My disposal of the complaints

Introduction

1 In this Chapter, I set out whether or not I uphold in full or in part each head of complaint contained within the terms of reference for the investigation which led to this report. Those heads of complaint were set out in Chapter 4 of this report.

2 This Chapter is structured in the following way:

(i) in paragraphs 3 to 15, I explain my approach to the determination of complaints at the end of any investigation;

(ii) in paragraphs 16 to 136, I set out my disposal of each of the specific heads of complaint contained within the terms of reference for the investigation which led to this report; and

(iii) in paragraphs 137 to 180, I set out my disposal of the general complaint contained within those terms of reference.

My approach to the determination of complaints

3 In order to be able to uphold any complaint that I consider, four conditions have to be satisfied. Those conditions are:

• first, that the complaint is not misconceived;
• secondly, that the complaint has a sound basis in fact;
• thirdly, that the relevant acts or omissions constitute maladministration; and
• finally, that any such maladministration led to injustice to those who have complained to me for which no remedy or no sufficient remedy has already been provided.

Identifying whether a complaint is misconceived

4 A complaint that is misconceived is one which has no prospect of being upheld whatever the outcome of any investigation. Such a complaint can belong to this category because, after closer examination, it turns out that it relates to action that is not within my remit, or that no injustice was ever sustained, or that any injustice sustained has since been remedied.

5 It can also belong to that category because, even if the allegations which underpinned the complaint were found, after investigation, to have a sound basis in fact, there would be no basis on which I could make any finding of maladministration.

6 That would generally be the case where the complaint was predicated on a view of the obligations of the relevant public body which was inconsistent with the obligations that were in fact imposed on that body, which I would establish, as part of an investigation, after identifying the general and specific legal and administrative obligations which such a body had at the relevant time.

Identifying whether a complaint has a sound factual basis

7 Whether a complaint is soundly based in fact is the core question that I consider during the course of any investigation. This I do by verifying, through consideration of the documentary and other evidence available to me, what actually happened in relation to the subject matter of the relevant complaint or complaints.

Determining maladministration

8 In Chapters 5 and 11 of this report, I have explained my approach to determining whether maladministration has occurred. Having established the facts and the overall standard which applies to the events which form the basis of the complaints made to me, I then assess those facts against that overall standard.

9 In particular, I assess whether or not an act or omission on the part of the body complained about constituted a departure from the applicable standard. If so, I then assess whether that act or omission was so unreasonable in the particular circumstances, when regard is had to the specific legal or administrative context of the case, as to constitute maladministration; and/or whether any such act or omission otherwise fell so far short of acceptable standards of good administration as to constitute maladministration.

Determining injustice

10 In Chapter 12 of this report, I have explained my approach to injustice. When determining in general terms whether or not any maladministration which I have determined has occurred 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 constituted an injustice for which no, or no sufficient, remedy has been provided.

Disposing of complaints

11 Where all four of the above conditions are satisfied, I would uphold the specific complaint in full.

12 Where a specific complaint contains more than one alleged act or omission which is the subject of that complaint, and where all four conditions are satisfied only in respect of one or more (but not all) of those allegations, then I would uphold the specific complaint in part.

13 Where none or not all of those conditions are satisfied in respect of any of the allegations, then I would not uphold the specific complaint and would dismiss it.

14 As I explained in Chapter 4 of this report, the terms of reference for this investigation contained eighteen specific heads of complaint and one general complaint. The general complaint was that ‘the public bodies responsible for the prudential regulation of insurance companies … and GAD failed for considerably longer than a decade properly to exercise their regulatory functions … and were therefore guilty of maladministration’. The specific heads of complaint contained, in most cases, more than one allegation. Many of those allegations overlapped with or duplicated other such allegations within different heads of complaint.

15 I will now set out my disposal of each of those specific heads of complaint and also of that general complaint.

The specific complaints

Complaint A – the prudential regulators had not been sufficiently resourced, and had not all possessed the necessary skills, to contribute effectively to the overall regulatory process and to responsibly exercise their discretionary powers as intended by Parliament and by the European Union.

16 Complainants alleged that the prudential regulators and/or GAD were not sufficiently resourced and did not possess the necessary skills to contribute effectively to the regulatory process.

17 Having reviewed all of the evidence before me, I have seen nothing to suggest that the prudential regulators and/or GAD were insufficiently resourced to undertake their responsibilities appropriately. Nor have I seen any evidence that would sustain a finding that those regulators and/or GAD were not sufficiently skilled to undertake their statutory functions.

18 My attention has been drawn to the view of Lord Penrose that insufficient resources or skills had played a part in the way in which the Society was regulated. I would respectfully suggest that his remarks were predicated on his view that a different system of regulation should have existed, when it did not in fact exist. I can derive no assistance from such a view.

19 In any event, there is no factual basis for this allegation. I therefore dismiss this head of complaint.

Complaint B – that the prudential regulators had failed to liaise and to co-operate effectively with those responsible for the regulation of the conduct of business by insurance companies.

20 Complainants alleged that the prudential regulators failed to liaise and to co-operate effectively with those responsible for the regulation of the conduct of business by the Society, particularly in respect of its communications with its policyholders.

21 Having considered the applicable statutory and administrative framework which governed the discharge by the prudential regulators of their functions during the period covered by this report, I find this complaint to be partly misconceived.

22 The conduct of business regulators and the prudential regulators had discrete spheres of responsibility. It was the responsibility of the conduct of business regulators to oversee how the Society was (and how other insurance companies were) interacting with customers and whether the information given to those customers conformed to the requirements of the conduct of business rules about information that was true, fair and not misleading.

23 I can make no finding about the acts or omissions of the conduct of business regulators in this, or any other, respect – as they are not within my jurisdiction.

24 That said, the prudential and conduct of business regulators had in April 1991 entered into an agreement concerning the information that they would pass to each other in certain specified circumstances.

25 This agreement provided that the prudential regulators would pass information to the conduct of business regulators where there were grounds for concern about the integrity or competence of those directing or managing an insurance company; where otherwise there were grounds for doubt about the financial soundness of the company – and where consideration was being given to the instigation of a formal investigation; where consideration was being given to the use of other powers of intervention; or where consideration was being given to the withdrawal of authorisation.

26 That agreement also provided that information would be passed by the prudential regulators to the conduct of business regulators where a company’s margin of solvency either had fallen or where it was anticipated that it would fall below the required minimum margin.

27 Indeed, as the detailed chronology of events set out within Part 3 of this report shows, once the prudential regulation of the Society was undertaken by the FSA, which coincided with the onset of the significant problems that the Society faced in the period after July 1998, those regulators regularly were in contact with their colleagues within the FSA who were responsible for conduct of business regulation. Such liaison grew in intensity throughout the post-closure period.

28 But what of the earlier period, when the two sets of regulators operated within different public bodies? While there were isolated occasions in that earlier period where it might be arguable that liaison pursuant to the agreement between the two regulators was called for, those occasions were few and far between, were about matters which did not evidence any pattern that would have indicated that such liaison was necessary, and related to peripheral issues that were not the focus of the prudential regulatory regime.

29 In any case, in so far as PRE is concerned, as I explain in this report the prudential regulators were required, if information came to their attention, to take their own action with respect to such matters.

30 It was not liaison with the conduct of business regulators which was necessary when grounds arose for the consideration of the need to act to protect PRE. However useful such liaison might also have been, the prudential regulators were under an obligation to consider the use of their own powers in such circumstances.

31 As it is based on an understanding of the relevant regulatory regime which is misconceived, I therefore dismiss this head of complaint.

Complaint C – that the prudential regulators had not operated the regulatory regime as it was intended to be implemented by Parliament and in conformity with European Directives. Those regulators instead had chosen to regulate Equitable with a ‘light touch’ – a concept not evident from or provided for under the Insurance Companies Act 1982 and the European Third Life Directive, nor one consistent with those statutory provisions.

32 Complainants alleged that the approach to the regulation of the Society was exceptionally and unjustifiably lenient, when compared to that adopted with other companies, and that the prudential regulators had applied a ‘two-tier’ standard of regulation.

33 To the extent that this allegation contends that there was a conscious decision by the prudential regulators to apply a different standard of regulation to the Society than for other similar companies of a similar size and writing similar business, I have seen no evidence that would support such a contention. There is no sound basis in fact for that allegation.

34 Furthermore, there were objective and entirely proper reasons for the differential treatment of certain insurance companies that were grounded both in the statutory and administrative elements of the applicable regulatory regime.

35 First, the provisions of the 1982 Act applied different standards of oversight and scrutiny and wider powers of intervention to newly authorised companies than those standards and powers which applied to existing companies. Similarly, companies where there had been a change of control were subject to a more intrusive regulatory regime, which included more frequent reporting and the need to submit and have a business plan approved. Those additional requirements also continued to apply to newly authorised companies for specified periods.

36 Secondly, there were administrative systems operated by the prudential regulators and by GAD when advising and assisting those regulators which were relevant to the standard of regulation applied in individual cases. Those systems included the system of priority ratings used by GAD, when considering the order in which the scrutiny of the annual returns of insurance companies would be undertaken, and administrative mechanisms, which enabled the prudential regulators to monitor companies that were giving grounds for disquiet.

37 The prudential regulators, acting with the advice and assistance of GAD, applied a closer level of scrutiny to insurance companies which, in their view, were demonstrating trends that might lead to them becoming a cause for concern.

38 In the light of the nature of the regulatory regime that I have described in Chapter 5 of this report, it seems to me entirely reasonable for the prudential regulators to have developed guidance or administrative systems to enable them, in the words of the Minister who piloted the Insurance Companies (Amendment) Act 1973 through Parliament, to take or to require ‘suitable corrective action in time to avert the consequences of imprudent or misguided policies’. That the prudential regulators did.

39 I consider that it was wholly consistent with the regulatory regime relevant to this investigation for the prudential regulators to have applied differential levels of scrutiny to the affairs of insurance companies where the decision to do so was based on objective criteria or was appropriate to enable or assist them in the discharge of their statutory functions.

40 To that extent, this complaint is also misconceived. Having no sound basis in fact and being partly based on a misunderstanding of the relevant regulatory regime in place at the time, I therefore dismiss this head of complaint.

Complaint D – that the prudential regulators and GAD had allowed successive chief executives or managing directors of the Society simultaneously to hold the post of appointed actuary, despite recognising the potential for conflict of interest. This had not been compatible with the basis of the regulatory regime.

41 Complainants alleged that the prudential regulators and GAD permitted one person to hold the dual roles of the Society’s Chief Executive and Appointed Actuary and that this had been incompatible with the basis of the regulatory regime.

42 I have found that maladministration is established in respect of this head of complaint. But I have been unable to determine whether any injustice resulted from that maladministration, because to make such a determination would require me to consider matters which I have no power to consider. However, equally, I cannot determine that no injustice resulted from that maladministration.

43 I therefore find myself unable to determine this head of complaint.

Complaint E – that the prudential regulators and GAD had failed to keep pace with developments in the pensions and life insurance industry and to assess and adapt their methods to reflect those developments.

44 Complainants alleged that the prudential regulators and/or GAD failed to keep pace with developments in the pensions and life insurance industry and to assess and adapt their methods to reflect those developments.

45 Having reviewed the evidence before me, I am satisfied that there is no evidential basis for the contention that the prudential regulators and/or GAD failed to keep pace with the developments in the pensions and life insurance industry during the period covered by this report.

46 I have seen evidence that considerable work was put into updating the systems and processes that those regulators and GAD utilised to discharge their functions. Many developments in the regulatory framework occurred during the period covered by this report. These include those developments to which the public bodies whose actions were the subject of complaint have drawn attention within their initial response to those complaints, which is set out within Part 4 – and which is summarised in Chapter 4 – of this report.

47 It may be that what is implied by this complaint is that the regulatory framework – the primary legislation and associated delegated legislation – had become unwieldy or out-of-date. If that is so, such a complaint is misconceived.

48 In any event, it is not within my jurisdiction to consider the discharge of legislative functions. I cannot therefore review the legal framework which governed the acts and omissions which I have investigated. My role is to identify whether those operating that framework discharged their functions with or without maladministration.

49 All that being so, I dismiss this head of complaint.

Complaint F – that GAD had recommended Equitable as a pension plan or additional voluntary contribution scheme provider in its advice to the administrators of the Principal Civil Service Pension Scheme and to other public sector pension schemes. This had led to a lack of proper separation of its responsibilities and to a clear conflict of interest between GAD’s role in providing advice to government bodies in relation to public sector pensions and in assisting the prudential regulators of the Society. This conflict of interest had compromised the proper discharge of GAD’s regulatory functions.

50 Complainants alleged that a conflict of interest existed because of the role GAD played within the system of prudential regulation, when they also had a role in advising the administrators of the Principal Civil Service Pension Scheme.

51 Having reviewed the evidence before me, I am satisfied that there is no basis for the allegation that GAD had a conflict of interest because of its roles within the system of prudential regulation and as adviser to the administrators of the Principal Civil Service Pension Scheme.

52 There is no dispute that GAD acted both as adviser to the prudential regulators of insurance companies and also as adviser to the Civil Service scheme, although in relation to the latter role this ended at the end of 1995.

53 I have examined all of the relevant files held by the administrators of the Principal Civil Service Pension Scheme. Having done so, I am satisfied that there was no conflict of interest, as alleged, on the part of GAD.

54 Indeed, I note that when the Treasury, then acting for the pension scheme administrators, contacted the prudential regulators on 1 October 1991 to establish what the financial condition of the Society was and whether there were any issues of contention between the Society and its regulators of which they should be aware, the DTI replied on 17 October 1991, after having taken the advice of GAD, and stated that they were not in principle able to provide such information and drew attention to the published regulatory returns instead. This was a proper approach and was the approach that the prudential regulators and GAD adopted to all such enquiries.

55 For completeness, I also asked the bodies whose actions were under investigation to obtain declarations of any financial or employment interests that those of its current or former staff with any direct role in the prudential regulation of the Society during the relevant period might have had. I received such declarations from all the relevant individuals – none disclosed any actual or apparent conflict of interest in terms of personal or financial links to the Society.

56 As there is no legal or factual basis for the conflict of interest alleged, I therefore dismiss this head of complaint.

Complaint G – that, from the mid-1980s until 1997, the prudential regulators had failed to evaluate the potential effect of guaranteed annuity rates on the solvency of Equitable in a context where current annuity rates were falling steadily, in line with the Bank of England’s base rate, to below contracted guaranteed annuity rates.

57 Complainants alleged that the prudential regulators failed to deal appropriately with the Society’s exposure to the risks associated with the guaranteed annuity rates contained within the Society’s older policies.

58 I have found that this allegation has a sound basis in fact and that the failures of the prudential regulators in this respect constitute maladministration. I have also found that injustice resulted from that maladministration.

59 I therefore uphold this head of complaint in full.

Complaint H – that, from about 1990 onwards, the prudential regulators and GAD had failed to give sufficient consideration to the fact that some of the measures used to bolster Equitable’s solvency position were predicated on the emergence of a future surplus. As a consequence, the prudential regulators and GAD had not properly assessed the overall impact and adequacy of those measures.

60 Complainants alleged that the measures used to bolster the Society’s solvency position were predicated on the emergence of a future surplus and that the prudential regulators and/or GAD did not properly assess the overall impact and adequacy of those measures.

61 The phrase ‘emergence of future surplus’ is broad and, in the context of this head of complaint, I have limited it to the use by the Society in its returns of future profits implicit items. To the extent to which the emergence of future surplus was a factor in other matters (for example, the credit taken for financial reinsurance), that is considered under the relevant heads of complaint which cover those other matters in this report.

62 I consider that this complaint, so limited, is misconceived – as it is premised on a view of what methods were appropriate for a life insurance company to improve its published solvency position which is inconsistent with the provisions of the applicable legislation which pertained at the relevant time.

63 The European Directives permitted (and still permit) the use of future profits implicit items by insurance companies. Those provisions were transposed into the domestic legislative framework of the United Kingdom through inclusion within the provisions of the valuation Regulations.

64 My attention has been drawn to the fact that this allegation reflects a view expressed by Lord Penrose in his report that such methods were inappropriate. I would respectfully suggest that Lord Penrose based his assessment of the relevant events on an entirely different basis from that on which I must base my assessment.

65 The Penrose Report was not produced on a basis which accepted the regulatory regime of the day as a given. Indeed, Lord Penrose made it very clear that his assessment had had little regard to the standards which applied at the relevant time. His role was as a reporter, aiming to identify lessons that could be learned for the future, and I derive no assistance from his view.

66 I must have regard to the applicable general and specific legal and administrative framework which pertained at the relevant time. I must assess the acts and omissions of the prudential regulators and/or GAD against that framework.

67 As the measures utilised by the Society were lawful and properly granted, there is no basis for making any finding of maladministration. I therefore dismiss this head of complaint.

Complaint I – that, from 1990 onwards, the prudential regulators had allowed Equitable to publish financial results and projections that were misleading in that they had not reflected the Society’s true position.

68 Complainants alleged that the prudential regulators allowed the Society to publish projections, illustrations, and bonus notices that were misleading in that they did not reflect the Society’s true position. Those complainants also alleged that the financial results contained in the Society’s regulatory returns were published in a misleading form.

69 To the extent that this head of complaint deals with the Society’s projections, illustrations, and other bonus notices, that complaint I find to be misconceived.

70 How the Society interacted with its policyholders and potential policyholders as part of the sales process or in relation to how it conducted or illustrated its business is not a matter over which I have any jurisdiction. The regulatory framework that was in place at the time covered in this report did not enable the prudential regulators to intervene in those matters, unless questions of PRE arose.

71 While my review of the evidence in the light of the specific complaints that have been made about PRE has had regard to the submissions I have received on this issue, it is not for me to make findings in respect of the Society or of the conduct of business regulators, whose role it was to ensure that information provided by insurance companies to their customers was true, fair, and not misleading.

72 To the extent, however, that this complaint deals with the Society’s returns, I have found in this report that one of the general consequences of the maladministration that I have determined occurred was that the prudential regulators could not reasonably have been satisfied, at any time covered by this report, that those returns were a reliable statement of the Society’s true financial position. I have also found that injustice, in the form of lost opportunities to take informed investment decisions, resulted from that maladministration.

73 That being so, this aspect of the complaint is substantiated and I therefore uphold this head of complaint in part.

Complaint J – that, during the period under investigation, the prudential regulators and GAD had failed to act when Equitable had adopted what Lord Penrose described as practices of ‘dubious actuarial merit’.

74 Complainants alleged that the prudential regulators and/or GAD had failed to act when the Society had adopted what Lord Penrose had described as practices of ‘dubious actuarial merit’.

75 I find this complaint to be misconceived in so far as it is based on a view that certain practices which were permissible within the regulatory regime at the time should not have been permitted because they were inappropriate. Such practices included the mortality assumptions that the Society used and the subordinated loan capital that it issued.

76 It is not my role to make findings that practices which were permissible should not have been permitted.

77 I have not found that maladministration is established in relation to the acts and omissions of the prudential regulators and GAD in respect of the ‘quasi-zillmer’ adjustment. While clues were present, it was not unreasonable, in the particular context, for those bodies not to have identified that practice at the time.

78 However, in respect of the failure to reserve for guaranteed annuity rates and the financial reinsurance arrangement, I have found maladministration is established in both respects. I have also found that injustice resulted from the maladministration associated with both of those matters.

79 That being the case, I uphold this head of complaint in part.

Complaint K – that … the prudential regulators and GAD had ignored or failed to act on information that might have led to formal or informal regulatory action against Equitable, thus also failing to alert new investors to the risks of investing. Those occasions included when the Society’s board papers were sent to GAD by the appointed actuary on 11 June 1991, and when information was provided to GAD on 10 September 1992 which showed that, for the years 1989 to 1991, the aggregate policy values had very significantly exceeded the value of the underlying assets.

80 Complainants alleged that the actions of a particular GAD actuary were inappropriate in that, when he was sent certain of the Society’s Board papers on 11 June 1991, he did not pass those papers to the prudential regulators.

81 Having reviewed all of the evidence before me, I am satisfied that there is no sound basis on which an adverse finding should be made concerning the receipt of certain of the Society’s Board papers by an individual GAD actuary.

82 That GAD actuary was sent those Board papers by the Appointed Actuary of the Society on a confidential basis. Those papers are reproduced in full in Part 4 of this report and are also summarised within the chronology entry for 11 June 1991 in Part 3 of this report.

83 It is common ground that the GAD actuary did not forward a copy of those papers to the DTI. That was perhaps unwise, as it left the GAD actuary open to precisely the type of allegations that have since been made.

84 That failure was also a technical breach of the obligations that were placed on GAD by paragraph 36 of the 1984 Service Level Agreement, which required that ‘any correspondence between GAD and an insurance company or its advisers and notes of any meetings held with them will be copied at the time to [the DTI]’.

85 While I consider that it was unwise for the GAD actuary to refrain from copying the papers to the DTI and also that, in so doing, he was not acting in accordance with the terms of the Service Level Agreement, there are two considerations which lead me, on balance, to come to the view that, while the facts bear the allegation out, there is no basis for the making of an adverse finding in all the circumstances of the case.

86 The first is that, on 19 December 1990, the GAD actuary had already informed the DTI of the existence of these and other Board papers (see the entry for this date in Part 3 of this report). The second is that the GAD actuary did pass the documents to his colleague who was responsible for the regulation of the Society.

87 Both of those being the case, I dismiss this aspect of this head of complaint.

88 However, I have found that GAD did not raise or seek to resolve with the Society as part of its scrutiny of the Society’s regulatory returns for every year from 1990 to 1996 the questions which arose from the information within those returns – and that those failures constituted maladministration.

89 I have also found that injustice resulted from the unreliable nature of the Society’s returns during this period.

90 That being the case, I uphold this aspect of the head of complaint and, accordingly uphold the head of complaint in part.

Complaint L – that, over a period of many years, the prudential regulators and GAD had permitted Equitable to operate an unsound business model, of which those regulators and GAD had been aware.

91 Complainants alleged that the prudential regulators and/or GAD had permitted the Society to operate an unsound business model of which they had been aware.

92 I consider this complaint to be partly misconceived. In Chapter 5 of this report, I have set out the key obligations that the prudential regulators and/or GAD had at the relevant time, in terms of the general and specific duties and powers which they possessed within the applicable regulatory framework.

93 I also explained that this system was based on a number of cornerstones, one of which was ‘freedom with publicity’. That is, that an insurance company was given considerable commercial freedom to act, so long as it conformed to the statutory requirements to which it was subject and provided complete and accurate information about its financial position in a prescribed manner.

94 The prudential regulators and/or GAD were entitled to have regard to the information they possessed about a particular business model deployed by any insurance company. Indeed, where doubts arose about the Society’s compliance with the requirements imposed on it, this would have been a necessary part of the background to regulatory consideration of the Society’s position.

95 However, within the regulatory regime which pertained at the time covered by this report, it was not for the prudential regulators to approve or to monitor an insurance company’s business model or to act as a ‘shadow director’.

96 That said, where information came to the attention of those regulators, acting with the advice and assistance of GAD, that a particular company was acting imprudently, without regard to the interests and/or reasonable expectations of its existing or potential policyholders, or in contravention of any statutory requirements to which it was subject, the prudential regulators were required to consider whether that information meant that grounds had arisen for intervention action to be taken to protect policyholders and, if so, whether it was appropriate to take such action.

97 A complaint about any failure to take information about a particular business model into account in the discharge of those obligations which the relevant regulatory regime imposed on the prudential regulators and/or GAD would thus not be misconceived. However, approval of such a model was not part of the applicable regulatory regime.

98 In relation to the scrutiny of the Society’s returns for every year from 1990 to 1996, I have found that GAD, in giving advice to the prudential regulators, failed to satisfy themselves that the way in which the Society had determined its liabilities and had demonstrated that it had sufficient assets to cover those liabilities accorded with the requirements of the applicable Regulations. I have also found that those regulators were consequently unable to verify the solvency position of the Society, as they were under a duty to do.

99 I have also found that the respects in which the Society’s returns raised questions included the valuation rate of interest used to discount the liabilities and the affordability and sustainability of the Society’s bonus declarations. Those were both aspects of the Society’s business model, about which GAD had sufficient information. That information did not feature in the scrutiny of the relevant returns.

100 That aspect of this head of complaint is thus not misconceived and has a sound basis in fact. I have found maladministration in respect of the scrutiny of the relevant returns and that injustice, in the form of lost opportunities to take informed investment decisions, resulted from that maladministration.

101 I therefore uphold this head of complaint in part.

Complaint M – that the prudential regulators had failed to ensure any satisfactory correlation between the total of declared policy values and the Society’s admissible assets in a context where Equitable, uniquely in the industry, had declared total policy values that had included terminal bonuses and had, without exception, always paid all claims (both contractual and non-contractual) in accordance with those declarations.

102 Complainants alleged that the prudential regulators and/or GAD failed to ensure any satisfactory correlation between the total of declared policy values and the Society’s admissible assets.

103 In relation to the scrutiny of the Society’s returns for every year from 1990 to 1996, I have found that GAD, in giving advice to the prudential regulators, failed to satisfy themselves that the way in which the Society had determined its liabilities and had demonstrated that it had sufficient assets to cover those liabilities accorded with the requirements of the applicable Regulations. Those regulators were consequently unable to verify the solvency position of the Society, as they were under a duty to do.

104 I have also found that, among the respects in which the Society’s returns raised questions, were the valuation rate of interest used to discount the liabilities and the affordability and sustainability of the Society’s bonus declarations.

105 I have also found that GAD had information before it, through the analysis they undertook as part of the annual report on the industry which GAD provided to the prudential regulators, that raised questions as to whether the Society was routinely paying out more than the asset share for individual policies.

106 On the other hand, I have seen considerable evidence that this was a more general problem which did not just affect the Society at the relevant time.

107 While this phenomenon begged the question as to its prudence and sustainability, I do not think that those facts are capable of sustaining an adverse finding in relation to the specific supervision of the Society.

108 GAD’s analysis showed that the Society was not in this regard at the extreme end of the spectrum among life insurance companies. Furthermore, I am not persuaded that, had GAD raised the issue, a reasonable explanation would not have been provided which might have referred to the fact that most equivalent companies were engaged in this practice.

109 It is not clear what any subsequent action by the prudential regulators would have been aimed at or what it would have secured for the Society’s policyholders. Had those policyholders known about the Society’s practice and decided to invest elsewhere, they would have invested in another company which might well have been doing the same as the Society or have been paying sums further above the asset share.

110 While I have found this complaint to have a sound basis in fact, in that the prudential regulators and/or GAD took no action on this matter when they had information before them, I make no finding of injustice resulting from maladministration. I therefore dismiss this head of complaint.

Complaints N and O – the protection of policyholders’ reasonable expectations.

111 Complainants alleged that Ministers had decided that consideration of PRE was to be based solely on the scrutiny of the returns and that the prudential regulators and/or GAD had, as a result, failed to determine the reasonable expectations of the Society’s existing and potential policyholders.

112 I consider that this complaint is partly misconceived in so far as it suggests that the prudential regulators and/or GAD were under an obligation to consider PRE questions in a particular way, such as the constant monitoring of PRE or the proactive assessment of the marketing material of insurance companies. I have explained why in Chapter 9 of this report.

113 It was open to Ministers to take a decision to discharge in a particular way their functions in relation to the protection of PRE, so long as that decision was compatible with the key obligations that the prudential regulators and GAD had during the relevant period, which I have described in Chapter 5 of this report.

114 While the scrutiny of the returns was the prime mechanism through which prudential regulation was undertaken, I have found that, where information came into the possession of the prudential regulators and/or GAD through any other source, they were required to consider it and to act in accordance with the obligations to which they were subject.

115 Those obligations included a duty to consider the use of their powers where the circumstances had or might have arisen which gave grounds for the use of such powers.

116 I have found that, in relation to the scrutiny of the Society’s returns for every year from 1990 to 1996, issues arose which appeared to raise questions about the PRE of the Society’s existing policyholders. Those issues were the valuation rate of interest used to discount the Society’s liabilities and the affordability and sustainability of the bonuses that were declared by the Society during this period.

117 I have also found that insufficient regard was had to the PRE of both existing and potential policyholders when the FSA took its decision to permit the Society to remain open to new business in the period after the decision of the House of Lords in the Hyman case.

118 I have determined to this extent that maladministration is established in connection with these findings and that injustice resulted from that maladministration.

119 I therefore uphold this head of complaint in part.

Complaint P – preparation for, and follow-up to, the House of Lords’ judgment.

120 Complainants alleged that the prudential regulators failed to protect the interests and reasonable expectations of the Society’s existing and potential policyholders during the Hyman litigation and in the period between the decision of the House of Lords in July 2000 and the Society’s closure to new business in December 2000.

121 With regard to the FSA’s actions in relation to the Hyman litigation and the associated scenario planning, I have seen no evidence on this matter which would make me depart from my conclusion, set out in my first report, that no maladministration occurred in this respect.

122 Therefore, while I have reconsidered this question, I find no basis for an adverse finding with respect to this aspect of this head of complaint.

123 However, I have found that, in so far as this head of complaint relates to the acts and omissions of the prudential regulators in relation to the decision to permit the Society to remain open to new business in the period after the Hyman judgment in the House of Lords, those regulators failed to record that decision and took it on an unsound basis.

124 I have also determined that maladministration was established in respect of both those findings and that injustice flowed from the basis on which that decision was taken but not from the failure to record the decision.

125 That being so, I find this complaint to be substantiated to the extent that it relates to this aspect of the actions that were subject to complaint.

126 All of the above being so, I uphold this head of complaint in part.

Complaints Q and R – the bonus and policy value cuts in the period following the closure to new business.

127 Complainants alleged that the prudential regulators permitted the Society to declare a bonus for 2000 and an interim bonus for 2001, which were subsequently withdrawn and which were both inappropriate and unjustifiable given the state of the Society’s finances at that time. They also alleged that those regulators failed to protect PRE by permitting the policy value cuts that were made in July 2001.

128 In so far as this head of complaint relates directly to the acts and omissions of the prudential regulators in respect of those matters, I find that there is no factual basis on which I could uphold this aspect of the complaint and that, in any case, it is partly misconceived.

129 As can be seen from Part 3 of this report, the FSA received and considered the Society’s board papers setting out the background to the policy value cuts, which discussed at some length the various options that were open to the Society to manage the fundamental financial uncertainties that it faced.

130 I have already explained that I have found no basis for any suggestion that the regulatory regime at the time required or permitted the prudential regulators to act as ‘shadow directors’ or to intervene in the commercial freedom granted by Parliament to insurance companies. Such a suggestion represents a misconception about the nature of the relevant regime in place at the time covered by this report.

131 The FSA had information before it which showed that the Society had carefully examined the position it was in, had set out and discussed the available options, and had considered in some detail the potential impact on the Society’s policyholders and the need to balance a range of competing interests. The FSA also gave consideration as to whether any of that information required them to consider the use of any of their powers of intervention.

132 Given both of those things, I find that there is no factual basis for any criticism of the FSA in these respects. This aspect of the head of complaint should thus be dismissed.

133 However, I consider that these complaints are essentially linked to the injustice claimed by those representing policyholders – financial loss sustained through reductions in bonus and cuts in policy values. Those aspects of the matters within this head of complaint have been addressed when making my determinations of injustice.

134 I have found that the consequences of all the maladministration that I have determined occurred was one contributory factor in the creation of the situation in which the policy value cuts had to be made by the Society. To that extent only, I find this head of complaint to be made out.

135 There were other contributory factors. For example, the falls in the equity and property markets would also have contributed to that situation.

136 To the extent alone that maladministration was a contributory factor in the creation of the situation in which the policy value cuts were made, I uphold these head of complaints in part.

The general complaint

137 But what of the general complaint? Did the prudential regulators and GAD fail ‘for considerably longer than a decade properly to exercise their regulatory functions in respect of the Equitable Life Assurance Society’?

138 In determining this general complaint, I need to address two separate questions. The first is whether the maladministration which I have determined occurred substantiates that complaint; the second is whether, if so, any injustice resulted from it.

Is the general complaint substantiated?

139 I would first note that, with respect to the Society’s regulatory returns throughout the period covered by this report, the prudential regulators and GAD could never properly have been satisfied that the true financial condition of the Society, in terms of its compliance with the regulatory requirements and of its presentation of its solvency position, was being disclosed through the publication of those returns.

140 As a result of maladministration on their part and on the part of GAD, the prudential regulators were not able to verify the financial condition of the Society throughout this period. The Society’s regulatory returns were published without amendment while serious questions about the Society’s true position remained unresolved.

141 The information available to investors and potential investors and their advisers on which those investors could base their financial decisions throughout the period covered by this report was, in the specific ways that I have found, consequently incomplete, possibly inaccurate, and thus misleading.

142 The nature of the failings on the part of the prudential regulators and GAD which I have determined occurred differed over the time periods which I have considered in this report.

143 I consider that the prudential regulators and GAD in the period prior to the closure of the Society to new business in December 2000 failed properly to undertake their responsibilities in a number of respects.

144 In consequence, those regulators did not verify the solvency of the Society, failed to satisfy themselves that the Society’s returns were accurate and complete, and failed to consider appropriate action to protect the interests of existing and potential policyholders, when such consideration should have been given as questions about the Society arose.

145 There was a comprehensive failure by the prudential regulators and GAD to identify issues of potential concern within the returns when they first arose – and in some cases ever. Those issues were significant either because they potentially had a fundamental impact on the solvency of the Society or because they appeared to demonstrate questions concerning compliance with the applicable law.

146 Moreover, when matters of concern were identified, little or no consideration was given by the prudential regulators, acting with the advice and assistance of GAD, as to whether that information merited the use of any of the powers of intervention which Parliament had conferred on them. Nor were the Society’s returns required to be amended and resubmitted on any occasion during the period covered by this report.

147 As I have explained in Chapter 9 of this report, there is no evidence that there existed a generally applied policy that inaccuracies or other deficiencies in the regulatory returns submitted by insurance companies would be left unchallenged by the prudential regulators.

148 Indeed, such a policy if it existed would have been inconsistent with the obligations which those regulators had – which might in itself have constituted maladministration. Moreover, as I have also explained in Chapter 9 of this report, the evidence on this question that I have seen points the other way.

149 Furthermore, certain matters were not pursued appropriately and to a conclusion which enabled the prudential regulators to be satisfied that the Society was acting in accordance with the provisions of the statutory regulatory framework or the administrative provisions set out in the relevant guidance.

150 Assurances given by the Society that it would undertake certain actions were often not followed through, reasonable concerns were rebuffed and not pursued further, and practices which should have raised questions in the minds of prudential regulators, acting reasonably, went undetected or were left unchallenged.

151 There was also a series of missed opportunities. The great respect in which the Society was generally held and the reputation it had developed over many years are the only rationalisations that I have been able to find which might explain the passive, reactive and complacent approach to the supervision of the Society that is evident from the acts and omissions of the prudential regulators and GAD during the period prior to 20 June 1998.

152 Once the supervision of the Society took on a heightened intensity in the period after 20 June 1998, when the prudential regulators and GAD had become aware of the significance of the guaranteed annuity rate issue and while the Hyman litigation was underway, those regulators and GAD initiated appropriate discussions with the Society, sought to insist that the requirements to which the Society was subject had to be fulfilled, and entered into extended dialogue with the Society to seek to ensure that those obligations were discharged. All that seems perfectly proper.

153 However, the prudential regulators permitted the Society to take impermissible credit within its returns for a financial reinsurance arrangement, when the terms of that arrangement were not concluded and also not capable of permitting such credit to be taken as the arrangement had no economic substance. On that basis, the Society was permitted to declare a bonus in March 1999. The amount of credit taken, in the returns for 1999 and 2000, was also unreasonable.

154 The prudential regulators also failed properly to consider whether to take action to protect the Society’s existing and potential policyholders once the Hyman judgment had ended the basis on which the Society had managed its affairs in relation to guaranteed annuity rates, through the use of its differential terminal bonus policy.

155 I have no doubt as to the severity of the situation which faced the prudential regulators and GAD (and the Society) in the period between 20 June 1998 and the closure on 8 December 2000 of the Society to new business. Nor do I consider that those regulators failed to initiate action in the difficult circumstances that the Society faced at that time.

156 But once such action was initiated appropriately, it was then negated by the subsequent acts and omissions of the prudential regulators and GAD. On the whole, those acts and omissions in this period were largely ineffective and often inappropriate.

157 Those bodies acted in a way that was inconsistent with the regulatory regime they were responsible for operating and they departed unreasonably from compliance with the obligations to which those regulators and GAD were subject.

158 In the post-closure period which I have considered, a considerable amount of activity was undertaken by the prudential regulators across a wide range of issues, many of which were of a seemingly intractable nature and which raised serious questions about the future survival of the Society. That the Society was able eventually to weather the storms that it faced during this period must, it seems to me, to be due, at least in part, to this considerable effort by the prudential regulators.

159 The actions of the prudential regulators in the post-closure period were largely effective but, when giving information to the Society’s policyholders and to others about the situation Equitable was in, the FSA provided information which was inaccurate and misleading.

160 That is particularly unacceptable, given the nature of the regime that the FSA were operating – which permitted the Society commercial freedom in return for accurate and complete information, information which the prudential regulators were supposed to ensure was provided. It was also unacceptable given the obvious and understandable concern felt by the Society’s policyholders about its stability and their own financial security when they contacted the FSA for such information.

161 Although I have made findings of maladministration within this report, such findings should not be taken as being based on a view that the prudential regulators and GAD were in any sense guilty of acting in bad faith. Similarly, in so far as the period covered in this report from July 1998 onwards is concerned, I do not suggest through my findings that those regulators and GAD gave inadequate attention to, or put insufficient effort into, the supervision of the Society.

162 Nevertheless, I have found there to have been three general consequences of the maladministration which I have determined occurred, namely:

• that the Society’s returns were an unreliable source of information;
• that both the prudential regulators and the Society lost opportunities to address at an earlier date issues which were to become critical; and
• that regulatory decisions were frequently taken on a basis which had insufficient regard to the powers available to the prudential regulators.

163 Those consequences of the extensive maladministration which I have determined occurred in this case demonstrate failings which all go to the heart of the responsibilities and obligations which the prudential regulators and GAD had at the relevant time.

164 I consider that, accordingly, the maladministration that I have identified pervades the exercise by the prudential regulators and GAD of their functions over the period covered by my investigation. I also conclude that my findings are of such individual and cumulative significance that they demonstrate a failure by the prudential regulators and GAD to discharge their statutory functions and other obligations in a proper and effective manner.

165 But does all this substantiate the general complaint? I consider that the maladministration which I have found substantiates the general complaint that the prudential regulators and GAD failed properly to exercise their regulatory functions in respect of the Society during the period prior to its closure.

166 I consider, however, that the one finding of maladministration that I have made in respect of the inaccurate and misleading information provided by the FSA during the post-closure period does not substantiate the general complaint in relation to that period. Such a finding does not outweigh the substantial and sustained efforts that the prudential regulators put into the supervision of the Society during this period in very difficult circumstances.

Did injustice result from these failings?

167 But did any injustice further to that which I have identified in Chapter 12 of this report result from the failings which have caused me, when those failings are taken together, to find that the general complaint is substantiated with respect to the period prior to 8 December 2000?

168 I have considered whether any further injustice has resulted from the maladministration I have found in respect of the general failure of those operating the system of prudential regulation during the period when the Society was still open to new business. In doing so, I was struck by one theme which ran throughout every one of the referred complaints and throughout every one of the considerable number of letters that I have received from those complainants.

169 The particular circumstances of each complainant vary enormously – in terms of their age, their involvement with the Society, the amount that they claim to have lost as a result of that involvement, and the degree of reliance that they have now, or had in the past, on income derived from their investments with the Society. However, one thing unites all those complainants.

170 That is a sense of outrage that those complainants feel at the failure of those operating the system of prudential regulation, which the complainants believe that events relevant to the Society demonstrate – and which, by way of findings of maladministration, in respect of some of their complaints at least, I have vindicated.

171 In determining whether this sense of outrage is justifiable and thus constitutes injustice, I have had regard to the purpose of the regulatory regime which on this occasion was operated with maladministration. I have also had regard to the prospectus held out at the time by those operating that regime about their responsibilities and the degree to which an existing or potential policyholder could rely on that regime.

172 In Chapter 5 of this report, I found that the stated aim of this system of prudential regulation was to protect the interests of policyholders and potential policyholders. Securing this 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.

173 That regime was predicated on four cornerstones – freedom with publicity, the central role of the Appointed Actuary in the system of prudential regulation, the protection of the reasonable expectations of existing and potential policyholders, and the fulfilment of the criteria of sound and prudent management.

174 In the case of the Society during the period covered by this report prior to the closure of the Society to new business in December 2000, none of those features of the regulatory regime operated as Parliament intended they should operate. That was a result of maladministration by those charged with operating that regime.

175 Furthermore, the prospectus held out to existing and potential policyholders gave the impression that those operating the system of prudential regulation would undertake their responsibilities in such a manner as would enable those investors, when making investment decisions, to rely on the information about the Society which was published in its annual returns. As a result of maladministration, that information was unreliable throughout the period covered by this report.

176 In light of the above, I consider that this serial regulatory failure, which the maladministration I have found in respect of the period prior to the Society’s closure to new business represented, has caused further injustice to those who have complained to me.

177 Such injustice takes the form of a justifiable sense of outrage that those operating the system of prudential regulation so comprehensively failed, when those complainants had been told that this system would protect their interests and would ensure that adequate information in prescribed formats about the activities of insurance companies would be published to enable informed investment decisions to be made.

178 I find that maladministration permeated the discharge by the prudential regulators of their statutory functions – functions which were discharged with the advice and assistance of GAD. This occurred throughout the period covered by this report. The consequences of that maladministration were both significant and serious for those who have complained to me. I also find that injustice resulted from that maladministration.

179 That maladministration substantiates the general complaint made to me in respect of the period prior to the closure of the Society to new business. Injustice – in the form of a justifiable sense of outrage – resulted from that maladministration.

180 I therefore uphold the general complaint that the prudential regulators and GAD failed properly to exercise their regulatory functions in respect of the Society during the period prior to 8 December 2000 that is covered in this report.

181 In the previous Chapter of this report and in this one, I have made five determinations that injustice resulting from maladministration has been sustained. Those are:

(i) that injustice was sustained by any policyholder who can show that they 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 about their financial affairs as a result of such reliance;

(ii) that policyholders sustained injustice in the form of the loss of opportunities in the period between July 1991 and April 1999 to take informed decisions about their financial affairs in full knowledge of the exposure of the Society to guaranteed annuity rates and of the risks that such exposure generated;

(iii) that all those who joined the Society or who paid a further premium that was not contractually required in the period after 1 May 1999 have sustained injustice in the form both of any financial loss they may have suffered and also in the form of lost opportunities to take informed decisions about their financial affairs;

(iv) that those individuals who can show, having regard to their particular circumstances, that they relied on deficient information provided by the FSA in the post-closure period, that such reliance was reasonable in the circumstances, and that it led to a financial or other loss have sustained injustice; and

(v) that all those who have complained to me have sustained injustice in the form of a justifiable sense of outrage at the failings of the system of prudential regulation that are epitomised by my findings of maladministration relating to the prudential regulation of the Society during the period prior to its closure to new business.

182 I now turn to consider what would be an appropriate remedy for the injustice that I have found resulted from maladministration. I do this in Chapter 14 of this report.