Foreword

Background

The most complex, wide-ranging and onerous investigation which the Office has ever undertaken^[1].

By far the longest and most detailed [report] produced by the Office [which] … resulted in the provision of the most substantial remedy ever to result from an investigation^[2].

These were the words used by two of my predecessors to describe the Barlow Clowes investigation conducted by my Office in the late 1980s. The reader of this report, which sets out the results of the investigation I have conducted into the prudential regulation of The Equitable Life Assurance Society during the period prior to 1 December 2001 – and the reader of other recent reports I have published – will, I am sure, agree with me that those accolades, if such they be, can no longer be accorded to the Barlow Clowes case.

A much more substantial remedy than was secured in the Barlow Clowes case has resulted from my March 2006 report on final salary occupational pensions. And this report is approximately ten times the length of my predecessor’s report on Barlow Clowes, has taken four times as long to produce, and has involved the devotion of resources which go significantly beyond those which supported the completion of that earlier report.

In part, all this is a natural consequence of the differing scope of the two reports. Equitable is a much bigger company than Barlow Clowes was. This report covers events which occurred over a much longer time period than was covered in the Barlow Clowes report.

In addition, I have received many more hundreds of complaints about the prudential regulation of Equitable than were received by my predecessors in respect of Barlow Clowes. The number of interested parties with whom I have engaged while conducting this investigation far surpasses those who had any involvement in the Barlow Clowes case – and the range of interests that those parties represent has been much more complex (and perhaps less uniform) than was so in the earlier case.

However, both cases share some similarities. Both cases were about regulation in the field of financial services. Indeed, and perhaps most important of all, both cases involved the financial security of many ordinary citizens and the loss of some of their savings and investments. The resulting issues go to the heart of longstanding (and perhaps ongoing) debates both as to what should be done to protect those investing in the products of financial services providers and as to how to handle situations where things go wrong.

As will be seen later in this report, this case has raised, in such a context, similar issues as were raised in the Barlow Clowes case. Such issues include the appropriate role of financial regulators, what potential and existing investors can expect from the system of financial regulation, and whether it would be in the public interest for the taxpayer to be expected, as complainants have advanced should be the case here, to remedy losses sustained in a context where such regulation did not necessarily cause any losses sustained but also did not prevent any such losses arising or mitigate their effects.

And both cases have involved a substantial degree of Parliamentary and public interest. My predecessor reported^[3], in words that resonate with me and which I would endorse, that:

Members, and the investors on whose behalf they approached me, are understandably anxious that I should complete my investigation as a matter of urgency. But I am having to urge that they be patient while all the necessary evidence is collected, examined and assessed.

The time taken to publish this report

As was clear to my predecessor, ensuring that an investigation is completed as speedily as possible and ensuring that it is conducted in such a manner as to produce a robust, authoritative, and soundly-based report are often competing pressures. I too have faced such competing pressures in this case.

When I announced my decision in July 2004 to conduct the investigation which led to this report, I said that I could not be specific about how long my investigation would take. I expressed the hope that this investigation could be conducted within a reasonable timetable, as I was conscious that significant numbers of people – many of them elderly – had told me that they were in difficult financial circumstances.

I regret that it has taken much longer to publish this report than I hoped would be the case at the outset of this investigation.

I recognise that the time that I have taken to conclude the investigation and publish this report has added to the frustration and anxiety that many of those who have complained to me have felt about the events covered by this report – and that this has done little to mitigate the uncertainty that they feel about their future financial position. I am very sorry that this has been the case.

I also recognise that the time taken to publish my report has meant that those whose actions have been subject to review have had to await my determination of the complaints made about them for longer than they might first have expected. That too is a matter for regret.

As with the inspectors appointed in June 1988 to investigate the affairs of the Barlow Clowes group of companies, whose report was published in July 1995, the publication of this report has been affected by the complexity and range of the matters investigated, the sheer amount of evidence to be analysed, and the need to ensure that those whose actions were potentially subject to adverse criticism – and those representing the people whose complaints this report will determine – had a proper opportunity to respond to my provisional findings and conclusions prior to publication of this report.

My preliminary observations

Before setting out the results of the investigation, I would like to make a number of preliminary observations. They relate to questions of fairness and due process; to the relationship between this report and the report of my first investigation into the prudential regulation of the Society, published in June 2003; to the subject matter of this report – regulation; and to the absence of a single inquiry covering all aspects of what has been termed ‘the Equitable Life affair’.

Fairness and due process

First, I should record that representations have been made to me in the course of my investigation, and in particular following the issue of my draft report to the public bodies whose actions were the subject of complaint, that the process that I have followed has not been fair. I have considered those representations very carefully and responded to them in detail, although I have not reproduced those exchanges in this report.

Chapter 3 of this report sets out the process that I have followed in conducting this investigation. I am satisfied that the process I have adopted has been fair and has given those complained about ample opportunity to respond to the allegations made against them, to submit evidence and to respond to my emerging findings.

The relationship between my two reports

My second preliminary observation is that this is not the first report that I have produced in relation to the prudential regulation of the Society; and that, in relation to certain matters, the conclusions in this report differ from those reached in my first report, published on 30 June 2003.

The complaints which gave rise to the two investigations leading to those two reports were different and only some issues are common to both reports. However, in the light of a fresh investigation of the relevant matters I have reconsidered conclusions set out in the first report – something which, when in July 2004 I reported my decision to conduct this investigation, I gave an undertaking to Parliament that I would do.

There are three principal factors which help to explain why some conclusions set out in this report differ from those set out in my first report.

• First, the inclusion of the Government Actuary’s Department within my jurisdiction at the outset of the second investigation has had a material effect on the approach that I was required to adopt. In the first investigation, I could only assess whether the actions of the relevant regulators constituted maladministration in the light of the advice that those regulators had received from their professional advisers in the Government Actuary’s Department. In the second investigation, I have had to consider the acts and omissions of those regulators and their professional advisers when assessing whether or not maladministration occurred.
• Secondly, the time periods covered by the two investigations were very different. My first report only considered events occurring from 1 January 1999 to 8 December 2000. This second report covers the whole period prior to 1 December 2001. The events considered and the acts and omissions reviewed in the course of the second investigation have thus been considerably more extensive than was the case with the first investigation. For the first time, I have been able to examine how the issues which arose during the period considered by the first investigation developed over time in an earlier period that was not covered by that investigation – and I have also been able to examine how (some of) those issues were eventually resolved in a later period than that covered by the first investigation.
• Thirdly, the evidence available to me in the course of this investigation was considerably more comprehensive than that available at the time of the first investigation. That is partly a function of the broader jurisdiction and more extensive time period covered in the investigation leading to this report. But, as I reported to Members of Parliament during the course of the second investigation, substantial additional evidence was provided to me that was not available during the first investigation. Much of this new material has been central to establishing what standard should be applied to the actions under investigation.

These three factors – a broader jurisdiction, a more extensive time period, and a more comprehensive evidence base – all help to explain, in relation to those matters covered in both reports, the differences between the conclusions reached following the first and second investigations.

One lesson that can be learned is that, where a technical jurisdictional obstacle might have a significant detrimental impact on the efficient conduct of an investigation, action should be taken – as was taken at the beginning of the second investigation – to seek the removal of such an obstacle, if that is possible.

It is against that background that I have reconsidered conclusions set out in my first report and, where I have considered it appropriate to do so, I have reached conclusions which differ from those set out in that first report.

For the avoidance of doubt, the conclusions set out in this report supersede and replace those set out in my first report. That first report, for the reasons set out above and in this report, can no longer be regarded as having any validity.

The focus of my report – regulation

My third observation relates to the fact that my investigation has been focused on regulation. That may seem like a trite observation – but there are two direct consequences of such an observation that I believe should be emphasised from the outset.

My investigation has been conducted in response to complaints about injustice claimed in consequence of alleged maladministration by regulators. It has not been – nor could it have been – focused on the actions of the entity being regulated, which in this case was Equitable. The underlying ‘true’ position of the Society at any one time is thus not central to my findings. I have focused only on the actions which the relevant regulators should have considered and/or taken on the basis of the information in their possession, however accurate that information was or might have been found to be had further investigation of the true position been undertaken at the time.

It will become apparent to the reader of this report that my investigation has identified numerous instances where issues arose which should have provoked regulatory consideration. On many such occasions, either no consideration or insufficient consideration was given by the relevant regulators.

Such regulatory considerations, rather than the commercial position of the Society, have thus been my central focus. It has been no part of this investigation to attempt to make findings about the actions of the Society. The legal framework within which I must operate would not permit me to do so.

I recognise that, had the relevant regulators acted on all those occasions when they should have acted, the Society might have responded appropriately and thus enabled a satisfactory resolution of some or all of the apparent regulatory issues to be achieved. It is not possible now, given the passage of time, to identify conclusively in relation to every issue what would have transpired had such appropriate regulatory action been undertaken.

This report examines how the relevant regulators discharged their responsibilities; it does not seek to come to definitive conclusions about the underlying position of Equitable.

An equally important consequence, which is the second consequence referred to above, is the need to have proper regard to the nature of regulation and to some central dilemmas faced by those exercising any regulatory functions.

I am acutely aware that those exercising regulatory functions are often placed in very difficult situations in which they have to exercise judgement in relation to complex matters which require the balancing of a range of often competing pressures and interests.

This is especially the case where they are granted powers by Parliament to protect the interests of citizens but where the use of such powers, if exercised prematurely or without a sound basis, might bring about precisely the outcome – detriment to the interests of those citizens – which the system of regulation was designed to avert.

It is relatively easy for anyone to identify instances where the acts or omissions of others have turned out not to be the most optimal solution to a particular problem – but it is less easy to put oneself in the position of the person who had to take the relevant decision at the appropriate time. In this context, regulators are very often ‘damned if they do’ take action, while at the same time being ‘damned if they don’t’. This is something that I readily acknowledge and have borne in mind throughout this investigation.

When reviewing the acts and omissions of regulators, it seems to me that key to recognising this dilemma is the adoption of an appropriate standard, derived from the contemporaneous framework of law, guidance, and established good practice, against which such actions can be objectively measured and assessed.

This report has been guided by the development of such an appropriate standard. It has not been prepared having regard to a counsel of perfection, judging the relevant regulators by impossible standards or against measures of what is only now deemed appropriate, measures which bear no resemblance to the context which existed at the relevant time. Anyone’s opinion as to what the purpose of regulation should be or as to how it should be conducted can be of no consequence in the context of an investigation conducted by any Ombudsman if that opinion is far removed from the reality of the regulatory system as it was constructed by Parliament and as it was required to be operated at the time.

The focus of my investigation has had to be on the role of the relevant regulators and not on the actions of the Society. It was also necessary to apply a standard that was grounded in the reality of the relevant regulatory regime as it existed at the relevant time and not in my own opinion as to what such a regime should have looked like.

Those are both considerations that have been central to my investigation. However, neither has received universal acceptance among the parties to the complaints. A small minority of complainants consider that no report is worthwhile unless it makes determinations in respect of the actions of the Society and all the other actors with some role in its story. That I simply cannot do.

The public bodies whose actions have been under investigation have submitted that the responsibilities of other actors than the prudential regulators and their advisers should be taken into account, in order not to ‘leave the reader with the incorrect impression that it was only, or even mainly, the prudential regulator who bore responsibility for Equitable’s subsequent difficulties’. However, I can make no determinations in respect of the responsibilities of bodies not in my jurisdiction. Hence my report does not seek to explain what caused the ‘difficulties’ of the Society, but instead seeks to determine whether maladministration on the part of the prudential regulators and the Government Actuary’s Department (GAD) occurred and, if so, whether any such maladministration caused injustice to those who have complained to me.

While I regret this lack of universal acceptance of the consequences of my role and powers, I am satisfied that the approach that I have adopted to these questions is the only correct one.

The absence of a single inquiry

My final preliminary observation follows from what I have said above and relates to the absence of a single inquiry covering all aspects of what has been termed ‘the Equitable Life affair’.

As I have noted above, the time that it has taken to publish this report is considerably longer than I had expected and that is a matter of regret. However, this is compounded by the fact that this report is only part of an extended series of reports, published following various inquiries, investigations and other proceedings related to Equitable. The four years that it has taken me to publish this report are only part of the almost eight years since the Society closed to new business.

I have great sympathy with those who have told me that they find it wholly unsatisfactory that they have had to wait more than seven years since they first were affected by the relevant events for this determination of their complaints. I do not think it acceptable that the response to the problems at the Society – and consideration of the complaints that have been made about those problems – has been handled through such a protracted process.

Indeed, as I note in Chapter 3 of this report, in July 2002 my predecessor, in his annual report for 2001-02, had even then drawn Parliament’s attention to the unsatisfactory nature of this situation, saying:

The root cause of the problem, in my view, is the failure of the authorities to establish at the outset a single inquiry with terms of reference covering all aspects of the Equitable Life affair, including issues of possible personal injustice due to maladministration and redress for such injustice if it should be demonstrated^[4].

The existence of the Baird Inquiry, an internal Financial Services Authority (the FSA) inquiry, and the establishment of the Penrose Inquiry by the Government were, of course, to the forefront of my predecessor’s mind when he considered whether he should investigate the prudential regulation of the Society.

The possibility that those inquiries would enable the consideration and resolution of the complaints that had been made about the role of the relevant regulators without the necessary restrictions on my Office’s role was central to the decisions that he took. Indeed, my predecessor reported that he had drawn the situation to the attention of the Public Administration Select Committee and noted:

I was strongly criticised in Parliament and the media for deferring a decision on whether to investigate some of those complaints until the Penrose Inquiry set up by the Government, which will consider a much wider range of issues than my statutory remit allows, had reported … It seems to me plainly inefficient, and potentially unfair, to have two simultaneous but separate investigations covering much the same ground and taking evidence from much the same sources…^[5]

That my Office could only ever conduct an investigation that was limited in scope and reach – focusing only on the actions of the prudential regulators during the period prior to 1 December 2001 – was a consideration that guided my decision to embark on a consultation exercise prior to coming to a decision as to whether to conduct this investigation. Despite recognition of the inherent limitations that were inevitably placed on any investigation I conducted, given the jurisdiction that Parliament has bestowed on me, respondents to that consultation were overwhelmingly in favour of my conducting a further investigation.

It seems to me that there is a direct link between the time that it has taken since the closure of the Society to new business to seek a final resolution of the complaints made about that closure and related matters and the piecemeal approach that the Government has adopted to handling the relevant issues.

The failure at the outset to establish a single inquiry which was not hampered by terms of reference or a statutory jurisdiction which limited the issues that could be addressed and resolved has resulted in such an extended and long drawn out process. The adage ‘justice delayed is justice denied’ has rarely been far from my thoughts as publication of this report has drawn nearer. And the continual uncertainty that this has caused for many individuals – and also for the Society itself – must have been difficult to bear.

I find it hard to accept that the establishment of a comprehensive inquiry was not possible in this case. The situation at Equitable was not unique. It shared a number of factors with other situations in other spheres of political life which have arisen and been resolved.

There are, of course, a number of mechanisms that could have been adopted. Key to the speedy and effective resolution of the issues relevant to the closure of the Society and related matters was the adoption of a mechanism that, in the particular circumstances of this case, was fit for purpose. Ensuring that inquiries or other means of explaining events and of resolving complaints, claims, and disputes are fit for purpose is critical to their success and to public confidence in them.

It seems to me that the principles which underpin fitness for purpose are that:

• those conducting the investigation or inquiry should be appropriately chosen and wholly independent from those under investigation: confidence in the robustness of the process will only be achieved where all the parties believe that the person or persons undertaking the inquiry are suitably competent and that the process will be fair and balanced;
• there should be clarity of purpose: the terms of reference of each inquiry or investigation should be clearly set out when it is established and should, at the very minimum, provide the means to achieve four aims:

(i) the relevant events and actions should be established on a factual basis;

(ii) who or what caused the adverse outcome should be determined - while identifying where hindsight has informed this judgment;

(iii) appropriate redress should be identified for any individuals or groups of individuals who have suffered as a result; and

(iv) lessons for the future, in terms of law, policy, practice and behaviour, should be identified and recommended in such a way that they can be implemented and that such recommendations can add value;

• the particular mechanism chosen should be the most appropriate in the circumstances of each case and the form of the inquiry or investigation should follow: whether it should be held in public or in private, for example, or whether it should adopt an inquisitorial or adversarial approach should be informed by the context of the relevant events; and
• the inquiry or investigation should be provided with the necessary resources to enable it to fulfil its mandate in a timely and effective manner, with access to appropriate levels of funding, staff, professional advice and powers to obtain information, evidence or papers.

In the case of ‘the Equitable affair’, no such comprehensive and fit for purpose inquiry has ever been established. Some – such as the two investigations that my Office has conducted – have been unavoidably limited in terms of jurisdictional reach. Others have been conducted within terms of reference that precluded the attribution of responsibility or the recommendation of redress or at least did not specify that either or both should be undertaken. Still yet others have focused solely on lessons to be learned for future practice.

That this is the case seems to me both iniquitous and unfair. Whatever else results from the publication of this report, I hope that I never again have to draw Parliament’s attention to such a disjointed process for resolving complaints that have affected so many of the constituents of almost every Member.

Acknowledgements

The completion of the investigation and the publication of this report would not have been possible without the co-operation of a large number of people. These include the direct parties to the complaints – the lead complainants and those members of certain policyholder and annuitant action groups they appointed to act as their representatives and also the officials of the three public bodies whose actions were subject to investigation, being Her Majesty’s Treasury, the Government Actuary’s Department, and the Financial Services Authority. In addition, I have greatly benefited from the input of a range of interested parties, including the Society itself.

I am extremely grateful for the considerable assistance that all these parties have provided to us at every stage in the investigation process. I would like to place on record my special gratitude to those in the action groups representing the lead complainants, as they largely contributed to the investigation on a voluntary basis without having the considerable resources to enable them to do so that were available to the other parties.

I hope that the burden that the provision of such assistance may have placed on all who have contributed to my investigation was not too onerous – it has certainly been of considerable value to us.

Finally, I would like to record my thanks to the team of people who have helped me to carry out this investigation and produce this report. That includes my in-house investigation team, and everyone in my Office who has supported them in a variety of ways, as well as my external advisers, both legal and actuarial. This report would not have been produced without them and I am indebted to them all.

Ann Abraham

16 July 2008

Footnotes

1 Sir Anthony Barrowclough, in paragraph 62 of his Annual Report for 1988, commenting on the investigation while it was underway. Second report – Session 1988-89 (HC 301), 12 April 1989.

2 Sir William Reid, in paragraph 64 of his Annual Report for 1989, commenting on the report after its publication. Third Report – Session 1989-90 (HC 353), 18 April 1990.

3 As for footnote 1.

4 Eighth Report, Session 2001-02: Annual Report for 2001-02 (HC 897), 2 July 2002, at paragraph 1.12.

5 Eighth Report, Session 2001-02: Annual Report for 2001-02 (HC 897), 2 July 2002, at paragraph 1.10.