compromise Scheme which set out the fundamental uncertainties that it faced.

164 Widely publicised policy value cuts had been imposed by the Society in July 2001. The Society’s returns for 2001 were later to underline the weakness of its financial position and the doubts that it had met the regulatory solvency margin at all times throughout 2001 if certain unresolved reserving issues had been taken into account.

165 In this context, whatever the information provided by the FSA, it was widely known that the Society was in deep difficulty and that one way of balancing the competing demands on its with-profits fund was by reducing the payouts that the Society was making.

166 I recognise that the FSA was seen as an authoritative and impartial source of information about the financial security of insurance companies. Given their role, that was entirely reasonable. However, the FSA did not, and did not purport to, give tailored or specific advice to individuals about their own circumstances and options.

167 I consider that, in order to have sustained injustice as a result of this maladministration, those who acted in reliance on the information they received from the FSA and who suffered either a financial loss or a lost opportunity need also to show that such reliance was reasonable in the circumstances. That can only be determined at an individual level.

168 I find that injustice resulted from maladministration to all those who can show that they relied on misleading information provided by the FSA, that such reliance was reasonable in the circumstances, and that it led to a financial or other loss. Where all this cannot be shown, I find that no injustice resulted from this maladministration.

The injustice claimed on behalf of complainants

169 But what of the injustice claimed by those representing complainants – that financial loss in the form of the July 2001 policy value cuts was a direct consequence of regulatory failure?

170 I would first record my conclusion that an argument that maladministration alone caused the policy value cuts is not one that could be sustained.

171 There is no basis for determining that the maladministration which I have found to have occurred caused, and was the sole cause, of the particular financial losses that those representing complainants say have been sustained, when regard is had to the effects of stock market movements or other commercial factors on the decision taken by the Society to make those policy value cuts.

172 Nor can the wider economic context – and the falls in the value of the stock market during 2000 and 2001 – be ruled out as being a contributory factor to the need for the Society to consider how best to stabilise its financial position.

173 All that suggests that the maladministration that I have found that was specific to the regulation of the Society cannot alone be seen to have caused the policy value cuts.

174 It is impossible to ignore the industry-wide reductions in with-profits payouts which occurred some time after the Society’s own cuts. Those cuts demonstrate the wider impact of the economic context. The also demonstrate that the Society’s particular position influenced the timing of those reductions, which will itself have affected the impact on some individual policyholders.

175 However, that does not mean that the maladministration which I have found to have occurred is wholly irrelevant when considering the factors which led to the creation of the situation in which the Society’s new Board decided that it was prudent and/or necessary to make those policy value cuts.

176 It seems to me that a fundamental premise behind the policy value cuts was the need to rebalance the Society’s finances due to the natural consequences of the events which led to the closure and which were in due course compromised through the Companies Act scheme of arrangement.

177 The responsibilities of the prudential regulators to verify the solvency of insurance companies and to protect the reasonable expectations of policyholders gave the prudential regulators a unique role.

178 Those regulators also considered, at the time that the Society closed to new business approximately eight months prior to the policy value cuts, that the Society was unique among the life insurance industry and that this distinctiveness had played a central role in its closure to new business.

179 As I have explained in Chapter 1 of this report, Treasury officials at that time had explained to the Tripartite Standing Committee their view that the problems faced by the Society had been caused by a unique set of circumstances. The four most important factors identified in that discussion were:

• first, that Equitable had for many years operated a policy of full distribution of any surplus through bonuses to their with-profits policyholders and a policy of not building up a free estate, leaving the Society with a comparatively low level of free assets;
• secondly, that Equitable, being a mutual, had no access to additional, shareholder capital;
• thirdly, that Equitable had offered relatively generous and flexible guarantees on certain types of policy; and
• finally, that the proportion of the Society’s business to which those guarantees applied was much higher than was the case for other companies.

180 What the prudential regulators recognised at the time were the root causes of the Society’s closure to new business were matters about which those regulators had – or could have had – information many years before the consequent relevant events occurred. All of that must have had an impact on the Society.

181 Given the nature and extent of the maladministration I have identified, it seems to me that it is not possible to say that regulatory issues are unrelated or merely incidental to this question.

182 If I were to accept that such a fundamental failure of the system of prudential regulation as this report has identified would have had no impact whatsoever on the fate which befell the Society, it would, it seems to me, beg the question as to what the purpose of such a system of regulation was.

183 Indeed, it is my view that the maladministration I have found to have occurred played a contributory role in the creation of the circumstances that led to the decision to cut the policy values of the Society’s policyholders. While the external context and matters unrelated to the acts and omissions of the prudential regulators and/or GAD did have a direct impact on the creation of the situation, part of the reasons why the Society’s options were limited was a direct result of regulatory failure.

184 Other companies faced difficult market conditions and reduced the proceeds paid to policyholders as a result of reduced investment returns. What made the Society different was that the methods available to it were constrained by the nature of the financial position in which the new Board found itself.

185 I consider that it would be impossible for me definitively to determine to what extent the losses claimed on behalf of complainants in the form of the July 2001 policy value cuts were unique to Equitable and, moreover, a direct consequence only of regulatory failure in respect of the particular supervision of the Society.

186 That would require me to go beyond the terms of reference of this investigation, to enter territory over which I have no jurisdiction, and to speculate rather than determine questions about the evidence before me.

187 But in any case, I do not need to do so. I am satisfied that maladministration was a contributory factor in the creation of the circumstances which led to the decision that it was prudent and/or necessary to make those policy value cuts.

188 I therefore find that any losses associated with the July 2001 policy value cuts are not exclusively attributable to the maladministration which I have found to have occurred but that such maladministration was one among many contributory factors to those losses.

189 Having determined whether maladministration led to injustice, I now turn to set out my disposal of each complaint within the terms of reference for the investigation which led to this report. I do this in Chapter 13 of this report.