Remedy and recommendations

Introduction

1 In this Chapter, I set out the consideration that I have given as to what remedy, if any, it would be appropriate for me to recommend in the light of my determinations that injustice resulted from the maladministration I have found. That consideration has been informed by representations on this question that I sought and received from the parties to the complaints.

2 I also set out the recommendations that I am making in the light of that consideration. Before doing so, I will explain my approach to remedying injustice resulting from maladministration.

My approach to remedy

3 In October 2007, I published a document, Principles for Remedy^[1], which sets out my views on the Principles that should guide how public bodies provide remedies for injustice or hardship resulting from their maladministration and confirms my own approach to recommending remedies.

4 Those Principles flow from my Principles of Good Administration, referred to in paragraphs 8 to 12 of Chapter 5 of this report. The provision of fair and proportionate remedies is an integral part of good administration, so the same principles apply.

5 My underlying principle is to seek to ensure that the relevant public body restores the complainant to the position he or she would have been in, had the maladministration not occurred. If that is not possible, the relevant body should compensate them appropriately.

6 As with my Principles of Good Administration, these Principles are not a checklist to be applied mechanically. Judgement should be used when applying the Principles to produce reasonable, fair, and proportionate remedies in the circumstances of each case.

7 The Principles that I have identified as being most relevant to this case are ‘getting it right’, ‘being customer focused’, ‘acting fairly and proportionately’, and ‘putting things right’.

8 ‘Getting it right’ means quickly acknowledging and putting right cases of maladministration or poor service that have led to injustice or hardship and considering all relevant factors when deciding the appropriate remedy, ensuring fairness for the complainant and, where appropriate, for others who have suffered injustice or hardship as a result of the same maladministration.

9 ‘Being customer focused’ means, among other things, apologising for and explaining the maladministration and providing remedies that take account of people’s individual circumstances.

10 ‘Acting fairly and proportionately’ means, among other things, offering remedies that are fair and proportionate to the complainant’s injustice or hardship and providing remedies to others who have suffered injustice or hardship as a result of the same maladministration.

11 ‘Putting things right’ means, if possible, returning the complainant – and, where appropriate, others who have suffered similar injustice or hardship – to the position they would have been in, had the maladministration not occurred. If that is not possible, the complainant and such others should be compensated appropriately. It also means considering fully and seriously all forms of remedy (such as an apology, an explanation, remedial action or financial compensation) and providing the appropriate remedy in each case.

12 In considering what an appropriate remedy might be in any particular case, I would expect a public body to consider the wishes and needs of the complainant in deciding an appropriate remedy and to consider all the circumstances of the case, trying, wherever possible, to offer a remedy that is calculated fairly and impartially but is still appropriate.

Representations made to me

13 In line with my normal practice, in February 2008, when I sent a copy of the revised draft of this report to the public bodies, to those representing complainants and to other interested parties, I asked those representing the lead complainants to tell me what they, on behalf of those complainants, considered would be an appropriate remedy for the injustice which I have found resulted from maladministration.

14 In May 2008, I received submissions on this question from those acting on behalf of the lead complainants. I also received submissions from the public bodies, whom I had also asked for their views on this question.

The submissions by EMAG on behalf of complainants

15 EMAG made submissions concerning both the broad principles which should govern any scheme for compensation and suggested an approach towards the quantification of such compensation. Those submissions are reproduced in full in Part 4 of this report.

16 With regard to the principles which should govern a compensation scheme, EMAG submitted that:

… an FSA-style compensation scheme, such as applied to various forms of mis-selling, could take another eight years. In eight years most Equitable Life policyholders will be beyond caring. They need and deserve, having suffered ‘outrageous’ treatment at the hands of the Treasury and the regulators, a redress package that:

1. Is rapid in payment.
2. Is simple to administer.
3. Is not administered by either the Treasury, or the FSA or any of their offshoots or by Equitable Life.
4. Does not require an extensive and complicated claims system.

17 EMAG further submitted, with respect to an approach to the quantification and delivery of compensation, that:

The approach EMAG suggests … is as follows:

1. Take the areas where [I have] found maladministration leading to injustice and make a broad brush estimate of the total loss arising to policyholders at 16 July 2001.
2. Add an estimate of the ‘removal costs’ in respect of those that have subsequently moved their funds elsewhere. This would include Market Value Adjustments, other penalties and re-investment charges.
3. Apply a series of appropriate discounts for things like the proportion who were not influenced by published data and those who would not have invested elsewhere and apply those percentages to the total to arrive at a compensation sub-total as at that date.
4. Add something for outrage and interest to the resulting sum to arrive at a current compensation ‘pot’, which the Treasury should pay immediately to an appropriate independent scheme administrator.
5. Distribute that compensation ‘pot’ upon a policy by policy basis in accordance with a sliding scale based upon values immediately before the big cut of 16 July 2001.

18 EMAG continued by saying:

The benefit of this approach is that once the compensation pot is agreed and transferred to the scheme administrators, calculation could be handled mechanically from the information held upon Equitable Life’s computers, now in the possession of Halifax Financial Services. The downside is a lack of sophistication to deal with all possibilities.

EMAG sees it as vital for the fair treatment of Equitable Life policy holders as a whole that compensation can be calculated, apportioned and distributed without undue delay, even if it involves the acceptance of some rough edges to the calculations.

19 EMAG told me that they had calculated the ‘losses incurred by policyholders investing after 1990 at £3.2bn if they would have remained with Equitable or £4.6bn if they would have invested elsewhere’.

My assessment of the submissions by EMAG

20 The principles that EMAG set out do not seem to me to be controversial. If it is decided to establish a compensation scheme, given the length of time that it has taken to determine the relevant complaints and the history of this case, it seems to me that it would be fair, just and reasonable for such a scheme to operate independently, flexibly, openly, and speedily – and with the acceptance of some ‘rough edges’.

21 As for EMAG’s suggested method of compensation, I am aware that there is more than one means of calculating compensation in circumstances such as this.

22 One method is that chosen by EMAG – the identification of quantifiable amounts which are then set at a global level, with the resulting amount shared out to those deemed eligible by some pre-determined formula. Another is that used by the Financial Ombudsman Service which, on an individual level, makes a comparative assessment of the performance of the company in question against an average-performing competitor. I have no concluded view on the relative merits of such proposals, which are a matter for others to determine.

23 Before I would make a recommendation for financial compensation in any individual case, I would need to be satisfied that those who had complained to me, and those who had been affected in the same way by the same maladministration, had sustained injustice in the form of financial loss as a result of that maladministration.

24 The injustice that I have found on this occasion to have been sustained by those who have complained to me was summarised in Chapter 12 of this report, and is:

• financial loss, where that has occurred, or lost opportunities to take informed decisions as a result of reliance on the information contained in the Society’s returns for 1990 to 1996;
• the loss of opportunities in the period between July 1991 and April 1999 to take informed decisions in full knowledge of the exposure of the Society to guaranteed annuity rates and of the risks that such exposure generated;
• financial loss, where that has occurred, to anyone who joined the Society or who paid a further premium that was not contractually required in the period after 1 May 1999 and lost opportunities to take those decisions on an informed basis;
• financial or other loss, where that has occurred, to those individuals who can show, having regard to their particular circumstances, that they relied on misleading information provided by the FSA in the post-closure period, that such reliance was reasonable in the circumstances, and that it led to any such losses; and
• a justifiable sense of outrage on the part of all those who complained to me at the failings of those operating the regulatory system during the period prior to the Society’s closure to new business.

25 It is my normal practice, where someone has been inconvenienced or made to feel a justifiable sense of outrage at the way that they have been treated, to recommend that an apology is made and that consideration is given to whether that apology should be accompanied by a tangible recognition of such inconvenience or outrage.

26 Where financial loss is established, I would normally expect that, where appropriate, such a loss should be remedied in full, with an appropriate payment of interest where that is relevant.

27 In that context, there are four questions that I need to address in this case before making any recommendations designed to remedy the injustice that I have found has been sustained on this occasion, namely:

• whether complainants have suffered a financial loss in absolute terms – that is, have they suffered an identifiable or quantifiable loss at all?;
• if so, whether complainants have suffered a financial loss in relative terms – that is, have they suffered a loss that they would not otherwise have suffered had they invested or saved elsewhere than the Society?;
• if so, whether there is a sufficient link between the maladministration found and that relative loss; and
• if there is, what it would be appropriate in all the circumstances of this case to recommend by way of a remedy.

If I were to find no financial loss, or were to conclude that any such loss sustained was not sufficiently linked to maladministration, or were to consider that it would not be appropriate to recommend a remedy for any such loss, I would then need to consider whether it would be appropriate to recommend a remedy for the opportunities that I have found were lost as a result of maladministration.

28 I also need to consider whether any injustice has already been remedied by other means. Where that is so, I would not expect a further remedy to be provided, as it is an important principle – one set out within the detail of my Principles for Remedy – that any recommendation I make should not lead to a complainant making a profit or gaining an unreasonable advantage.

29 As for absolute loss, I am very far from concluding that everyone who has complained to me about the prudential regulation of the Society has suffered a financial loss. Still less do I conclude that everyone who has saved with, or invested in, the Society during the period covered by this report has suffered financial loss.

30 It seems to me that it is a natural and unavoidable consequence of one of the basic premises of the complaints that have been made about the events covered in this report – namely, that distribution took place of the resources of the Society in what is said to be an imprudent manner which it could not afford – that some people have gained from saving and investing with the Society more than they would have done had any such distribution not occurred.

31 That said, there is no avoiding the fact that those who are, or were at the relevant time, members of the Society underwent the series of policy value and bonus cuts during the period after it closed to new business that are set out within Chapter 2 of this report.

32 That is sufficient evidence in my mind to persuade me to conclude that, for many people at least and in a context where those people had reasonable expectations concerning their policy values and bonuses, financial loss has been sustained. In coming to this conclusion, I have also borne in mind the acceptance, which appears to be common ground among all the parties, that such losses were suffered across the with-profits industry at the relevant time.

33 That brings me to relative loss. Did those who have complained to me, and those in a similar position to those complainants, suffer a loss that they would not have suffered had they saved or invested elsewhere?

34 I explained above that the approach that the Financial Ombudsman Service takes to the question of remedying financial loss is a comparative approach. For example, such an approach is illustrated in their determination of the case of Ms E^[2]:

The compensation due to Ms E should put her in the position she would have been in if she had not invested with Equitable Life. The value of her funds, like those of nearly all funds invested in the stock market, fell during this period. But it would be unfair to order Equitable Life to compensate Ms E for losses due to falls in the stock market that would have affected all with-profits funds and which she would have suffered if she had invested with a different firm instead of Equitable Life.

Therefore, compensation is to be assessed by comparing the return Ms E received on the money she put into a with-profits pension with Equitable Life and the return she would have received from a similar product with an alternative provider. Since I have been unable to identify which particular alternative provider Ms E would have chosen, I have decided that the comparison should be made with the average return achieved by comparable with-profits funds.

35 The Society has dealt with many types or categories of mis-selling complaints, or claims based on breach of contract. However, the most analogous category of complaint to the maladministration on the part of the prudential regulators and GAD that I have found to have occurred on this occasion was those complaints which were made due to the Society’s failure to disclose the existence of guaranteed annuity rates.

36 I sought information from the Society as to what the outcome had been to the cases of those people in a similar position to Ms E who, not being caught by the effects of the Compromise Scheme, had complained to the Financial Ombudsman Service about such alleged mis-selling on the part of the Society – and whose case had been assessed using the approach outlined above in relation to Ms E.

37 That information shows that relative loss was established in 1,072 cases. In a further 233 cases, a complaint of mis-selling was upheld but the comparative assessment resulted in a determination that no loss had been sustained. That is, that approximately 60% of those who had made complaints of the type made by Ms E were found to have suffered a relative loss, there having been 1,796 such cases in total.

38 I understand that the cases dealt with by the Financial Ombudsman Service followed on from a review conducted by the Society, at the request of the FSA, of any mis-selling which related to the failure to disclose the existence of guaranteed annuity rates. In the course of that review, the Society also adopted an analagous comparative approach to assessing loss, although I understand that it imposed a ceiling or cap on the remedy provided.

39 Under that review, a total of 7,253 cases were considered. Relative loss was established in 5,636 of those cases. No loss was found in 601 cases and no liability for mis-selling or loss in 1,016 cases. That is, that approximately 78% of those with mis-selling complaints of types other than that made by Ms E were found to have suffered a relative loss.

40 Those who have complained to me are in substantially the same circumstances as those who complained to the Society or to the Financial Ombudsman Service, with the exception that they were caught by the effects of the Compromise Scheme and thus could not pursue such complaints.

41 When the above information is considered together, it seems to me that this demonstrates that, for many of those covered by my recommendations, it could be established that a loss has been sustained, relative to what would have transpired had those individuals saved or invested with a comparable with-profits fund.

42 I therefore conclude that it would be difficult to sustain an argument that no person affected by ‘the Equitable affair’ had suffered a relative loss. I also conclude that the individual circumstances of each complainant and other people similarly affected are key to establishing whether those people are in the category of those who have suffered relative loss. Accordingly, whether relative loss in a particular case has been sustained has to be determined at an individual level.

43 I now turn to consider whether there is a sufficient link between the acts and omissions of the bodies whose actions have been investigated and found to be deficient with any relative loss that is established.

44 I explained in Chapter 5 of this report that the aim of the system of prudential regulation was to protect the interests of policyholders through the supervision of the affairs of insurance companies, in the manner in which Parliament intended and using the means that Parliament provided.

45 Chapter 10 of this report sets out my findings as to the deficiencies in the way in which that regulation was carried out in this case. My conclusions as to whether injustice resulted from the maladministration, which, in Chapter 11 of this report, I found had occurred, are set out in Chapter 12.

46 It is on that basis that I conclude that there is a direct link between the acts and omissions of the prudential regulators and both the information throughout the period that was before those making savings and investments decisions regarding the Society – and also between those acts and ommissions and the public knowledge about the solvency position of the Society in the period on or after 1 May 1999.

47 The prudential regulators, and no one else, were given the functions of scrutinising the returns that the Society submitted and of verifying its solvency position. Those regulators did this with advice and assistance from GAD. No other party can be said to be at fault because those regulators and/or GAD acted with maladministration.

48 I am satisfied that there is a sufficient link between the actions of the prudential regulators and GAD and any relative loss that may be established occurred in individual cases. That also goes for the opportunities to invest elsewhere than the Society which I have found that complainants have lost.

49 I now turn to what it might be appropriate to recommend to remedy the injustice that I have found resulted from maladministration on the part of the prudential regulators and/or GAD.

50 This I would normally do in line with the basic principle that I have outlined above, namely that the relevant public bodies should restore complainants to the position they would have been in, had maladministration not occurred or, where that is not possible, those bodies should compensate the complainants appropriately.

51 However, I have received submissions from the public bodies that question whether it would be appropriate, in the specific context of this case, to apply the approach that I would normally apply to questions of remedy and redress.

52 I consider those submissions below and then go on to address the question of what it would be appropriate to recommend on this occasion.

The submissions by the public bodies

53 The public bodies in their submissions questioned whether, in principle, it would be appropriate for me to recommend financial compensation, in the light of my findings and determinations. Those submissions were made, those bodies said, ‘without prejudice’ to a ‘central submission’ on their part that no maladministration had occurred and that, in any event, no injustice had resulted.

54 Those bodies first told me that they accepted that my ‘jurisdiction is wider than that of the courts’ and that I applied ‘different tests to [my] approach to maladministration and injustice’.

55 However, the public bodies submitted that:

… in any consideration of a possible recommendation of a remedy involving compensation being paid by any of the bodies under investigation, they contend that there are compelling reasons of policy as to why it is contrary to the public interest or otherwise inappropriate to recommend financial redress to “remedy” any maladministration. Amongst these reasons are those that have led the English courts to shy away from imposing a duty of care on regulators.

56 The public bodies continued by saying:

It is important to note that, even now, Equitable has not failed. Essentially, the complainants in this investigation seek redress not for the collapse of Equitable, but to compensate for the fact that, following the events that were brought about by the decision of the House of Lords in the Hyman litigation, the non-guaranteed element of their policy values has fallen relative to what they were expecting.

57 It was submitted by the public bodies that:

There are many sound public policy reasons for not recommending that a regulator such as the bodies under investigation should provide financial recompense even if negligent regulation (and, by analogy, maladministration) is established. Prominent among these reasons are that such a recommendation would:

(a) tend to result in an over-cautious or excessively risk-averse regulatory approach, for example the distortion of decision-taking in favour of those most likely to sue;

(b) if accepted, result in the diversion of scarce public resources;

(c) be illegitimate in circumstances where the regulator does not exercise sufficiently immediate day to day control over the primary wrongdoer;

(d) obscure the fact that the immediate and material cause of the loss in this case was Equitable itself, coupled with the combined impact of external factors which were beyond the control of the prudential regulator;

(e) be inconsistent with the broader role of regulation; [and]

(f) be incompatible with the statutory scheme in place during the relevant period covered by the … Report.

58 The public bodies continued by saying:

Effective regulation entails the careful weighing of competing objectives and the exercise of judgement as between a range of possible courses of action. The Courts have consistently recognised this, in cases such as Yuen Kun Yeu^[3] v Attorney General of Hong Kong; Davis v Radcliffe^[4]; and Three Rivers DC v Bank of England^[5].

As the Court observed in the last of these three cases, “… the exercise of the powers and duties of a supervisor in this field involves the balancing of many different factors in the interests both of the public generally and of both existing and future depositors. The interests of these and other different groups may conflict so that it makes no real sense to hold that a duty of care or a statutory duty is owed to only one or some of those groups …”.

59 It was further submitted by the public bodies that:

In the present context, the prudential regulator had to make judgements in the context of a need to weigh up competing considerations of investors and potential investors, the interests of the financial services sector and the wider public interest in fostering competition and innovation.

60 The public bodies continued:

The Courts have on many occasions, in a number of different contexts^[6], recognised that to impose a liability to provide financial redress on regulators would result in over-cautious or excessively risk-averse regulatory decisions. In the particular context of financial regulation, in Yuen Kun Yeu the Court considered that there was “much force” in the argument that the imposition of a duty of care on a banking regulator in respect of losses suffered by depositors would have a seriously inhibiting effect on the work of the regulator.

This is because a sound judgement would be less likely to be exercised if the regulator were to be constantly looking over its shoulder at the prospect of claims against it, and its activities would be likely to be conducted in a detrimentally defensive frame of mind. The result of this, the Court decided, was that the effectiveness of the regulator’s functions would be at risk of being diminished: consciousness of potential liability could lead to distortions of judgement.

61 The public bodies then submitted that:

Any acceptance of a recommendation to make financial compensation would potentially expose the public purse to liability to an unlimited number of claimants comprising existing depositors or investors and potential depositors or investors.

This was a powerful factor which weighed with the Court in Davis v Radcliffe, where it commented that a consideration militating against the existence of the alleged duty of care on the regulator was that “it is said to be owed to an unlimited class of persons including not only the depositors of money with [the regulated entity] but also those considering whether to deposit their money with [the regulated entity]”.

62 It was further submitted that:

This leads to the related point that any acceptance of a recommendation to pay compensation from the public purse as a result of defective regulation would inevitably result in the diversion of scarce public resources provided by the taxpayer away from important social programmes such as education or health.

63 The public bodies then set out a ‘further fundamental objection to the making or acceptance of any recommendation for financial compensation’, that being:

… that this would entail, in effect, making the regulator liable for the defaults of the regulated entity.

As a matter of principle, it is only legitimate to seek to impose liability on a body for the wrongdoings of another to the extent that the body can exercise a high degree of control over the latter, as was emphasised by the Court in Davis v Radcliffe and in Yuen Kun Yeu.

Both these cases were cited by the High Court in Three Rivers District Council v Bank of England. In considering whether the Bank of England owed a duty of care in its regulatory capacity in respect of losses suffered by depositors following the collapse of BCCI, the Court (having referred to Davis v Radcliffe and Yuen Kun Yeu) highlighted the significance of the fact that the Bank of England did not exercise day to day control in its regulatory functions. The judge stated:

“… in each case it was held that the supervisor had no day to day control of the supervised institution. … the same is true here. … none of [the Bank’s powers] gave the bank the kind of control which the Privy Council had in mind as potentially giving rise to a duty of care or statutory duty to depositors … In my judgment the Bank cannot fairly be regarded as having day to day control of BCCI or any other supervised institution.”

64 It was then submitted by the public bodies that:

This reasoning is, the bodies under investigation contend, applicable to the respective positions of the bodies under investigation on the one hand and Equitable on the other. The regulation of life insurance companies such as Equitable is in principle similar to the regulation of banks with which the Yuen Kun Yeu, Davis v Radcliffe and Three Rivers cases were concerned.

65 The public bodies then set out a ‘further reason why it would be quite inappropriate to recommend any financial remedy’, that being:

… that the root causes of the “losses” suffered by policyholders were changes in financial market conditions and Equitable’s loss of discretion to adjust terminal bonus rates as a result of the House of Lords’ judgment in the Hyman litigation, coupled with the shortcomings of Equitable itself, its senior management and its Appointed Actuary, whose “central place … within the regulatory regime” is recognised by [me] ...

66 The public bodies then submitted that:

A broader reason for coming to the same conclusion is that the purpose of the regulatory system in force at the material time was not to provide a warranty to investors.

Moreover, any recommendation for a financial remedy would not be in accordance with the specific statutory scheme in place during the relevant period. In Yuen Kun Yeu the Court declined to impose a duty of care on the regulator because the Court is “unable to discern any intention on the part of the legislature that in considering whether to register or deregister a company the commissioner should owe any statutory duty to potential depositors. It would be strange that a common law duty of care should be superimposed upon such a statutory framework.”

Similarly, there is nothing in the regulatory regime with which the … Report is concerned which suggests that Parliament intended any common law duty of care to be superimposed on that framework.

67 The public bodies then concluded by submitting that:

Any recommendation for a financial remedy would be tantamount to a recommendation that the State should accept by the back door a very similar obligation to that which Parliament has declined to impose via the front. Such a recommendation, in the circumstances of the present case, would not be an appropriate use of the Ombudsman’s powers.

and that:

Moreover, it is not necessary for there to be financial redress to provide for the full accountability of regulators. Public bodies are held accountable for their acts and omissions in a number of ways: through Parliamentary and press scrutiny, by bodies such as the National Audit Office and by public opinion.

My assessment of the submissions by the public bodies

Preliminary matters

68 Before setting out my assessment of those submissions by the public bodies, I would first note, as a preliminary point, that this statement of principle by those bodies – that it would never be appropriate for me to recommend financial compensation in, or following, a report in which I had upheld complaints that injustice had been sustained in consequence of maladministration on the part of financial regulators – is a surprising submission.

69 I say that it is surprising for three reasons. First, I would note that I am being invited to adopt, without regard on each occasion to the relevant circumstances of the case, a blanket approach to the question as to whether or not it would be appropriate, in the context of all complaints about financial regulation, to recommend financial compensation for any injustice which I identify has been sustained.

70 However, I do not consider that the adoption of such an approach would be permissible. I may not fetter my discretion. I am required to consider each case on its merits. The adoption of a rigid policy, such as is here proposed by the public bodies, would not, in my view, be lawful or appropriate. Nor either, in my view, would it be appropriate if public bodies adopted such a rigid policy when responding to my reports, for similar reasons.

71 Secondly, if I were required as a matter of principle to adopt such an approach, this would constitute a fundamental constitutional principle, one which was not articulated by Parliament within the legislative framework which governs my role.

72 There are many examples within the 1967 Act of qualifications to, or restrictions on, the type of action taken in the exercise of administrative functions that I am empowered to investigate. Specific exclusions from such action, which relate to individual bodies among those which are listed in Schedule 2 to the 1967 Act as being bodies to which that Act applies, are set out by way of Notes to that Schedule.

73 It seems to me that, had it wished to do so, Parliament could have excluded through this method action taken as part of the discharge of the functions of particular financial regulators such as the DTI or the Treasury from the scope of my jurisdiction. Indeed, when Parliament brought GAD within my jurisdiction to enable me to conduct the investigation which led to this report, Parliament limited the actions by GAD that I could investigate by way of such a Note.

74 The bringing into my jurisdiction of GAD was, it seems to me, itself an indication of the Parliamentary intention that I should consider the actions which I have investigated in this case – and apply the tests that I would normally apply, once I had considered those actions and had determined whether the complaints I have received about those actions were justified.

75 Furthermore, Schedule 3 to the 1967 Act lists types of action taken in the exercise of the administrative functions of all the bodies within my jurisdiction that I am not permitted in any case to investigate.

76 Had Parliament intended that the actions of all financial regulators should be treated differently from those of the other bodies in my jurisdiction, including certain regulators in other fields, it could have removed as a class the actions of financial regulators from my investigative reach by listing those actions within that Schedule.

77 Yet Parliament did not do so – not even on the many occasions on which the 1967 Act was amended after the then Government had indicated, in response to my predecessor’s report on Barlow Clowes, that the Government believed that financial regulators were, in the context of my remit, a special case – in respect of which the normal approach adopted by the Ombudsman should not apply.

78 In the absence of express authorisation by Parliament, I consider that it would be inappropriate for those whose actions are subject to investigation to seek to bypass the scheme established by Parliament through the creation of my Office, merely by the assertion that their particular position is different to that of other public bodies.

79 If I were to accept that a public body, through such assertions, was entitled to take itself outside the scope of the remedies that can be provided through my work, this would potentially have significant ramifications on a wider scale.

80 This, it seems to me, is even more the case when regard is had to the purpose of the scheme established by Parliament, which is precisely to enable remedies to be provided for justified complaints that injustice has resulted from maladministration on the part of those bodies within my jurisdiction.

81 That brings me to the third and final reason why I have found the submissions of the public bodies on this point to be surprising.

82 The initial position of the then Government in respect of the Barlow Clowes report changed over time^[7]. Despite this, that position – namely that recommending financial compensation to remedy injustice resulting from maladministration on the part of financial regulators would always be inappropriate – is now put forward again as an important principle that should guide my consideration of what recommendations I should make in this case.

83 But such a fundamental principle is surely one that the public bodies in this case could have clearly and publicly stated before now.

84 At no time have the public bodies made such a statement that, whatever I might find at the end of the investigation which led to this report, it was an important matter of principle that no compensation would ever be payable in any circumstances. That has only been submitted to me since I issued the first draft of this report to those bodies.

85 The terms of reference for my investigation stated plainly that, at the end of that investigation, I would recommend appropriate redress for any injustice I found had been caused by maladministration on the part of those bodies whose actions were subject to complaint. Yet such a principle as is now put forward was not articulated within the initial response of those bodies to the complaints within those terms of reference.

86 Nor was such a principle stated in the response of the Government to the Penrose Report, or during the consultation process that I undertook prior to deciding to launch the investigation which led to this report, or at any of the other opportunities to make such a submission that have arisen during my investigation, or in evidence given by the public bodies before the European Parliament Committee of Inquiry.

87 It seems to me that those who have complained to me therefore have a legitimate expectation that I will consider what it would be appropriate to recommend by way of remedy, without imposing constraints which have no grounding in the legislative scheme governing my role.

88 Those complainants – and others, including Parliament – would, it seems to me, be entirely justified in asking what had been the purpose of my investigation, or of the other inquiries which have been undertaken in respect of the Society, if I were simply to suggest now, at the invitation of the public bodies, that there had never been any possibility of an appropriate remedy at the end of this process.

Do these submissions provide an adequate basis for concluding that no remedy for maladministration should be forthcoming?

89 While, for the reasons I have explained above, I am surprised by the nature of the submissions made by the public bodies, I recognise that those submissions constitute a clear statement of principle which I am invited to adopt. I also recognise that the adoption of such a principle would have a profound effect on what I might consider it appropriate to recommend in this report.

90 I accept, therefore, that the substantive merits of those submissions should be assessed. This I now turn to do.

91 The public bodies have told me that they accept that, ‘my jurisdiction is wider than that of the courts’ and that I apply ‘different tests to [my] approach to maladministration and injustice’. At the same time they submit that, ‘there are compelling reasons of policy as to why it is contrary to the public interest or otherwise inappropriate to recommend financial redress to “remedy” any maladministration.’ They say that, ‘amongst these reasons are those that have led the English courts to shy away from imposing a duty of care on regulators.’

92 The underlying premise of these submissions by the public bodies, their acceptance that my jurisdiction is wider than that of the Courts notwithstanding, is that I should take into account the same considerations as would the Courts when considering negligence claims against public authorities. In other words, that the work of the Courts in relation to negligence claims is directly analogous to my work. I do not accept that underlying premise for the following reasons.

93 First, I am aware that the Courts have held that only in exceptional cases would they accept that the interests of justice justified an extension of the law of negligence to new categories of public body, such as financial regulators; and that this has normally been on the basis that to do so would create a novel category of negligence liability.

94 A classic example of the caution that I understand the Courts would adopt in such a situation appears in the case of Reeman v Department of Transport [1997], where Phillips LJ said^[8] that: ‘When confronted with a novel situation the Court does not [consider whether to impose a duty of care] … in isolation. It does so by comparison with established categories of negligence to see whether the facts amount to no more than a small extension of a situation already covered by authority, or whether a finding of the existence of a duty of care would affect a significant extension to the law of negligence. Only in exceptional cases will the Court accept that the interests of justice justify such an extension of the law’.

95 However, the rationale for the establishment of my Office was to provide a mechanism for complaints that are not actionable in the Courts to be considered by an independent and impartial officer and to assist Parliament to provide remedies that the Courts could not provide for injustice – a wider concept than those which underline matters which are actionable in the Courts.

96 Indeed, that no remedy exists before the Courts, as is the case here according to the submissions of the public bodies, does not preclude me from conducting an investigation or from treating such a case in line with my normal practice – the position is quite the opposite.

97 Section 5(2)(b) of the 1967 Act provides that I shall not conduct an investigation in respect of any action where the person aggrieved has or had a remedy by way of proceedings in any court of law, unless I am satisfied that, in the particular circumstances of the case, it is not reasonable to expect that person to resort (or to have resorted) to such a remedy.

98 Situations where there is no legal remedy, or where there is such a remedy but I do not consider it reasonable to expect a complainant to exercise that remedy, thus constitute the staple diet of the work of my Office.

99 This is perhaps best exemplified by the case of Mr and Mrs Reeman, to which I have in paragraph 94 above referred.

100 Mr and Mrs Reeman had bought a fishing vessel called Cornelis Johanna, which had received a certificate issued by the Department of Transport certifying that the ship complied with the relevant statutory provisions designed to ensure that it was seaworthy.

101 Mr and Mrs Reeman relied on that certification as demonstrating that the vessel’s design and construction rendered it fit for service as a fishing vessel. Unfortunately, the surveyor who had issued that certificate had failed to carry out his duties when so doing with due skill and care.

102 After stability tests found that, in fact, the vessel did not meet the minimum requirements of the legislation and was thus not permitted to take to sea, Mr and Mrs Reeman initiated a legal action against the Department of Transport, claiming damages for breach of the common law duty of care which they alleged was owed to them by that Department.

103 That litigation concluded when the Court of Appeal held, on 26 March 1997, that it would not be fair, just and reasonable to impose a duty of care on a body, such as the Department of Transport, charged with the regulatory duty of certifying ships with a view to promoting safety at sea. Mr and Mrs Reeman’s claim for damages thus failed^[9].

104 However, that was not the end of the matter. Mr and Mrs Reeman complained to my predecessor, who decided to conduct an investigation. In his report on that investigation^[10], my predecessor upheld their complaint, having found injustice in the form of financial loss resulting from maladministration on the part of the surveyor who had acted on behalf of the Department.

105 The Department of Transport, as a result, agreed to make an ex gratia payment to Mr and Mrs Reeman to compensate them for the injustice they had sustained and that Department subsequently made an interim payment of more than £215,000 to Mr and Mrs Reeman, with the final amount paid amounting to approximately £750,000^[11].

106 That case underlines the fact that there is no direct or close analogy between the standards which apply to the consideration by the Courts of negligence claims against public authorities and those which apply to my consideration of complaints about injustice resulting from maladministration by those same authorities.

107 There is a difference, rightly accepted by the public bodies in this case, between legality and maladministration. As has been held elsewhere^[12], although there is a substantial element of overlap between maladministration and unlawful conduct, those concepts are not synonymous.

108 There is no reason in principle why the considerations which determine whether there has been maladministration should, necessarily, be the same as those which determine whether conduct has been unlawful.

109 There is therefore no reason why, when exercising my powers to conduct investigations and to report on complaints of maladministration, that I should necessarily be constrained by the legal principles which would be applicable were the different task being carried out of determining whether certain conduct is lawful.

110 For the reasons given above, I reject the submission that there is a direct analogy, which I should follow, between the approach adopted by the Courts, when considering the liability of certain public authorities for negligence, and the approach that I should adopt, when considering remedies for injustice resulting from maladministration by financial regulators.

111 Nonetheless, it seemed to me that I should, in any event, consider the public policy reasons put forward by the public bodies for not providing financial recompense in this case. Those reasons are set out at paragraph 57 above. I am not persuaded by them, with one exception. I explain why below.

112 I would first emphasise that I fully accept that, when considering what an appropriate remedy might be for the injustice sustained in this case, the public interest is a consideration to which I should have regard.

113 I also accept that, when doing so, it would be appropriate to consider the potential impact on the public purse of any payment of compensation in this case. That one group of taxpayers might have to underwrite the payment of compensation to another group is something that cannot be left out of all account.

114 To that extent, I accept the submissions of the public bodies. I agree that the diversion of scarce public resources is a relevant consideration which should be taken into account and weighed in the balance along with other relevant considerations.

115 I also accept that it is a matter of record that the Courts have not imposed a common law duty of care on financial regulators^[13].

116 In that context, the public bodies in their submissions have argued that I should have regard to certain matters of public policy. Those submissions raise the following four questions:

• would any recommendation for financial redress in this case result in an over-cautious or excessively risk-averse regulatory approach?;
• would such a recommendation be illegitimate because the regulators in this case did not exercise sufficient control over the ‘primary wrongdoer’ or because it would ‘obscure the fact that the immediate and material cause of the loss in this case was Equitable itself, coupled with the combined impact of external factors’?;
• would such a recommendation be inconsistent with the broader role of regulation?; and
• would such a recommendation be incompatible with the statutory scheme that was in place during the relevant period?

117 I am not persuaded by the answers to those questions provided by the public bodies in their submissions.

118 When considering the above questions, I have borne in mind two central facts about the wider context of this case. The first is that the system of regulation which has been under consideration in this report no longer exists. The events recounted in this report belong to an historical era.

119 As I noted in Chapter 1 of this report, there has been, since 1 December 2001, a wholly new system of financial supervision in place pursuant to the terms of the Financial Services and Markets Act 2000. When that new regime was introduced, it was said to have strengthened and made more effective the regulatory regimes it replaced through consolidation and a move to a principles-based supervisory approach.

120 Secondly, as I also explained in Chapter 1 of this report, those operating that new regime, the FSA, are not within my jurisdiction and so there is unlikely to be any further occasion on which I will be able to consider complaints made about their actions.

121 It is therefore unclear to me on what basis a specific recommendation now – designed to remedy a purely historic injustice which arose within a regulatory framework which no longer exists and which has been the subject of complaints that could never again be considered – would reasonably lead to any detrimental impact on the actions of financial regulators exercising different powers in another context.

122 Nor would such a recommendation be designed to remedy losses caused by the Society, as has been suggested by the public bodies. In relation to findings of maladministration leading to injustice, such as I have made in this report, the ‘primary wrongdoer’ is the body or bodies which acted with such maladministration, not any third party.

123 In my view, a recommendation to remedy injustice would be entirely consistent with the broader role of regulation, and would not, as has been suggested by the public bodies, be equivalent to the creation of a warranty for current and future investors. Such a recommendation would also be compatible with the statutory scheme for prudential regulation that was in place during the relevant period, considered in the context of the further statutory scheme created by the 1967 Act.

124 When considering whether it would be appropriate to make a recommendation for financial compensation – or for any other remedy – the statutory regime to which I must have regard is that which governs my work. That is the approach I have followed.

125 While the facts of each case are matters to be taken into account in any investigation, the appropriateness of the contents of my report, including what remedies might be appropriate, will be determined by consideration of my role and remit as that is prescribed in the 1967 Act.

126 There is no inconsistency between the recommendation of a financial remedy in this case and the provisions of the legislative framework within which I must work.

127 Even if that were not so, I do not accept that a recommendation for financial compensation in this case would be incompatible with the statutory scheme in place at the time governing the prudential regulation of insurance companies. Indeed, I consider that those who promoted that legislation would be surprised by the contention that the application of my normal approach to complaints about the prudential regulation of insurance companies would be inconsistent with that regime.

128 In 1973, when Parliament was considering what became the Insurance Companies (Amendment) Act 1973 – which was subsequently consolidated with other relevant legislation into the Insurance Companies Act 1982 – concern was expressed about certain of the powers granted to the prudential regulators by those legislative proposals.

129 Such concerns primarily related to the authorisation process and to the ‘fit and proper’ powers to be granted to the prudential regulators, which together were designed to enable those regulators to control entry to the insurance industry. Particular concerns arose regarding the lack of independent appeal mechanisms in cases where those regulators decided not to authorise a company or not to permit an individual to hold a controlled position.

130 The Ministers promoting that legislation expressly relied on the ability of those with complaints about the actions of the prudential regulators of insurance companies to come to my Office through their Member of Parliament^[14]. That ability persuaded Parliament to agree to the proposals and to reject amendments aimed at building into the legislation additional appeal mechanisms.

131 Given this clear intention on the part of Parliament and the lack of any express qualification on my ability to apply our normal tests when considering complaints about the functions of the prudential regulators, I see no basis for accepting the proposition that any recommendation that I might make would be incompatible with the scheme of the insurance companies’ legislation.

132 I have explained above why, even were I to accept that the considerations to which the Courts have regard are directly applicable to my consideration of this case, the submissions of the public bodies are unpersuasive. I would, moreover, note that the Courts have held^[15], in the context of negligence claims against public authorities, that:

… it would require very potent considerations … to override the rule of public policy which has first claim to the loyalty of the law: that wrongs should be remedied.

133 I too would need to be satisfied that ‘very potent considerations’ existed before I would decide that no remedy should be recommended where one was properly due. I consider that having regard to that rule of public policy would be in the public interest on this occasion. The submissions of the public bodies do not, in my view, constitute such potent considerations.

My recommendations

134 For all the reasons given above, I have concluded that the submissions by the public bodies – that I should be constrained in this case from adopting the normal approach that I would adopt in other cases, when considering what an appropriate remedy would be for the injustice which I have found resulted from maladministration – are unpersuasive. It is open to me to recommend financial compensation if that is appropriate.

135 I do not accept that I should adopt the approach of the Courts to these questions and I am entirely unpersuaded that I should depart from my normal approach in that way. I now turn to set out my recommendations.

First recommendation

136 My first recommendation is that, in recognition of the justifiable sense of outrage that those who have complained to me feel about the maladministration in the form of the serial regulatory failure identified in this report, the public bodies should apologise to those people for that failure.

137 As I explain in Principles for Remedy, apologising is not an invitation to litigate or a sign of organisational weakness. It can benefit the public body as well as the complainant, by showing its willingness to acknowledge when things have gone wrong, accept responsibility, learn from maladministration, and put things right.

Second recommendation

138 My second – and central – recommendation is that the Government should establish and fund a compensation scheme with a view to assessing the individual cases of those who have been affected by the events covered in this report and providing appropriate compensation.

139 The aim of such a scheme should be to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.

140 Addressing relative loss in this way would remedy any financial loss that has occurred and also the loss of opportunities to invest elsewhere than the Society. It is thus the most appropriate remedy for the injustice that I have found resulted from maladministration.

141 The scope of such a scheme should, in line with my Principles for Remedy, cover all those who have suffered similar injustice to those who have complained to me. That should include not just residents of the United Kingdom but all those who have sustained the injustice that I have found resulted from maladministration.

142 I consider that it would be reasonable to expect such a scheme to be established within six months of any decision by Government and Parliament to do so.

143 I recognise that there are likely to be practical difficulties in establishing and operating such a scheme. There may be an inherent conflict between the speed and simplicity of delivery on the one hand, and fairness both to those affected and to taxpayers generally on the other.

144 I began this investigation by addressing, in my July 2004 report to Parliament, arguments that complexity of the subject matter or practical operational difficulties were a relevant factor to be taken into account in any decision to conduct an investigation. I said that those were not compelling arguments in that context. I similarly do not accept now that such difficulties mean that an appropriate remedy should not be delivered.

145 I also recognise that how such compensation should be calculated will need to be carefully considered, not just in terms of how best to design any scheme but also in the context of the principles of regularity, propriety, and accountability for the use of public money that are set out in Managing Public Money^[16].

146 While different approaches might be taken to the calculation of compensation in such circumstances, the existence of those approaches – such as that proposed by EMAG on behalf of complainants or that adopted by the Financial Ombudsman Service in considering mis-selling complaints – indicates that any difficulties that may be encountered are not insuperable.

147 All those considerations are relevant to how any compensation scheme should be organised and delivered. While recognising that the creation of such a scheme would not be straightforward by any means, such difficulties as are likely to arise are not, in my view, sufficient to negate the prime consideration to which I consider regard should be had – namely that, where wrong has been suffered, a remedy for that wrong should be provided.

148 I recognise that the decision as to how best to establish and administer any compensation scheme is a matter for Government and Parliament. However, I would offer, as a contribution to that debate, my view of the principles which should govern any such compensation scheme.

149 It seems to me that such a scheme:

• should be independent and constituted along the lines of a tribunal or adjudication panel, with three members – one broadly representing the interests of citizens and one representing those of the relevant public bodies, with an independent chair;
• should operate in a transparent manner, with the basis being made public of the decisions as to how compensation is to be calculated, as to what procedure will govern the consideration of individual cases, and as to the criteria which will be taken into account when considering those cases. Those decisions should only be made after appropriate consultation is undertaken, including with those directly affected;
• should be simple, not imposing undue burdens, whether evidential or procedural, on those making claims to the scheme.

150 The above principles would, I hope, be accepted widely as being an appropriate and effective mechanism of decision and delivery of the remedy that I have recommended should be provided.

151 I hope, also, that it would be accepted that this mechanism has to have, as its guiding principle, the need to deliver as speedy a remedy as is possible in the circumstances, consistent with recognising the complex issues that would need to be addressed and resolved. In my view, the scheme should take no longer than two years from the date of its establishment to complete its work.

Conclusion

152 I recognised above that the public interest is a relevant consideration and that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case. Furthermore, I am acutely conscious of the potential scale of what I have recommended and that acceptance of my central recommendation might entail opportunity costs elsewhere through the diversion of resources.

153 I also acknowledge that the public bodies have raised an issue of principle which, if accepted, would potentially have a much wider significance for my work and thus for the remedies available to Members of Parliament to enable them to assist their constituents.

154 In that context, I invite Parliament to consider the issues that have been raised in this report and the recommendations that I have made and to further reflect on what its response to my report should be.

155 Having alerted Parliament to the injustice that I have found was sustained in consequence of maladministration, I would be very happy to assist Parliament in its deliberations in any way that I can.

Footnotes

1 Available at: http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples/principles-for-remedy

2 Whose complaint to the Financial Ombudsman Service about mis-selling by the Society was upheld: http://www.financial-ombudsman.org.uk/faq/pdf/Equitable_GAR_final_decision.pdf

3 [1988] AC 175.

4 [1990] 1 WLR 827.

5 (Commercial Court) 1 April 1996.

6 In cases such as, for example, X v Bedfordshire CC [1995] 2 AC 633 and Hill v Chief Constable of West Yorkshire [1989] AC 53.

7 As is well known, the initial response of the then Government to my predecessor’s report on the collapse of Barlow Clowes was that, while, out of respect for my Office and in recognition of the special circumstances which pertained in that case, compensation would be paid to those who had lost as a result of that collapse, the findings that maladministration had occurred were contested. Moreover, the then Government set out its view, in its published response to that report, as to the role of regulators in the financial sector and as to whether it would be reasonable for such regulators ever to be held liable for negligence in the performance of their functions. However, that initial response did not constitute the Government’s final view on whether maladministration had occurred in relation to the regulation of Barlow Clowes. On 7 July 1995, in the DTI inspectors’ report concerning Barlow Clowes, those inspectors concluded that ‘in our view, the DTI did not demonstrate, in relation to Barlow Clowes, the characteristics of a competent regulatory authority’. And the then Secretary of State for Trade and Industry, Lord Young, had earlier conceded, in an interview shown as part of a Channel 4 documentary on Barlow Clowes, that the regulators had probably been to blame for licensing at least the domestic operation of that company, saying, as regards my predecessor, that ‘I suspect he was right’ in that respect – see The Barlow Clowes Affair – Lawrence Lever (1992: Macmillan).

8 Phillips LJ in Reeman v Department of Transport [1997] 2 Lloyd’s Rep 648, CA.

9 Reeman v Department of Transport [1997] 2 Lloyd’s Rep 648, CA.

10 Case No. C.557/98, Selected Cases and Summaries of Completed Investigations: April – September 1999, pp. 29-45. Mr and Mrs Reeman at that time asked that our normal practice of anonymisation within published reports should be disapplied in their case.

11 See our Annual Report for 1999-2000 (HC 593), page 37.

12 In R v Local Commissioner for Local Government for North and North East England, ex parte Liverpool City Council, [2001] 1 All ER 462. See also my report, A Debt of Honour, 4th Report, Session 2005-2006, (HC 324: 13 July 2005), at paragraphs 132-3.

13 This has normally been on the basis that to do so would create a novel category of negligence liability.

14 See, for example, the Earl of Limerick in the House of Lords on 8 February 1973 and on 22 February 1973.

15 Sir Thomas Bingham MR in X v Bedfordshire County Council [1995] 2 AC 633. This view has been cited with approval by the House of Lords in Gorringe v Calderdale Metropolitan Borough Council [2004] 1 WLR 1057 at [2] and by the Court of Appeal in Brooks v Commissioner for Police of the Metropolis [2002] EWCA Civ 407.

16 This document, which replaced Government Accounting in 2007, contains cross-Government guidance on the use of public money. It is available at: http://www.hm-treasury.gov.uk