My investigation

Introduction

1 In this Chapter, I explain the involvement of my Office in respect of the events related to Equitable which led to my decision to undertake this investigation. I then go on to outline the legal and administrative framework for the investigation and to describe the process that I have used to conduct it.

2 This Chapter is structured in the following way:

• in paragraphs 3 to 22, I explain the earlier involvement of my Office in the relevant events – including those which led to my decision to undertake this investigation;
• in paragraphs 23 to 28, I outline the legal and administrative framework which governed the investigation which led to this report;
• in paragraphs 29 to 43, I describe the process used during the preliminary phase of the investigation;
• in paragraphs 44 to 54, I describe the process used to conduct the investigation proper; and
• in paragraphs 55 to 66, I describe the process used to share drafts of this report with the parties to the complaints and other interested parties.

The involvement of my Office

3 The first complaint that my Office received about the prudential regulation of Equitable was received in early January 2001. In his Annual Report for the year 2000-01, published on 27 June 2001, my predecessor set out his decision in relation to the complaints he had received by that date, saying:

I decided to postpone a decision on whether there were aspects of [the regulatory] handling of the affair which I might usefully investigate until the report of an investigation being undertaken by the Financial Services Authority was available. In doing so, I was mindful of the limitations of the Authority’s remit, and of the expectations that Members of Parliament and the public rightly have as regards the independence of the investigating body in matters of this kind.

I hoped, however, that the Authority’s investigation might serve to indicate those areas, if any, which warranted further scrutiny. I accordingly wrote to all Members setting out my position, and undertook to write again once I had reached my final decision. I expect that to be later in 2001-02.

4 Following publication of the Baird Report (see paragraphs 129 to 132 of Chapter 2), my predecessor re-assessed the position, as he had indicated to Parliament that he would do, in the light of the conclusions of that internal FSA review. He decided to conduct an investigation into the discharge under contract by the FSA of certain of the functions of the Treasury related to the prudential regulation of Equitable during the period covered by the Baird Report.

5 My predecessor did so on the basis that the shortcomings in regulation identified in the Baird Report constituted prima facie evidence of maladministration, which had hitherto been lacking.

6 In relation to other aspects of the Equitable affair, he decided to await the outcome of the Penrose Inquiry (see paragraphs 144 to 149 of Chapter 2) before deciding whether to conduct a wider investigation. Those decisions reflected the normal practice of Ombudsmen that intervention in respect of complaints is only appropriate once the body whose actions are the subject of complaint has had an opportunity to consider the complaint and to respond to it.

7 When his next Annual Report was published on 2 July 2002, my predecessor reported those events to Parliament in the following way:

… there were particular difficulties concerning complaints about the conduct of the prudential regulation of the Equitable Life Assurance Society. I was strongly criticised in Parliament and the media for deferring a decision on whether to investigate some of those complaints until the [internal inquiry] set up by the Financial Services Authority had reported, and for deferring a decision on whether to investigate other 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. I did not, and do not, agree with the critics. 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.

However, the critics had a point: the situation is not satisfactory. The investigation by my office into the first category of complaints could not begin until December 2001; any investigation into the second category – should such an investigation be considered appropriate – would start a good deal later still. That is objectionable, not only because complainants should not have to wait so long for their case to be considered, but also because it is difficult or impossible to conduct a satisfactory investigation after such a lapse of time.

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.

8 I became Parliamentary Ombudsman on 4 November 2002. Shortly after taking up office, as a matter of priority I conducted a review of the limited investigation that my predecessor had launched, in the light of representations I had received that I should widen the scope of that investigation.

9 I reported the results of that review to all Members of Parliament in a letter dated 5 December 2002. I explained that it had become clear from a statement made on the Inquiry’s website that the Penrose Inquiry – which was looking at all aspects of these events, which I could not do – was prepared to make adverse findings against any of the relevant parties should the evidence justify such findings. That being so, I saw no basis at that time to depart from the decision taken by my predecessor to limit the scope of my Office’s investigation – one that was nearing completion – to the time period covered by the Baird Report.

10 The report setting out the results of that investigation was laid before Parliament on 30 June 2003. I reported (in paragraph 9 of Part I of that report) that:

I did not find evidence to suggest that FSA acting as prudential regulator had failed in their regulatory responsibilities during the period under investigation. Nor did I find that the decisions which the prudential regulator had taken as to what action (either formal or informal) was required of them in relation to Equitable were outside the bounds of reasonableness, given the information they held and the legal and actuarial advice which they received.

11 I reported to Parliament that I therefore could not uphold the complaints which alleged that maladministration had occurred during the period covered by that report and that such maladministration had resulted in injustice to complainants.

12 Following the publication of the Penrose Report on 8 March 2004 – in which no determinations were made as to whether the prudential regulators had failed properly to undertake their responsibilities in accordance with the standards that had prevailed at the relevant time – I wrote to all Members of Parliament on 16 March 2004.

13 I advised them that, in order to inform my decision on whether I should conduct any further investigation into the prudential regulation of Equitable in the light of the evidence set out in that report, I would consult interested parties.

14 That consultation, on whether my Office should carry out a further investigation and, if so, over what period and with regard to which matters, was launched on 22 April 2004 by way of letters to interested parties and by notices in the press.

15 I set out the results of that consultation and of my subsequent decision in a report that was laid before Parliament on 19 July 2004, to which I referred at the beginning of Chapter 1 of this report. As I explained there, excerpts of that report are reproduced in Part 4 of this report.

16 In my 2004 report, I explained that the Penrose Report and the representations I had received during the consultation process had provided me with sufficient prima facie evidence that indicated that administrative action or inaction on the part of the bodies responsible for the prudential regulation of Equitable might have played some role in causing the unremedied injustice that individuals claimed to have sustained and about which they had provided me with ample information through the consultation process.

17 Having considered all the evidence before me at the time and having regard to submissions concerning whether a further investigation would be in the public interest or might be able to produce a worthwhile outcome for the parties to the complaints, I decided to conduct a further investigation.

18 The full reasoning for this decision was set out in my July 2004 report to Parliament (relevant extracts of which, as I have said, are reproduced in Part 4 of this report). However, key to my decision was a recognition that the outcome sought by those who had complained to me – a determination as to whether maladministration on the part of the prudential regulators and GAD had occurred and, if so, whether that had caused injustice to them – was something that only I could provide.

19 Considering the practical difficulties that would inevitably arise if I were not able, for jurisdictional reasons, to investigate the actions of GAD in assisting the prudential regulators of Equitable, I asked the Government to make provision for GAD to be brought within my jurisdiction to enable me properly to assess all of the actions of those involved in the prudential regulation of the Society during the relevant period.

20 Following the agreement of the Government to this request and Parliamentary sanction of this proposal, the Parliamentary Commissioner Order 2004 (SI 2004/2670) came into force on 15 November 2004.

21 That Order brought GAD within my jurisdiction, enabling me to investigate any action that related to the giving of advice by GAD on or before

26 April 2001 in respect of the exercise of administrative functions under Part II of the Insurance Companies Act 1982 or any other enactment concerned with the regulation of insurance companies.

22 It was in this context that I launched the investigation which has led to this report. I will now turn to explain the procedure used to conduct the investigation.

The legal and administrative framework for the investigation

23 The 1967 Act places me under certain obligations in respect of the nature of the process by which I conduct investigations – the first being those contained in section 7 of that Act, which states, in section 7(1), that, where I propose:

… to conduct an investigation pursuant to a complaint under this Act, [I] shall afford to the principal officer of the department or authority concerned, and to any other person who is alleged in the complaint to have taken or authorised the action complained of, an opportunity to comment on any allegations contained in the complaint.

24 Section 7(2) of the 1967 Act further provides that:

Every such investigation shall be conducted in private, but except as aforesaid the procedure for conducting an investigation shall be such as [I consider] appropriate in the circumstances of the case; and without prejudice to the generality of the foregoing provision [I] may obtain information from such persons and in such manner, and make such inquiries, as [I think] fit, and may determine whether any person may be represented, by counsel or solicitor or otherwise, in the investigation.

25 A further obligation placed on me is contained in section 10 of the 1967 Act. I must send a copy of the final report of any investigation to the Member(s) of Parliament who referred the original complaint(s) and to the principal officers of the body or bodies whose actions were the subject of those complaints.

26 There are no other mandatory requirements imposed on me as to the procedure I must use in the conduct of an investigation. Parliament, through the provisions of the 1967 Act, has thus given me considerable discretion as to procedure; and the Courts have recognised the width of the discretion granted in this respect to Ombudsmen.

27 I must, nonetheless, act fairly and in accordance with principles of natural justice when conducting any investigation and when determining what an appropriate process to conduct any investigation might be. However, the Courts have also recognised that what process is appropriate in any investigation is largely derived from the circumstances of each case.

28 In all investigations conducted by my Office, in the interests of fairness it has always been our practice to provide, prior to the issue and/or publication of a final report, full drafts of those reports to those whose actions have been investigated. It has also been my practice in recent years, for the purposes of the investigation, to share such drafts with complainants (and/or their representatives). Where relevant, I will also for the same reasons provide excerpts from draft reports to affected third parties.

The investigation

July 2004 to March 2005 – the preliminary stage

29 As I am required to do, in December 2004 I asked the principal officers of the public bodies whose actions were subject to complaint for their response to the allegations contained in the complaints as those complaints had been put to me.

30 The formulation of those heads of complaint (with the input of certain policyholder and annuitant action groups) – from a mass of documentary material submitted in support of (at that time) more than 600 referred complaints – constituted part of the preliminary stage of the investigation.

31 The initial response to those heads of complaint, which I received from the principal officers in March 2005, is summarised within Chapter 4 and is reproduced in full in Part 4 of this report.

32 In May 2005, I decided that the scope of my investigation would include those known as the ‘internationals’, that is, those people who had bought policies from one of the Society’s overseas or offshore branches. I came to this conclusion following consideration of the views as to this question that were provided to me by the public bodies whose actions were the subject of the investigation which led to this report and by the Guernsey Financial Services Commission.

33 The preliminary stage of the investigation had a number of other aspects. First, as I explained in a letter to all Members of Parliament issued on 24 November 2004, between August and October 2004 I appointed a team of investigators to conduct the investigation, using the power contained in section 3(2) of the 1967 Act – which enables me to authorise any of my officers to undertake functions on my behalf. That team has, throughout the investigation, exercised such delegated authority on my behalf.

34 Secondly, I appointed both legal and actuarial advisers to assist my investigation team. Legal advisers were appointed in February 2005 and actuarial advisers appointed in May 2005. The advice of both sets of professional advisers has greatly informed (and is integrated into) this report.

35 My legal advisers during the investigation were Tony Child, of Beachcroft LLP, and Anna Forge, of McGrigors LLP, and my actuarial adviser was Tony Leandro, of Barnett Waddingham LLP.

36 In addition, I arranged for the actuarial advice I received to be peer reviewed. I also appointed in August 2005 an academic advisory panel, made up of external professionals with relevant experience. I asked them to advise me on the standard of regulation set out in this report, with a view to ensuring that this standard was consistent with the prevailing standards that were applicable at the time relevant to the actions I have investigated.

37 Thirdly, as has been noted already in paragraphs 19 to 21 above, work was undertaken to bring GAD within my jurisdiction and to gain sanction for the provision by Parliament of additional resources to support the conduct of the investigation. I had a number of meetings with principal officers and others during the preliminary stage of the investigation in connection with both of these developments.

38 Fourthly, during September 2004 my team held preliminary meetings with officials of the public bodies whose actions were the subject of complaint to establish liaison arrangements and to discuss the likely scope of the investigation and the process through which it would be conducted.

39 During October 2004, similar preliminary meetings were held with the policyholder and annuitant action groups. The action groups who have liaised with my staff during the investigation are the Equitable Members’ Action Group, Equitable Life Trapped Annuitants, the Equitable Late Contributors’ Action Group, the Equitable Members’ Help Group; and the Investors’ Association.

40 Such meetings have continued throughout the investigation, as have meetings with the Society and with other interested parties.

41 Fifthly, with the assistance of those action groups, 15 individuals who had made complaints about the prudential regulation of Equitable were chosen to act as lead complainants for the purposes of the investigation. Those lead complainants epitomised the position of all the principal groups of the Society’s current and former policyholders and annuitants who had complained to me.

42 Section 6(2) of the 1967 Act permits the persons aggrieved to be represented by a personal representative, a family member, or other suitable individual. In this case, the lead complainants authorised members of the action groups referred to above to act as their personal representatives during the course of the investigation.

43 Finally, as part of the preliminary stage of the investigation we sought to gain access to all the relevant evidence necessary for the conduct of the investigation. The different sources of evidence we have reviewed included:

(i) the operational and policy files of the public bodies whose actions were under investigation;

(ii) all the documentary evidence from other sources that was available to Lord Penrose;

(iii) transcripts of evidence given to the Baird and Penrose inquiries (and to my first investigation) by current and former officials and actuaries who had some connection with the prudential regulation of the Society;

(iv) the working documents and emails of those officials and actuaries;

(v) publicly available material (such as actuarial papers and discussions); and

(vi) historical and other material held at the National Archives, the British Library, and the libraries of the DTI, the Institute of Actuaries, and the Institute of Chartered Accountants of England and Wales.

April 2005 to January 2007 – the investigation proper

44 As I explained in paragraph 31 above, in March 2005 I received the response of the principal officers of the public bodies to the allegations contained in the terms of reference for the investigation. As that response, which, as I have said, is reproduced in full in Part 4 of this report, did not resolve the matters which formed the basis for the complaints made to me, I decided to continue my investigation.

45 As part of the investigation, in April 2005 the public bodies were asked to comment on the detailed submissions made by the action groups in support of the complaints set out in the terms of reference for the investigation. Those public bodies provided comments in July 2005.

46 In May 2005, a summary of the initial response of the public bodies to those complaints was issued to the action groups; those groups were invited to comment on that response, which they did in June 2005.

47 Also in May 2005, all the parties to the complaints were issued with a discussion document, on which comments were sought, which outlined my role and the nature of the subject matter that this investigation would cover. That document also, after setting out a summary of the responsibilities of the public bodies as they at that time were understood, explained the tests that I proposed to adopt as being an appropriate standard of regulation.

48 I received comments on that document from the action groups in June 2005 and from the public bodies in both July and November 2005. The discussion document and excerpts from the responses of the public bodies to that document are reproduced in Part 4 of this report.

49 During September 2006, my Office conducted a survey of all those with registered complaints concerning the prudential regulation of Equitable. Throughout the investigation, a substantial number of letters from those with complaints about the prudential regulation of the Society were received and reviewed. We corresponded with the lead complainants throughout the investigation and my investigation team met them in April 2008.

50 Early drafts of Parts 2 and 3 of this report, which contain the work done to chart the historical development of the relevant regulatory regime and the chronology of relevant events, were shared with the public bodies in September 2005, January 2006, and December 2006. We also shared revised drafts of those Parts of this report, which reflected the comments of the public bodies on earlier drafts, with the Society and the action groups in July 2006 and April 2007. The comments and suggestions of all those parties, provided in response to the emerging drafts, were considered.

51 Meetings were also held, in addition to those held with the principal parties to the complaints, with other interested parties, including with the actuarial profession, the Financial Ombudsman Service, the European Parliament Committee of Inquiry, and several Members of Parliament. My staff also travelled to Brussels in September 2005 to assist the Petitions Committee of the European Parliament to understand the nature and scope of my investigation.

52 My investigation team also held regular meetings with my actuarial and legal advisers. Throughout the investigation, my team and advisers have worked collaboratively. A number of roundtable meetings were held at which the professional advice I have been given was reviewed. All my advisers have contributed to the drafting process through such meetings, as well as through the advice that they have provided.

53 I have carried out a thorough and wide ranging investigation into the subject matter of the complaints within the terms of reference for the investigation. I have given careful consideration to all of the evidence, submissions, and other material before me, whether or not that material is referred to within this report.

54 While this report does not refer to everything that I and my investigation team have reviewed, I am satisfied that nothing of significance to my conclusions has been omitted from this report.

Draft reports and review – January 2007 to date

55 At the end of January 2007, I sent to the principal officers of the public bodies a first draft of this Part of my report, which contained my provisional views as to the relevant facts and as to whether maladministration had occurred and, if so, whether it had resulted in any injustice to complainants.

56 At the same time, I also sent those officers further drafts of Parts 2 and 3 of this report, which had been amended in the light of my consideration of the comments which had been made in respect of earlier drafts of those Parts. In March 2007, I made available to the public bodies the full draft of the provisional report of my actuarial adviser.

57 As I explained in a letter of 22 May 2007 to all Members of Parliament, in April 2007 I received substantial joint representations from the public bodies concerning my first draft report. I received at the same time additional representations from three former FSA senior managers.

58 I agreed, in the light of the nature and extent of those representations, to conduct a fundamental review of my first draft report. That review included the seeking of further professional advice from both actuarial and legal advisers and seeking the view of peer reviewers as appropriate.

59 The representations of the public bodies were considered in detail as part of that review, which was also informed by supplementary submissions by the public bodies made in September 2007 at the request of my investigation team. Other work, such as revisiting the original files and other relevant evidence, was also undertaken as part of my review.

60 I communicated the results of that review to the principal officers of the public bodies on 30 November 2007, providing them with an indication of the extent to which I was at that time minded to accept their representations and of the provisional views that I proposed to set out within a revised draft report, which I would send to all the parties to the complaints.

61 That revised draft report, setting out my revised provisional views, was issued in February 2008 to the public bodies, to those representing lead complainants, and to the Society. Representations (or further representations) were invited on that revised draft report.

62 Relevant draft excerpts were also disclosed for the purposes of the investigation to interested parties. Those interested parties included certain former directors of the Society and its former auditors.

63 I received responses to my revised draft report from the public bodies, from those action groups representing the lead complainants, from certain individual members of those groups, from the former Appointed Actuaries of the Society, and from solicitors representing the Society’s former auditors.

64 Having considered those responses, which to the extent necessary are reflected within later Chapters of this Part of this report or reproduced in whole or in part within Part 4 of this report, shortly before publication I informed the parties to the complaints as to whether any substantive changes were to be made to my conclusions in the light of my consideration of their representations. I also informed them of the findings that would be made in this report.

65 This report, in which I have reached my final conclusions in the light of my consideration of all the evidence, the submissions I have received, and the other material before me, is the product of all that work.

66 I now turn to set out in detail the complaints which formed the basis for the investigation and the initial response of the public bodies to those complaints.