The basis for my determination of the complaints

Introduction

1 In this Chapter, I do four things:

• I first describe, in paragraphs 2 to 7 below, the  general approach that I adopt when determining complaints that a citizen has sustained injustice as a result ofmaladministration. This approach is based on establishing a clear understanding of the standards, both those of general application (the general standard) and those which are specific to the circumstances of a case (the specific standard), which applied at the time that the events complained about occurred. The general standard and the specific standard together comprise the overall standard.
• I then set out, in paragraphs 8 to 16 below, the general standard relevant to the investigation, as derived from established principles of good administration and from public law principles.
• I then set out, in paragraphs 17 to 108 below, the specific standard relevant to the investigation, i.e. the specific legal and administrative framework of prudential regulation and the specific duties imposed upon, and the powers available to, the prudential regulators within that framework during the relevant period.  
• I then summarise, in paragraphs 109 to 114 below, the key legal and administrative obligations that the prudential regulators and/or GAD had at the relevant time, which are relevant to my consideration of the manner in which those regulators and/or GAD discharged those obligations.

My general approach and the overall standard

2 In simple terms, when determining complaints which have as their basis a claim that injustice has been sustained in consequence of alleged maladministration, I generally begin by comparing what actually happened with what should have happened.

3 So in addition to establishing the facts that are relevant to a complaint, I also need to establish a clear understanding of the standards, both of general application and which are specific to the circumstances of the case, which applied at the time that the events complained about occurred and which governed the discharge of administrative functions by those whose actions are subject to complaint. I call this establishing the overall standard.

4 The overall standard has two components: the general standard which is derived from general principles of good administration and of public law;and the specific standard which is derived from the specific legal and administrative framework relevant to the events in question.

5 Having established the overall standard, I then assess the facts in accordance with that standard.

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

7 The general and specific standards applicable tothis investigation are set out below in paragraphs 8 to 16 and 17 to 108, respectively; together they comprise the overall standard. The facts as I have found them to be are set out in Part 3 of this report, which contains a detailed chronology of the relevant events. Those events are summarised in Chapters 6, 7, and 8 of this report. My assessment of those facts against the overall standard is set out in Chapters 10 and 11. The general standard: principles of good administration and public law General principles of good administration

8 Since my Office was established in 1967, it has developed and applied certain principles of good administration in determining complaints of maladministration. In March 2007, I published those established principles in codified form, in a document entitled Principles of Good Administration.

9 The document^[1] organises the established principles of good administration, which are based on 40 years’ experience of investigating complaints and are thus derived from the practical processes of our casework, into six principles. Those principles are:

• Getting it right;  
• Being customer focused;
• Being open and accountable;
• Acting fairly and proportionately;
• Putting things right; and  
• Seeking continuous improvement.

10 I have taken into account those principles of good administration in my consideration of the complaints which led to this report. I have identified that the principles of ‘getting it right’ and ‘being open and accountable’ are of particular relevance in relation to the complaints which formed the basis for this investigation. For that reason, I set out below in greater detail some of what Principles of Good Administration says under those headings.

11 Getting it right means (amongst other things):

• Acting in accordance with the law and with due regard for the rights of those concerned.
• Acting in accordance with the public body’s policy and guidance (published or internal).
• Taking proper account of established good practice.
• Taking reasonable decisions, based on all relevant considerations.

12 Being open and accountable means (amongstother things):

• Being open and clear about policies andprocedures and ensuring that information, andany advice provided, is clear, accurate andcomplete.
• Stating the criteria for decision making andgiving reasons for decisions.
• Keeping proper and appropriate records.

General principles of public law

13 The first principle of good administration, ‘gettingit right’ means, as indicated above, acting inaccordance with the law. In addition to workingwithin the specific legal framework applicable to insurance business, those responsible for theprudential regulation of insurance companies wererequired, as are all public bodies, to act inaccordance with general principles of public law.

14 In summary, public law may be described as the lawthat governs the exercise by public bodies andofficers of the powers and duties conferred onthose authorities. It is a collection of generalprinciples which control the exercise of powers andthe carrying out of duties by public authorities.

15 The aim of those principles is to ensure that publicauthorities carry out their duties in accordancewith the law and to keep the exercise by thosebodies and officers of their powers and dutieswithin their legal bounds.

16 The principles of public law particularly relevant tomy investigation are that:

(i) Public bodies must carry out their legal dutiesin accordance with the law.

Every public authority must comply with anyduties imposed upon it by statute inaccordance with any requirements specified inthat statute. Those on whom duties areimposed may not choose not to perform orpermit themselves to be prevented fromperforming such duties.

Any public authority which carries out anaction must be able to demonstrate that it hasstatutory authority to do so and that it hasexercised that authority in the right and propermanner that Parliament, when conferring that authority, is presumed to have intended. Apublic authority must have regard to, and act inaccordance with, all relevant law, including thelaw of the European Community.

(ii) Where public bodies have a power granted tothem they must properly consider whether toexercise that power.

The exercise of a legal power is discretionary,but a public authority must give properconsideration to the use of its powers at thepoint when it reasonably considers thatgrounds for the exercise of those powers haveor may have arisen. The authority cannot fetteror constrain its ability to give properconsideration to the exercise of its powers.

(iii)When public bodies exercise a powerthey must act fairly and reasonably and inaccordance with any conditions imposedby law.

Legislation conferring power on publicauthorities frequently imposes conditionsabout procedures to be followed before thepower may be exercised. Any such conditionsmust be complied with. In addition, statutorypowers must be exercised in a right and properway and in accordance with the presumedintention of Parliament when it conferredthose powers. Those powers must be exercised
in good faith, reasonably, for a proper purpose,and with procedural propriety.

The specific standard: the framework ofprudential regulation

17 I now turn to set out the principal provisions of theregime relevant to the prudential regulation ofinsurance companies derived from legislation. Before doing so, I will explain briefly what the
principal influences were on the development ofthat regime and the legislative purpose underlyingthat regime.

The influences on the regulatory regime

18 The development of the regime relevant to theprudential regulation of life insurance companieswhich pertained at the time covered by myinvestigation is explained in more detail in Part 2 of this report. The development of that regime hadfour principal influences:

• the traditional approach within the UnitedKingdom to insurance regulation, which wasunderpinned by the concept of ‘freedom withpublicity’;
• the central place of the actuarial professionwithin the architecture of life insuranceregulation, which was primarily given effectthrough the role of the Appointed Actuary;
• the reaction to insurance company failures andthe need for consumer protection, which ledto the introduction of the concept of theprotection of the reasonable expectations ofexisting and potential policyholders; and
• the United Kingdom’s membership of theEuropean Economic Community and thedevelopment of a Single Market for insurancewithin Europe, which led to the introduction ofthe concept of the fulfilment of the criteria of‘sound and prudent management’.

 The United Kingdom approach to regulation and‘freedom with publicity’

19 The first influence was the central importancewithin the developing system of insuranceregulation in the United Kingdom of the conceptof ‘freedom with publicity’. In a paper prepared inFebruary 1976 by the Insurance Division of theDepartment of Trade, entitled Brief History ofInsurance Supervisory Legislation in Great Britain,it was stated that:

The main purpose of insurance supervisorylegislation is to protect policyholders throughmeasures aimed at preventing insolvencies ofinsurance companies. Its introduction in thiscountry more than a century ago couldtherefore be regarded as one of the earliestforms of consumer protection. The basis ofthe British system has been “freedom withpublicity” – freedom for the insurers to fixtheir own premium rates, policy conditions,investment policies etc. in return for publicityabout their financial condition to enablesolvency to be monitored.

Actuaries and life insurance and the role of theAppointed Actuary

20 The second influence was the central place of theactuarial profession within life insurance regulationin the United Kingdom and the creation in 1973 ofthe statutory role of the Appointed Actuary as partof that system of regulation.

21 In its February 1991 brochure, The role of theAppointed Actuary in the United Kingdom, theactuarial profession explained that:

Actuaries in the United Kingdom, as in mostcountries, fulfil a very broad range of roles inthe financial management of life insurancecompanies. In the United Kingdom, however,one actuarial position is set apart bylegislation and practice. The actuary whoholds this position is known as the AppointedActuary… [who plays a] special role… in a lifecompany’s affairs.

22 In an earlier paper to the Institute of Actuaries inNovember 1988 on the role of the AppointedActuary, the then Government Actuary hadexplained what that special role entailed:

… the Appointed Actuary is in a specialposition in that he is appointed andremunerated by the company, and thus formspart of the management team responsible tothe Directors, and at the same time he hasresponsibilities and obligations to the DTI byreason of his statutory duties, which arisefrom the Department’s supervisory functionsaimed at the protection of policyholders.

Insurance company failures and policyholders’reasonable expectations

23 The third influence was the reaction to a numberof high-profile instances in the 1960s and 1970s inwhich insurance companies collapsed leaving theirpolicyholders without insurance cover. Perhaps themost notorious example of such a failure wasVehicle & General.

24 The domestic statutory regime for prudentialregulation at the time relevant to my investigationwas contained in the Insurance Companies Act1982. That regime had its roots in – andconsolidated – legislation enacted in the 1970s,after those collapses, which had aimed tostrengthen the protection provided by insuranceregulation. When this new legislation had beenintroduced in 1973, its objective was stated by thethen Minister to be:

Not primarily to penalise post facto dishonestor incompetent managements, but to protectpolicyholders by taking or requiring suitablecorrective action in time to avert theconsequences of imprudent or misguidedpolicies… [the intention was to] strike a properbalance between, on the one hand, allowing the industry so much freedom that it can beexploited by rogues, and on the other hand,creating for the industry such shackles that itcannot give efficient, competitive and forwardlooking service to consumers here and abroad (Hansard, House of Commons, 21 May 1973).

25 That legislation – the Insurance Companies(Amendment) Act 1973 – had introduced theconcept of ‘policyholders’ reasonable expectations’(a concept which also included the reasonableexpectations of potential policyholders) as acentral component of the protection that was tobe delivered by that regulatory regime. Thisconcept became known as ‘PRE’ – I will refer to it,where appropriate, in this way in the rest of thisreport.

The European dimension and sound and prudentmanagement

26 The fourth influence was the United Kingdom’smembership of the European EconomicCommunity and the development of a SingleMarket for life insurance by moves to co-ordinatethe laws, regulations and administrative provisionsin Member States in relation to the financialsupervision of insurance companies.

27 Key to the completion of the Single Market in sofar as the financial supervision of insurancecompanies was concerned was the concept of‘sound and prudent management’ which concernedthe way in which insurance companies conductedtheir business and were governed.

28 In 1992, the European Third Life Directive hadestablished this concept. Article 15.3 of thatDirective provided that ‘the competent authoritiesof the home Member State shall require everyassurance undertaking to have soundadministrative and accounting procedures andadequate internal control mechanisms’.

The cornerstones of prudential regulation

29 The prudential regulation of life insurancecompanies was undertaken within the context ofthose four principal influences – the traditionalUnited Kingdom approach to insurance regulation,the pivotal role of the actuarial profession, thereaction to insurance company failure, and thedevelopment of a Single Market for insurancewithin Europe.

30 The regulatory regime which developed over timeto deliver prudential regulation and which pertainedat the time covered by this report thus had fourcornerstones. Those four cornerstones were:

• ‘freedom with publicity’;
• the central place of the Appointed Actuarywithin the regulatory regime;
• the protection of the ‘reasonable expectations’of both policyholders and potentialpolicyholders; and
• the criteria of ‘sound and prudentmanagement’.

31 Those cornerstones laid the foundations on whichwere built:

•  the way in which regulation was undertaken –in which information provided through theregulatory returns and the role played by theAppointed Actuary in ensuring that thisinformation was so provided were given acentral place; and
• the powers, duties, and means conferred onthe prudential regulators – which gaveprominence to the protection of PRE andensuring the fulfilment of the statutory criteriaof sound and prudent management.

The aim of prudential regulation

32 The stated aim of the system of prudentialregulation was to protect the interests ofpolicyholders and potential policyholders. Securingthat aim was to be done in such a way as to balance
the need to take such action as was necessary toprotect those interests, without interfering in thebusiness of insurance companies to such an extentas would stifle competition and prevent innovation,
thus harming consumer interests.

The statutory framework

33 The statutory framework which governed thatsystem of regulation, and within which theprudential regulators (acting with the advice andassistance of GAD) were given powers for thepurpose of protecting the interests ofpolicyholders and potential policyholders, had fourchief component parts:

• European Directives concerning life assurance;
• the Insurance Companies Act 1982;
• secondary legislation made under the InsuranceCompanies Act 1982; and
• certain other domestic statutory provisionsrelated to the activity of insurance companies.

34 The duties imposed and the powers conferredunder this framework were generally to beperformed, or were exercisable, by Ministers,although in line with the Carltona principle^[2], theday-to-day exercise of those powers was carriedout by officials working under delegated authority.

Table 5a shows the Ministers responsible for prudential regulation during the period covered by this report.

DTI Ministers responsible for the prudential regulation of insurance companies from June 1983 to January 1998
Period	Secretary of State	Junior Minister
16/06/1983-16/10/1983	Cecil Parkinson	Alex Fletcher
16/10/1983-02/09/1985	Norman Tebbit	Alex Fletcher
02/09/1985-26/01/1986	Leon Brittan	Michael Howard
26/01/1986-13/06/1987	Paul Channon	Michael Howard
13/06/1987-26/07/1989	Lord Young of Graffham	Francis Maude
26/07/1989-27/07/1990	Nicholas Ridley	John Redwood
27/07/1990-15/04/1992	Peter Lilley	John Redwood
15/04/1992-21/11/1994	Michael Heseltine	Neil Hamilton
21/11/1994-12/07/1995	Michael Heseltine	Jonathan Evans
12/07/1995-24/07/1996	Ian Lang	Jonathan Evans
24/07/1996-06/05/1997	Ian Lang	John Taylor
06/05/1997-05/01/1998	Margaret Beckett	Nigel Griffiths

Treasury Ministers responsible for the prudential regulation of insurance companies from January 1998 to December 2001
Period	Chancellor	Chief Secretary	Junior Minister
06/01/1998-27/07/1998	Gordon Brown	Alistair Darling	Helen Liddell
28/07/1998-22/11/1998	Gordon Brown	Stephen Byers	Patricia Hewitt
23/11/1998-27/07/1999	Gordon Brown	Alan Milburn	Patricia Hewitt
28/07/1999-10/10/1999	Gordon Brown	Alan Milburn	Melanie Johnson
11/10/1999-10/06/2001	Gordon Brown	Andrew Smith	Melanie Johnson
11/06/2001-01/12/2001	Gordon Brown	Andrew Smith	Ruth Kelly

European law

35 The three life insurance Directives together formthe principal European legislation relevant to thisinvestigation. Those Directives aimed to create asingle market in the insurance sector and tocoordinate the laws, regulations and administrativeprovisions concerning direct life assurance withinMember States. The First Life Directive was madeon 5 March 1979 and is described more fully inparagraphs 220 to 233 of Part 2 of this report; theprime aim of that Directive was to ensure freedomof establishment throughout the Community –that is, that life insurance companies which wereauthorised in one Member State were permittedto establish branches within other Member States.

36 The Second Life Directive was made on8 November 1990 and is described in more detailin paragraphs 407 to 411 of Part 2 of this report; theprime aim of that Directive was to ensure freedomto provide services throughout the Community –that is, that life insurance companies authorised inone Member State were permitted to market theirproducts in other Member States without the needfor authorisation in those other countries.

37 The Third Life Directive was made on 10 November1992 and is described in more detail in paragraphs485 to 508 of Part 2 of this report. The prime aimof this Directive was to complete the Single Marketin life insurance throughout the Community.

38 All three Directives contained provisions whichaimed to co-ordinate the systems of financialsupervision of life insurance companies withinMember States. The key provisions of thoseDirectives, as they affect the issues underconsideration in this report, are:

(i) that all insurance companies were required tobe subject to official authorisation which hadto be obtained from the competentsupervisory authority prior to a company beingpermitted to operate^[3];

(ii) that all authorised insurance companies had tomaintain specified reserves and margins ofsolvency that were to be calculated inaccordance with prescribed principles^[4]; and

(iii) that an authorised insurance company couldhave its authorisation withdrawn by thesupervisory authority if the company no longermet the conditions necessary for authorisation,if the company breached its solvencyrequirements and was unable within a specifiedtime to take the measures it had been requiredto take to restore a sound financial position, orif the company failed seriously in its obligationsunder the applicable Regulations within therelevant Member State^[5].

39 An important provision for the prudentialregulation of insurance companies was thatcontained in Article 16 of the First Life Directive.This provided that:

The supervisory authority of the memberstate in whose territory the head office of theundertaking is situated must verify the stateof solvency of the undertaking with respect toits entire business. The supervisory authoritiesof the other member states shall provide theformer with all the information necessary toenable such verification to be effected.

40 That obligation was replaced pursuant to anamendment contained in the Third Life Directivewhich, so far as is relevant, amended the relevantArticle^[6] to provide that:

… financial supervision shall includeverification, with respect to the assuranceundertaking’s entire business, of its state ofsolvency, the establishment of technicalprovisions, including mathematical provisions,and of the assets covering them, inaccordance with the rules laid down orpractices followed in the home Member Statepursuant to the provisions adopted atCommunity level. The competent authoritiesof the home Member State shall require everyassurance undertaking to have soundadministrative and accounting procedures andadequate internal control mechanisms.

41 The European Directives were implemented in theUnited Kingdom through domestic legislation, theprincipal components of which are describedbelow. However, those Directives continued tohave direct effect and to impose certain directduties on Member States.

42 The duties placed on the United Kingdom by thoseEuropean Directives are, in my view, central to anyinterpretation of the functions that thoseresponsible for the prudential regulation of lifeinsurance companies were to discharge. It is anestablished legal principle that, where a statutoryprovision is necessary in order to comply with aEuropean Directive, that provision is to beconstrued by reference to the wording andpurpose of that Directive, even if that Directivepost-dates the relevant domestic legislation.

43 If, as is the case with the subject matter of thisreport, the extent of the obligations imposed onthose public authorities with responsibility fordischarging the United Kingdom’s duties withrespect to financial supervision of insurancecompanies is a matter of dispute, regard should behad to the terms of the relevant EuropeanDirectives. In this context, European Directiveshaving direct effect take precedence overdomestic legislation.

44 I consider that the most important duties relevantto the subject matter of this report are thoseimposed by the provisions of the three life insuranceDirectives, which required the United Kingdom:

(i) to take all steps necessary to ensure that itssupervisory authorities had the powers andmeans necessary for the financial supervisionof the activities of those life insurancecompanies established within their territory,including activities engaged in outside thatterritory^[7].

(ii) to ensure that its supervisory authorities^[8]:

(1) were able to make detailed enquiries aboutan insurance company’s situation and thewhole of its business, including by gatheringinformation or requiring the submission ofdocuments concerning life insurancebusiness or by carrying out on-the-spotinvestigations at the company’s premises;

(2) were able to take any measures that wereappropriate and necessary to ensure thatthe activities of the insurance companyremained in conformity with the laws,regulations and administrative provisionswith which the company had to comply;and

(3) were able to act to prevent or remedy anyirregularities prejudicial to the interests ofpolicyholders.

(iii) to ensure that each life insurance companywithin the United Kingdom maintained anadequate solvency margin in respect of itsentire business^[9].

(iv) to ensure that, as part of their financialsupervision, its supervisory authorities wererequired^[10]:

(1) to verify a life insurance company’s state ofsolvency, with respect to its entire business;

(2) to verify the establishment of technicalprovisions and of the assets covering them,in accordance with the rules laid down orpractices followed in the United Kingdompursuant to the provisions adopted atCommunity level; and

(3) to require every company to have soundadministrative and accounting proceduresand adequate internal control mechanisms.

(v) to ensure that each life insurance company^[11]:

(1) established sufficient technical reserves,including mathematical reserves (in linewith stated principles); and

(2) had assets equivalent to the underwritingliabilities assumed in all the countrieswhere it carried on its activities.

(vi) to collaborate closely with other MemberStates in supervising the financial position ofauthorised insurance companies^[12].

(vii) to ensure that each life insurance companyproduced an annual account of its financialsituation and solvency and renderedperiodically the returns and statisticaldocuments necessary for the purposes ofsupervision^[13].

Domestic law – primary legislation – the Insurance Companies Act 1982

 45 In the United Kingdom, the duties imposed bythose three European Directives were transposedinto domestic law through what became theInsurance Companies Act 1982 and throughsubsequent amendments to that Act.

46 The system of prudential regulation of insurancecompanies created by this statutory frameworkfocused on four regulatory areas of activity. Thesewere:

• the control by the prudential regulators ofentry into the insurance market through thedual processes of the authorisation ofcompanies to conduct business and theapproval, using ‘fit and proper’ powers, bythose regulators of persons who held acontrolling interest or undertook certainspecified and significant management roleswithin a company;
• the monitoring by the prudential regulators ofthe financial condition of companies throughthe process of the submission and scrutiny ofannual regulatory returns, which containedprescribed information about the activity andfinancial strength of the company;
• the possession by the prudential regulators ofpowers of intervention that could be used inspecified circumstances to direct a company totake certain forms of action or to refrain fromcertain action; and
• the ability of the prudential regulators topetition the court to wind up a company incertain circumstances.

47 The detailed provisions of the 1982 Act aredescribed in paragraphs 282 to 340 of Part 2 of thisreport; the provisions of predecessor legislation aredescribed in paragraphs 22 to 45 and 78 to 160 ofPart 2 of this report. The key provisions of the 1982Act, as they affect the issues under considerationin this report, are:

(i) that a life insurance company could only carryon insurance business if it had received priorauthorisation to do so from the prudentialregulators^[14];  

(ii) that each life insurance company had toappoint an actuary – who became known asthe Appointed Actuary – who was required tohold prescribed qualifications and whoseidentity had to be notified to the prudentialregulators within fourteen days ofappointment^[15];

(iii) that the company was required to ‘cause’ itsAppointed Actuary to make an annualinvestigation of the company’s financialposition and the company was then required tocause an abstract of the Actuary’s report to bemade in a prescribed form^[16];

(iv) that such an investigation had to include avaluation of the liabilities of the companyattributable to its life assurance business and adetermination of any excess over thoseliabilities of its assets representing the fund orfunds maintained by the company in respect ofthat business^[17];

(v) that, for the purposes of that investigation, thevalue of any assets and the amount of anyliabilities were to be determined in accordancewith valuation regulations made by theSecretary of State (or, in later years, by theTreasury)^[18];

(vi) that each company was required to hold assetswhich exceeded their liabilities by at least aprescribed margin. That requirement – knownas meeting the required margin of solvency –had to be maintained throughout every yearalthough, in general, it was only required to bedemonstrated to the prudential regulators ateach year-end^[19]. However, from 1996, theDirectors of a company had to certify that thecompany had met the required minimummargin of solvency throughout the year^[20]; and

(vii) that each company was required to submit tothe prudential regulators, in a prescribedformat and normally within six months afterthe close of the period to which thedocuments related:

• a copy of its annual accounts and balancesheet;
• the abstract of the Appointed Actuary’sreport (which was not audited) and anystatement of its long term business;
• its annual statement of business, preparedunder section 20 of the 1982 Act; and
• any auditor’s report on the accounts^[21].

48 The above documents, more commonly known asthe regulatory returns, were deposited by theprudential regulators with Companies House andwere made available for public inspection – and
each company was also required to make availablea copy of the returns on request to anypolicyholder or, where relevant, shareholder^[22].

49 The prudential regulators were subject to expressstatutory duties by virtue of section 22(5) of the 1982Act. That section provided that the prudential regulators:

… shall consider the documents… [i.e. the regulatoryreturns], and if any such document appears to [the prudential regulators] to be inaccurate orincomplete in any respect, [the prudentialregulators] shall communicate with the companywith a view to the correction of any suchinaccuracies and the supply of deficiencies.

50 Thus, the prudential regulators were under duties:

(i) to consider the regulatory returns andassociated documents that insurancecompanies were required to submit on anannual basis to those regulators; and

(ii) to communicate with an insurance companywith a view to the correction of any inaccuracyor the supply of any deficiency where thoseregulators considered that the relevant returnswere inaccurate or incomplete in any respect.

51 In addition to those duties, the 1982 Act gave tothe prudential regulators certain powers ofintervention, which included:

(i) powers to withdraw authorisation from acompany to conduct new business if itappeared that the company was not fulfillingits statutory obligations under the 1982 Act orif it no longer met the criteria necessary for theauthorisation of companies to carry outinsurance business^[23] – and, with effect from July1994, an additional power to suspendauthorisation in urgent cases was introduced^[24];

(ii) powers, in the event that a company failed tomeet its required margin of solvency, to requirethe company to submit a plan for the restorationof a sound financial position and to require thecompany to propose modifications to that planif it was inadequate. The company was thenrequired to give effect to any plan accepted bythe prudential regulators as adequate^[25];

(iii) powers, if a company’s margin of solvency fellbelow the ‘guarantee fund’ of one third of therequired margin of solvency (or below £400,000if that sum were the greater), to require thesubmission of a short-term financial schemeand to require the company to proposemodifications to that scheme if it wasinadequate. The company was then required togive effect to any plan accepted by theprudential regulators as adequate^[26]; and

(iv) powers to intervene in the affairs of a companyin specified circumstances in the form of:

•  a requirement for the company not tomake, or to realise, certain investments^[27];
•  a requirement for the company to maintaincertain assets within the United Kingdomand to require that all or part of thoseassets be placed in the custody of anindependent trustee^[28];
•  a requirement for the company to limit itsaggregate premium income, either gross ornet of reinsurance^[29];
•  a requirement for the company to arrangefor its Appointed Actuary to investigate allor part of the affairs of the company at atime other than the annual investigationand to deposit an abstract of the Actuary’sreport with the prudential regulators (whichwas then sent to the Registrar of Companiesand was open to public inspection)^[30];
•  a requirement for the company toaccelerate the deposit of its regulatoryreturns with those regulators^[31];
•  a requirement for the company to producespecified information or documents,verified in any way specified by thoseregulators^[32]; and
•  a residual power to take such other actionas appeared to be appropriate for thepurpose of protecting policyholders orpotential policyholders against the risk thatthe company might be unable to meet itsliabilities or to fulfil the reasonableexpectations of policyholders or potentialpolicyholders^[33].

52 The power under section 45 of the 1982 Act was‘residual’ in the sense that it was only to be used inthe event that protecting policyholders (orpotential policyholders) from the risk that theirreasonable expectations might not be fulfilledcould not be appropriately achieved by theexercise of the prudential regulators’ otherpowers^[34].

53 Furthermore, the power in section 45 of the 1982Act could not be used in such a way as to restrict acompany’s freedom to dispose of its assets unlessauthorisation to conduct new business had firstbeen withdrawn from the company (or suspended);or unless the prudential regulators believed thatthe company did not meet the required minimummargin of solvency; or unless the regulatory returnsby the company showed that the company’sliabilities had been determined otherwise than inaccordance with the valuation regulations or, if nosuch regulations applied, in accordance withgenerally accepted accounting practices^[35].

54 From 1 July 1994, as a result of the commencementof domestic Regulations implementing theprovisions of the Third Life Directive, additionalpowers were conferred on the prudential regulators:

(i) those regulators were empowered to appointan independent, competent person to conductan investigation with a view to ascertainingwhether the criteria of sound and prudentmanagement were fulfilled or whether thosecriteria would be fulfilled if the applicationfrom a person seeking to become a controllerof the company were approved^[36];

(ii) those regulators were empowered to apply tothe court to seek an order restraining aninsurance company from disposing of its assetswhere it appeared that grounds existed onwhich the prudential regulators were empoweredto require a company not to do so^[37]; and

(iii) the prudential regulators were empowered touse the residual power in section 45 of the 1982Act to take such action as appeared to themappropriate for the additional purpose ofensuring that the criteria of sound and prudentmanagement were fulfilled with respect to aparticular company^[38].

55 The criteria of sound and prudent managementwere listed in the new Schedule 2A to the 1982 Act.Those criteria included:

(i) that the business of the company should becarried on with integrity, due care and theprofessional skills appropriate to the nature andscale of its activities^[39];

(ii) that each director, controller, manager or mainagent of the company should be a fit andproper person to hold that position^[40];

(iii) that the company should be directed andmanaged by a sufficient number of personswho were fit and proper persons to hold thepositions they hold^[41]; and

(iv) that the company should conduct its businessin a sound and prudent manner^[42].

56 A company was not to be regarded as conductingits business in a sound and prudent manner in thefollowing, among other, circumstances:

(i) unless the company maintained adequateaccounting and other records of its businessand maintained adequate systems of control ofits business and records (and thosearrangements were not to be consideredadequate unless they were such as to enablethe business to be prudently managed)^[43];

(ii) if the company failed to conduct its businesswith due regard to the interests ofpolicyholders and potential policyholders^[44];

(iii) if the company failed to satisfy any obligationto which it was subject under the 1982 Act^[45]; or

(iv) if the company failed to supervise the activitiesof any subsidiary undertaking with due careand diligence and without detriment to thecompany’s business^[46].

57 The powers of intervention conferred on theprudential regulators were exercisable on thegrounds specified in the 1982 Act, which included:

(i) where those regulators considered thatintervention was desirable for protectingpolicyholders or potential policyholdersagainst the risk that the company might beunable to meet its liabilities^[47];

(ii) in the case of long-term business, where thoseregulators considered that intervention wasdesirable for protecting policyholders or potential policyholders against the risk that thecompany might be unable to fulfil theirreasonable expectations^[48];

(iii) (with effect from 1 July 1994) where it appearedto those regulators that any of the criteria ofsound and prudent management of aninsurance company was not or might not befulfilled by the company (or had not or mightnot have been fulfilled in the past)^[49];

(iv) if it appeared to the regulators that thecompany had failed to satisfy an obligation towhich it was subject by virtue of the 1982 Actor predecessor legislation^[50];

(v) if it appeared to the regulators that thecompany had furnished misleading orinaccurate information to those regulatorsunder or for the purposes of the 1982 Act or ofpredecessor legislation^[51];

(vi) if those regulators were not satisfied thatadequate arrangements were in force or wouldbe made for the reinsurance by the company ofany risks that the prudential regulatorsconsidered should be reinsured^[52];

(vii) if there were grounds on which, were thecompany a new company, those regulatorswould have been prohibited from granting itauthorisation to carry on insurance business^[53];or

(viii) if it appeared to those regulators that thecompany had substantially departed from anybusiness proposal or financial forecastsubmitted at the time of its authorisation^[54].

58 The power to require a company to producedocuments to the prudential regulators atspecified times or intervals was also exercisable onthe ground that those regulators considered theexercise of that power to be desirable in thegeneral interests of persons who were or whomight have become policyholders^[55].

59 The powers of intervention conferred on theprudential regulators to impose requirements on aninsurance company regarding:  

(i) the making or realisation of investments; or

(ii) the limitation of premium income; or

(iii) the actuarial investigation of all or part of itsaffairs; or

(iv) the furnishing of information; or

(v) the residual power to take other action necessary for the protection of PRE or toensure that the criteria of sound and prudentmanagement were being fulfilled

were also exercisable whether or not any of thegrounds for the exercise of the prudentialregulators’ powers of intervention existed – if therelevant power was exercised before the expirationof the period of five years beginning with the dateon which a new controller of the company became such a controller, although any requirementimposed on the company by virtue of thisprovision could not continue in force after theexpiration of ten years from the relevant date^[56].

60 The prudential regulators were also given thepower to disapply or to modify the application to aparticular company of certain provisions governingthe prudential regulation of insurance companies,where that company applied for or consented tothe modification or disapplication of suchprovisions^[57]. Those regulators were also given thepower to alter the financial year of an insurancecompany, either by extending or shortening thatfinancial year^[58].

61 In addition to being granted powers to controlentry into the insurance market through the dualprocesses of the authorisation of companies andthe approval of certain controllers and seniormanagers of such companies using ‘fit and proper’powers (see paragraph 46 above), additional powerswere conferred on the prudential regulators witheffect from 1 July 1994 in respect of existingcontrollers or senior managers of authorisedcompanies.

62 From 1 July 1994, those regulators also had thepower to object to a controller or senior managerof a company continuing to hold such a positionwhere it appeared that the criteria of sound andprudent management were not fulfilled or may notin the future be fulfilled by reason of the ability ofthat person to influence the company^[59]. Theprudential regulators were required to give writtennotice that they were considering the use of thispower. However, they were not obliged to disclose to the person concerned or to the company anyparticulars of the ground on which they wereconsidering the service of a notice of objectionbeyond specifying which of the criteria of soundand prudent management was being relied on.

63 Those affected by such a proposal had to beafforded an opportunity to make representationsto the prudential regulators and any suchrepresentations were to be taken into accountbefore any notice of objection was served by thoseregulators. Where a notice of objection had beenserved on a company in respect of a managingdirector or chief executive, the company wasrequired to remove the person from their postforthwith^[60].

64 The prudential regulators were also given thepower to petition the court for the winding-up ofan insurance company in accordance withinsolvency legislation – on the grounds that thecompany was unable to pay its debts, or that thecompany had failed to satisfy an obligation towhich it was subject under the 1982 Act or underan obligation arising in another country related tothe provisions of the European Directives, or thatthe company had failed to keep or to provide suchaccounting records as enabled those regulators toascertain the financial position of the company^[61].

65 When exercising any power of intervention, theprudential regulators were required to state theground on which they were exercising that power –although, in the circumstances described inparagraph 59 above, those regulators were onlyrequired to state that they were exercising therelevant power^[62]. Domestic law – secondary legislation under theInsurance Companies Act 1982

66 Much of the detail of the relevant regime was leftby the provisions of the relevant primary legislationto be fleshed out in secondary legislation. TheRegulations most relevant to the prudentialregulation of insurance companies during theperiod covered by this report were:  

(i) the valuation of assets and determination ofliability regulations – contained in variousInsurance Companies Regulations. Thesecontained the rules (which were amended overtime) concerning the methods and assumptionswhich insurance companies were required toapply in valuing their assets and determiningtheir liabilities for the purpose of therequirements of the 1982 Act;

(ii) the regulations which prescribed the form andcontent of the returns – contained in variousInsurance Companies (Accounts andStatements) Regulations. These prescribed overtime, in varying degrees of detail, the form inwhich the regulatory returns were to besubmitted to the prudential regulators and theinformation to be given in those returns (andplaced in the public domain) – theseRegulations contained general requirements forvaluations to be undertaken in accordance withthe valuation regulations referred to in (i) aboveand that the annual accounts required bysection 17 of the 1982 Act should ‘fairly statethe information’ on the basis required by theRegulations; and

(iii) the Insurance Companies (Third Life Directive)Regulations 1994, which amended the 1982 Actto give effect to the provisions of the EuropeanThird Life Directive, particularly relating to thecodification of the criteria of sound andprudent management, outlined in paragraphs55 and 56 above.

67 There were two principal sets of regulationsgoverning the valuation of assets and thedetermination of liabilities made during therelevant period: those made in 1981 and those madein 1994 – although various amendments were madeto them over the years^[63]. The provisions of the 1981Regulations are described in paragraphs 248 to 281of Part 2 of this report. The provisions of the 1994Regulations are described in paragraphs 628 to 684of Part 2 of this report.

68 There were three principal sets of accounts andstatements regulations made during the periodcovered by this investigation: those made in 1980,in 1983 and in 1996 – although minor amendmentswere made to them in other years. The provisionsof the 1980 Regulations are described in paragraphs235 to 239 of Part 2 of this report^[64]. The 1983Regulations are referred to in paragraphs 341 to 43of Part 2 of this report. The provisions of the 1996Regulations as complemented by the provisions ofthe Deregulation (Insurance Companies Act 1982)Order 1996 and as subsequently amended aredescribed in paragraphs 774 to 812 of Part 2 of thisreport, where the revised requirements placed oninsurance companies to provide certaininformation through the regulatory returns areoutlined.

69 Thus, during the time relevant to the subjectmatter of this report, there were primarily:  

(i) two periods in which different regulationsgoverned the methods and assumptions to beused by insurance companies and theirAppointed Actuaries when calculating acompany’s assets, liabilities, solvency positionwhen completing the returns and providinginformation about other aspects of thatcompany’s business – the first ran from thesubmission of the 1988 returns to thesubmission of the 1993 returns, with the secondrunning from the submission of the 1994returns to the submission of the 2000 returns;and

(ii) two periods in which the format and contentof the regulatory returns were to be producedunder different regulations – the first ran fromthe submission of the 1988 returns^[65] to thesubmission of the 1995 returns, with the secondrunning from the submission of the 1996returns to the submission of the 2000 returns^[66].

70 It is not necessary here to set out every provisionthat those Regulations contained in respect of thevaluation of assets and the determination ofliabilities or in respect of the format of the returns.The relevant provisions of these Regulations will beset out in my assessment, within later Chapters ofthis report, of the way in which the Society wasregulated.

Domestic law – other relevant legislation

71 Other legislation had an indirect impact on theprudential regulation of insurance companies – orotherwise came into play in certain circumstances.The most important of these were the PolicyholderProtection Act 1975, the Insurance Companies(Winding-Up) Rules 1985, and the Insurance (Fees)Act 1985.

72 The Policyholder Protection Act 1975 put in place asystem for the payment of compensation topolicyholders in the event that an insurancecompany became insolvent or was otherwiseunable to meet its liabilities. The provisions of thatAct are described in more detail in paragraphs 207to 214 of Part 2 of this report.

73 The Insurance Companies (Winding-Up) Rules 1985set out the preconditions for and the processthrough which insurance companies were to bewound up by the court – and how the court wouldcalculate the liabilities of the company to itspolicyholders and other creditors.

74 The Insurance (Fees) Act 1985 inserted a newsection 94A in the 1982 Act under whichRegulations were made from time to time, with aview to securing (so far as practicable) that thecosts of the prudential regulation of insurancecompanies would be recouped by the Secretary ofState (and, later, by the Treasury) through the levyof annual fees on each company, based on a slidingscale that had regard to the size of each company’spremium income.

The administrative framework – those playing a rolein the system

The role of the prudential regulators

75 The statutory framework therefore gave theprudential regulators the central role in the systemof prudential regulation, which involved thoseregulators in:

• the authorisation of insurance companies – andthe suspension or withdrawal of suchauthorisation – and the approval of proposedmanaging directors, chief executives andcontrollers of such companies;
• the receipt and appraisal of accounts, balancesheets, abstracts and statements submitted byinsurance companies and the monitoring ofinsurance companies using those documents, inorder to verify their solvency and otherwise tosecure compliance by insurance companieswith the requirements of the applicable law;and
• the consideration of whether to exercisepowers of intervention in respect of aninsurance company or to exercise powers topetition the court for the winding-up of such acompany, on the basis of specified statutorygrounds, and the use of such powers wheresuch grounds existed and their exercise wasappropriate to promote the purposes of the1982 Act in the public interest.

The role of GAD

76 In the period prior to 26 April 2001, the prudentialregulators were assisted in the discharge of theirstatutory functions by GAD, under the terms ofservice level agreements (SLAs) that were agreedbetween them in 1984, in 1995 and in 1998. Thoseagreements are reproduced in full in Part 4 of thisreport. From 26 April 2001 onwards, actuarial adviceto the prudential regulators was provided byactuaries working for the FSA, who also conductedthe scrutiny of the regulatory returns.

77 Under the 1984 SLA, the primary objectives of thedetailed examination of the returns which GADundertook on behalf of the prudential regulatorswere^[67]:

•  to form a view about the solvency position ofthe company in respect of its long-termbusiness and to determine whether, at thevaluation date of the returns, the company hadand whether, in the foreseeable future, itseemed likely to continue to have, the marginof solvency required in respect of that business;
• to determine if the returns, with respect tolong-term business, complied with relevantstatutory requirements (and with anyundertakings given by the company); and
• to determine, as far as possible from thereturns, whether the company appeared tohave complied with other statutoryrequirements (or any other undertakings)relating to its long-term business.

78 GAD prepared a scrutiny report which wasprovided to the prudential regulators and whichwas required to include^[68]:

• a general description of developments in theyear which might have affected the companyor its long-term business;
• a general commentary on the present andfuture financial position (including any majorweaknesses in the valuation basis adopted bythe Appointed Actuary);
• any differences between any quarterly returnsand the annual returns (which was not relevantto Equitable, as the Society was never requiredto submit quarterly returns);
• any deviations from a business plan that hadbeen submitted by a company (which was alsonot relevant to Equitable, as the Society wasalready authorised at the time of theenactment of the 1982 Act and was thus neverrequired to submit a business plan as part ofthe process of new authorisation);
• details of breaches, or possible breaches, ofstatutory requirements or undertakings;
• details of significant errors or omissions in thereturns or other significant instances of noncompliance,explaining whether the problemhad been rectified and, if not, whether or notGAD was raising the issue with the company;
• details of any qualifications of any of thecertificates; and
• details (and copies) of correspondencebetween GAD and the company or itsAppointed Actuary.

79 The 1984 SLA was updated in March 1995. Underthe revised agreement, the primary role of theInsurance Division of the DTI, which wasresponsible for the regulation of insurancecompanies, was set out^[69] as being:

… to regulate the insurance industry effectively(within the duties and powers set out in theAct) so that policyholders can haveconfidence in the ability of UK insurers tomeet their liabilities and fulfil policyholders’reasonable expectations.

80 One of the prime functions of GAD^[70] was to‘advise [the prudential regulators] in the fulfilmentof these aims’. The 1995 SLA stated that the DTI’sInsurance Division had sole responsibility for allexecutive decisions taken in the exercise of theSecretary of State’s powers under the 1982 Act andthat GAD ‘recognise[d]’ that its functions wereadvisory (and that it had no responsibility for theexercise of those powers).

81 In its role in the scrutiny programme, GAD was toprovide a report to the prudential regulators toidentify any company which^[71]:

• was not complying with statutoryrequirements;
• was not meeting regulatory solvencyrequirements or was in any danger of failing tomeet them in the near future; and
• appeared not to be fulfilling PRE.

82 The scrutiny report to the prudential regulatorsfrom GAD, in the format specified in Appendix Aof the 1995 SLA, was to include^[72]:

•  a basis for action if any of those fundamentalrequirements were not being met, or if trendsin the reports suggested problems might beencountered when seeking to meet thoserequirements in the near future; and
• a basis for informed longer term discussionwith any company on problems which mightarise if trends in key performance indicatorscontinued.

83 Key indicators were said to include cover forsolvency, actuarial issues (for example, changes inthe valuation basis or matching position), types ofnew business, expenses, lapses, asset exposures andinvestment strategies, impact on bonuses and anysignificant other developments during the year.

84 In October 1998, the SLA was again updated. Therevisions mainly reflected the fact that statutoryregulatory responsibility had moved from the DTIto the Treasury – and that GAD was now providingadvice to the new prudential regulators.

The mechanisms of scrutiny – the means by whichGAD discharged its responsibilities to the prudentialregulators under the SLAs

85 In providing advice to the prudential regulators ofauthorised insurance companies in order to enablethose regulators both to verify the financialposition of such companies and properly toconsider whether grounds existed for the use ofany of the regulators’ intervention powers or oftheir power to petition the court for the windingupof the company, GAD used a number ofmechanisms.

86 Chief amongst those mechanisms was the annualscrutiny of the regulatory returns which aninsurance company was required to submit to theprudential regulators on an annual basis. Thatprocess had two separate stages – the initialscrutiny and the detailed scrutiny. The initialscrutiny of the returns of a particular company wasitself carried out in two steps. The first step, the A1initial scrutiny, was designed to ensure that all theparts of the returns had been completed andproperly signed. The second step, the A2 initialscrutiny, was carried out through an initial reviewbased largely on some standard arithmeticalchecks. GAD had a standard ‘tick-list’ for these checks, which was completed in manuscript.

87 The A2 tick-list also contained sections wherecomments could be made, including one headed‘aspects that look worrying’. Based primarily on thesolvency position shown on Form 9 of the returns,a priority rating was allocated and recorded on thetick-list. That priority rating governed whether ornot a particular company’s returns were to besubject to a detailed scrutiny and, if they were, thehigher the priority rating the more quickly thedetailed scrutiny was to be carried out. TheSociety’s returns were subject to detailed scrutinyin all years covered by this report apart from thosesubmitted in respect of 1988 and 1989.  

88 Once the returns had been reviewed by GAD, itwas normal for GAD to raise questions directlywith the company about any actuarial issues. TheSLAs allowed this, although they also provided that
any particular regulatory issue was to be dealt withbetween the prudential regulators and thecompany. GAD was required to identify anysignificant errors or omissions in the returns whenreporting to those regulators. This contactbetween GAD and a company was an importantpart of the scrutiny process. Through such contact,GAD gained a better understanding of thecompany, was able to advise the prudentialregulators whether the returns needed clarificationor whether further information from the companywas needed and was able to advise those regulatorswhat the important issues regarding the companywere, as GAD were required to do. In addition to itsscrutiny of the returns, GAD was also providedwith copies of other correspondence between theprudential regulators and the company. In this way,GAD was kept informed of developing issuesduring the year.

89 However, while the scrutiny of the annualregulatory returns submitted by insurancecompanies was the prime focus of the mechanismsused by the prudential regulators and GAD to assistthem to undertake their responsibilities, that wasnot the only mechanism open to them. A furtherpart of the information-gathering process wascompany visits, which were introduced in the early1990s and which became a regular part of theregulatory process. Those visits covered industryand company-specific topics and allowed theprudential regulators and GAD to assess theactuarial management of the company in face-tofacemeetings.

90 GAD also undertook a number of industry-wideanalyses to enable them to scrutinise the returns ofinsurance companies in a wider context, tohighlight any practices which were out of line withindustry practice, and to spot any developingtrends. GAD also initiated and/or participated inprofessional working parties on specific actuarialissues of concern or interest. This work alsoincluded the preparation of internal GAD standardsin relation to mortality assumptions and analysis ofthe investment performance of a typical fund.Much of this analysis was reported within an annualreport on the industry, which was confidential toGAD and to the prudential regulators but whichwas referred to by GAD scrutinising actuaries aspart of their consideration of the regulatory returns.

The role of others in the system – the insurancecompany and its Directors

91 A number of other actors had key roles within thesystem of prudential regulation that pertained atthe time covered by this report. The terms of the1982 Act imposed obligations on life insurance
companies to ensure that their AppointedActuaries took certain steps, which are summarisedin paragraphs 95 to 98 below. The applicable lawalso placed the following obligations on insurance
companies:  

(i) to maintain at all times a prescribed solvencymargin of assets in excess of their liabilities,prudently assessed;

(ii) when calculating their solvency margin, to makeproper provision for all liabilities on prudentassumptions which included appropriate marginsfor adverse deviation of the relevant factors;

(iii) when calculating their solvency margin, to valuetheir assets in accordance with the assetvaluation regulations and to maintain a properspread of such assets; and

(iv) when determining the amount of theirliabilities for the purpose of these calculations,to follow prescribed valuation rules set out inthe valuation regulations or – where departuresfrom those rules were permitted – to usevaluation methods which produced at leastequally prudent results.

92 These were the principal obligations to whichinsurance companies were subject pursuant to the1982 Act and to secondary legislation made underit. Where a company failed to satisfy any suchobligation, this gave grounds for the prudentialregulators to exercise their powers of intervention.

93 In addition, as a failure by insurance companies toconduct their business having regard to theinterests and reasonable expectations both of theirpolicyholders and potential policyholders and as a
failure to act in accordance with the criteria ofsound and prudent management both constitutedgrounds for intervention action by the prudentialregulators, insurance companies were underimplicit obligations to act in a way which did notprovide grounds for the exercise of those powersof intervention.

94 Specific responsibilities were also imposed on themembers of a life insurance company’s Board ofDirectors. Those responsibilities included ensuringthat the Companies Acts accounts of the companygave a true and fair view of the affairs of thecompany, that the regulatory returns prepared forthe purposes of insurance legislation were preparedin accordance with that legislation, and that the
company fulfilled the criteria of sound andprudent management (as set out in Schedule 2A tothe 1982 Act). The Directors also had to sign acertificate in relation to the regulatory returnsregarding such matters as whether those returnshad been produced in accordance with theapplicable Regulations, the adequacy of accounting records and appropriate systems of control, themaintenance of the margin of solvency throughoutthe year in question, and whether a list ofpublished guidance had been complied with.  

The role of others in the system – AppointedActuaries

95 Appointed Actuaries also had express requirementsand implicit obligations by virtue of the relevantsubordinate legislation. The statutory requirementswere complemented by professional guidance toactuaries (both mandatory and recommended interms of professional standards) issued by theFaculty and Institute of Actuaries to theirmembers.

96 The actions which the Appointed Actuary wasrequired to undertake by the legislation or in orderto comply with the professional guidance toactuaries were considerable. Those actionsincluded carrying out at the instigation of thecompany, once in every twelve months, aninvestigation of the company’s financial conditionin respect of its long term business, undertaking avaluation of the liabilities and determining anyexcess of assets over liabilities, and separatelyidentifying any excess relating to the with-profitspart of the fund.

97 The Appointed Actuary was also to be required bythe company to prepare an abstract of thevaluation report (for the annual returns) when theannual investigation was undertaken, or whenanother investigation was made with a view to thedistribution of profits or when the results of theinvestigation were to be made public. TheAppointed Actuary would also undertake a specialactuarial investigation when the company wasrequired by the prudential regulators to arrange forsuch an investigation to be undertaken.

98 Other matters in respect of which the AppointedActuary had responsibilities pursuant toprofessional guidance included ensuring, so far aswas within his or her authority, that the company
was operated on sound financial lines and withregard to PRE and also taking all reasonable steps toensure, at all times, that he or she was satisfied thatin any investigation the long-term fund would besufficient and the company would be able tosatisfy any obligation to which it was subject byvirtue of the 1982 Act. The Appointed Actuary wasalso required to advise the company of his or herinterpretation of PRE, advising on the implicationsfor PRE of any likely significant changes whichmight affect the company and ensuring thatincoming policyholders were not misled as to theirexpectations.

The role of others in the system – the actuarialprofession

99 The Faculty of Actuaries and the Institute ofActuaries also played a part in the prudentialregulation of insurance companies, although thatrole was given only limited acknowledgement inthe relevant subordinate legislation^[73]. Acting undertheir Royal Charters, these professional bodies,among their other functions, set professionalstandards and provided guidance to actuaries;liaised with GAD and were formally and informallyconsulted by GAD over such matters as methodsof valuation; initiated research and set up workingparties on actuarial issues and proposed newRegulations and guidance; set professionalqualification standards (which eventuallyculminated in the issue of practising certificates);and were responsible for professional discipline.

The role of others in the system – the auditors of aninsurance company

100 The auditors of insurance companies had only alimited role to play in the system of prudentialregulation. Such auditors had no role in consideringthe Appointed Actuary’s valuation report or the
certificates and forms that those Actuaries wererequired to submit as part of the returns. Thosewere matters for the professional judgement of theActuary concerned. Auditors were, however,
generally responsible for:

(i) auditing the company’s accounts and relateddocuments in the manner prescribed in theCompanies Acts;

(ii) reporting to members of the company on theannual accounts laid before a general meeting,stating whether the annual accounts had beenprepared in accordance with the CompaniesAct 1985 (and certain international accountingstandards on consolidated accounts, ifapplicable) and, from 1995, stating whether theaccounts gave a ‘true and fair view’, inaccordance with the relevant financialframework, of the state of affairs of thecompany (in the case of a balance sheet) and itsoperating profit and loss (in the case of a profitand loss account);

(iii) auditing the company’s balance sheet, profitand loss account and revenue account (requiredto be prepared under section 17 of the 1982Act) and every statement, analysis, report orcertificate annexed thereto which was referredto in certain of the Regulations (but, as notedabove, not including the abstract of theactuary’s valuation report, the forms requiredto be submitted by Schedule 4 to theRegulations, or the certificate given by theAppointed Actuary);

(iv) giving a report containing statements (inaddition to the comparable statementsrequired under companies legislation) of theopinion of the auditors on such matters aswhether specified forms and information in theannual returns had been properly prepared inaccordance with the applicable Regulations andwhether or not it was unreasonable for thedirectors to have made the statementscontained in their certificates; and

(v) communicating to the Secretary of Stateinformation which the auditors had reasonablecause to believe might be of materialsignificance for determining whether any of theSecretary of State’s powers of interventionshould be exercised.

The administrative framework – relevant policyand guidance

101 In order to seek to ensure that the statutoryframework for the prudential regulation ofinsurance companies operated effectively and thatall those who had a role to play within that systemunderstood their obligations and responsibilitiesproperly, guidance was issued to explain the natureof the system, to set out how those operating itshould conduct themselves, and to set minimumstandards to which it was expected that therelevant actors within the system would conform.

102 There were five types of general guidanceapplicable to the system of the prudentialregulation of insurance companies.

103 First, there was internal guidance developed bythe prudential regulators to assist them to applyconsistently the provisions of the relevantstatutory framework. During the period coveredby this report, the principal form of such guidancewas the DTI’s Policy Guidance Notes, which were issued in September 1991. The most relevantof this guidance is reproduced in Part 4 ofthis report.

104 Secondly, there was internal guidance developedby GAD to assist those actuaries responsible forconducting the scrutiny of the annual regulatoryreturns to undertake that scrutiny. During theperiod covered by this report, the two principalforms of such guidance were GAD’s InsuranceSupervisory Work Guidance Manual and theirscrutiny proformas, which set out key questions tobe covered in the scrutiny reports of a company’sannual returns and which gave a structure to suchreports. Both of those sets of guidance arereproduced in Part 4 of this report.

105 Thirdly, there was external guidance developed bythe prudential regulators and issued to assistinsurance companies to comply with therequirements of the relevant and applicablestatutory framework. During the period covered bythis report, there were two principal forms of suchguidance: the Prudential Guidance Notes issued bythe prudential regulators to assist companies in,among other matters, completing and submittingtheir regulatory returns, and the ‘Dear Director’ (or‘Dear Managing Director’) letters sent by thoseregulators to companies from time to time onissues of topical or general concern. The mostrelevant of this guidance is reproduced in Part 4 ofthis report.

106 Fourthly, there was external guidance developed byGAD and issued to assist the Appointed Actuarieswithin insurance companies to understand thegeneral requirements that GAD expected fromsuch actuaries when applying the relevantRegulations and professional standards. During theperiod covered by this report, the principal formsof such guidance were the ‘Dear AppointedActuary’ letters issued by the GovernmentActuary. The most relevant of these letters arereproduced in Part 4 of this report.

107 Finally, the actuarial profession issued guidance inthe form of both mandatory and recommendedprofessional standards, to which AppointedActuaries (and other actuaries) were required orexpected to conform in the discharge of theirresponsibilities. This guidance is publicly availableon the profession’s website.

108 It is not practicable to summarise here all of thatpolicy, procedural, explanatory and professionalguidance, some of which, as I have said, is set outin full or in part within Part 4 of this report. Whererelevant, aspects of such guidance are set outwithin later Chapters of this report.

Summary of the key obligations of theprudential regulators and/or GAD whichare relevant to this investigation

109 In later Chapters of this report, I set out myfindings of fact and my determinations as towhether the acts and omissions of the prudentialregulators and/or GAD which are disclosed in thosefindings constitute maladministration on the partof either the prudential regulators, or GAD, orboth.

110 I have set out in paragraphs 2 to 7 above theapproach that I generally adopt when making suchdeterminations. I establish first the facts and theoverall standard, and I then go on to assess thefacts against that overall standard.

111 In particular, I assess whether or not an act oromission on the part of the body complainedabout (in this case the prudential regulators and/orGAD) constituted a departure from the applicablestandard. If so, I then assess whether that act or omission was so unreasonable, in the particularcircumstances, when regard is had to the specificlegal or administrative context of the case, as toconstitute maladministration; and/or whether anysuch act or omission otherwise fell so far short ofacceptable standards of good administration as toconstitute maladministration.

112 Central to this approach is the identification of thegeneral and specific legal and administrativeobligations which I consider the prudentialregulators and/or GAD had at the relevant time;and my consideration of the manner in which thoseregulators and/or GAD discharged thoseobligations.

113 This Chapter, supported by the relevant detail inPart 2 of this report, provides an overview of thegeneral and specific legal and administrativeobligations which I consider the prudentialregulators and/or GAD had at the relevant time.  

114 From that overview, I have identified the followingkey legal and administrative obligations that theprudential regulators and/or GAD had at therelevant time, which I use in my consideration ofthe manner in which those regulators and/or GADdischarged those obligations:

(i) The prudential regulators were under a specificstatutory duty, imposed by the 1982 Act andthe Regulations made under that Act, toconsider whether the regulatory returns werecomplete and accurate (in the sense of thembeing compliant with the applicableRegulations).

In complying with this duty, I would expectthe prudential regulators (acting with theadvice and assistance of GAD) to haveconsidered the regulatory returnssubmitted by insurance companies and, if those returns appeared to be inaccurate orincomplete in any respect, to havecommunicated with the company with aview to the correction of any suchinaccuracies and the supply of deficiencies.

(ii) The prudential regulators were under a specificstatutory duty, imposed by the 1982 Act andthe Regulations made under that Act, to ensurethat an insurance company valued its assets anddetermined its liabilities in accordance with therequirements that were imposed on it by theapplicable Regulations.

In complying with this duty, I would expectthe prudential regulators (acting with theadvice and assistance of GAD) to haveconsidered whether the way in which aninsurance company valued its assets anddetermined its liabilities that was set outwithin the regulatory returns had beenundertaken in accordance with therequirements of the 1982 Act and theRegulations made under that Act and, if it
appeared that the company had used avaluation basis that was not compliant withthese requirements, to have consideredwhether to take action to seek to remedythe position.

(iii) The prudential regulators were under a generalpublic law duty to give proper consideration tothe use of their powers of intervention wherethe circumstances had or may have arisenwhich gave grounds for the use of such powers.  

In complying with this duty, I would expectthe prudential regulators (acting with theadvice and assistance of GAD) to haveconsidered the use of their powers in thelight of any information that theypossessed – whether from the content of the regulatory returns, from contact withan insurance company, or from othersources – which gave rise to questionsabout the solvency position of thatcompany, or about whether it was acting inline with the interests of its policyholdersor in accordance with the reasonableexpectations of those policyholders, orpotential policyholders, or about whetherit was acting soundly or prudently.

(iv) The prudential regulators were under a generalpublic law duty to exercise their statutorypowers in a right and proper way, in accordancewith the presumed intention of the legislaturewhich conferred those powers, in good faith,reasonably, for a proper purpose, and withprocedural propriety.

In complying with this duty, I would expectthe prudential regulators (acting with theadvice and assistance of GAD) to have dealtappropriately with any regulatory issueswhich arose in relation to any insurancecompany other than through the scrutinyprocess and to have acted in such a manneras to ensure the effective operation of theregulatory regime as Parliament hadestablished it – informed as that regimewas by the concepts of ‘freedom withpublicity’, the protection of the reasonableexpectations of policyholders and potentialpolicyholders, and the fulfilment of thecriteria of sound and prudent management.

(v) Both the prudential regulators and GAD wereunder an obligation generally to act inaccordance with established principles of goodadministration.

In complying with this obligation, I wouldexpect the prudential regulators and/orGAD:

• to have acted in accordance with theirgeneral and specific legal duties andpowers;
• to have acted in accordance with theirown published and internal policy andguidance;
• to have taken proper account ofestablished good practice, includingprofessional practice;
• to have taken reasonable decisions basedon all relevant considerations, leaving outof account irrelevant considerations andbalancing those considerationsappropriately;
• to have kept proper and appropriaterecords as evidence of their activities,including a record of the reasons fortheir decisions; and
• to have provided information, where itwas appropriate to provide information,which was clear, accurate, complete andnot misleading.

Conclusion

115 In this Chapter, I have set out my general approachto determining complaints of maladministrationagainst public bodies; and I have provided anoverview of the general and specific legal and
administrative obligations which I consider theprudential regulators and/or GAD had at therelevant time – the overall standard against whichI assess the facts in this case.

116 Finally, I have extracted from that overview asummary of the key legal and administrativeobligations that the prudential regulators and/orGAD had at the relevant time, which I use in myconsideration of the manner in which thoseregulators and/or GAD discharged thoseobligations.

117 In Chapters 6, 7, and 8 which follow, I set out asummary of the way in which the prudentialregulation of the Society was undertaken duringthe period from when the regulatory returns for1988 were submitted to the end of my jurisdictionon 1 December 2001.

Footnotes

1 Available at http://www.ombudsman.org.uk/improving-services/ombudsmansprinciples/principles-of-good-administration

2 It is a principle of constitutional law that a decision made on a Minister’s behalf by an official is that of the Minister. This is known as theCarltona principle after the case of Carltona Ltd v. Commissioners of Works [1943] 2 All ER 560. Except where the express delegation ofauthority is required by a particular statute, the official’s authority flows from a general rule of law and not from formal delegation.

3 Article 6 of the First Life Directive.

4 Articles 17 to 20 of the First Life Directive.

5 Article 26 of the First Life Directive.

6 Following other restructuring of the Directive, this was now Article 15.

7 Article 23 of the First Life Directive, as inserted by the Second Life Directive.

8 Article 23 of the First Life Directive, as inserted by the Second Life Directive.

9 Article 18 of the First Life Directive.

10 Article 15 of the First Life Directive, as inserted by the Third Life Directive.

11 Article 17 of the First Life Directive. This was modified and expanded by the Third Life Directive – see Part 2 of this report.

12 Article 15 of the First Life Directive, prior to amendment by the Third Life Directive – the latter contained similar provisions for collaboration which reflected the different responsibilities between ‘home’ and ‘host’ States enshrined within that Directive.

13 Article 23 of the First Life Directive.

14 Section 2 of the 1982 Act.

15 Section 19 of the 1982 Act. Each Appointed Actuary was normally invited on first appointment to meet the Government Actuary inperson to discuss the role of the Appointed Actuary in the regulation of insurance companies. From the transfer in April 2001 of theresponsibility for providing actuarial advice to the prudential regulator to actuaries working in-house at the FSA, those interviews weregenerally conducted by the head of the FSA’s actuarial function.

16 Section 18(1) of the 1982 Act.

17 Section 18(2) of the 1982 Act.

18 Section 18(4) of the 1982 Act.

19 Section 32 of the 1982 Act.

20 Paragraph 2 of Schedule 6 to the 1996 Regulations.

21 Section 22 of the 1982 Act.

22 Sections 23 and 65 of the 1982 Act.

23 Section 11 of the 1982 Act.

24 Section 12A of the 1982 Act.

25 Section 32 of the 1982 Act.

26 Section 33 of the 1982 Act.

27 Section 38 of the 1982 Act.

28 Sections 39 and 40 of the 1982 Act (exercisable on restricted grounds specified in section 37(3) of the 1982 Act).

29 Section 41 of the 1982 Act.

30 Sections 42 and 65 of the 1982 Act.

31 Section 43 of the 1982 Act.

32 Section 44 of the 1982 Act.

33 Section 45 of the 1982 Act.

34 Section 37(6) of the 1982 Act.

35 Section 45(2) of the 1982 Act. Prior to July 1994, the exception relating to solvency referred only to the minimum margin under section 33 of the 1982 Act – see further paragraph 307 of Part 2 of this report. Similar limitations applied to the exercise of powers of interventionwhich involved imposing restrictions on a company’s freedom to dispose of its assets (under sections 39, 40, and 40A of the 1982 Act) byvirtue of section 37(3) of that Act.

36 Section 43A(1) of the 1982 Act.

37 Section 40A of the 1982 Act (exercisable only on the restricted grounds specified in section 37(3) of the 1982 Act).

38 Section 45(1)(b) of the 1982 Act.

39 Paragraph 1 of Schedule 2A to the 1982 Act.

40 Paragraph 2 of Schedule 2A to the 1982 Act.

41 Paragraph 4 of Schedule 2A to the 1982 Act.

42 Paragraph 5 of Schedule 2A to the 1982 Act.

43 Paragraph 6(1) of Schedule 2A to the 1982 Act.

44 Paragraph 7 of Schedule 2A to the 1982 Act.

45 Paragraph 8 of Schedule 2A to the 1982 Act.

46 Paragraph 9 of Schedule 2A to the 1982 Act.

47 Section 37(2)(a) of the 1982 Act.

48 Section 37(2)(a) of the 1982 Act.

49 Section 37(2)(aa) of the 1982 Act.

50 Section 37(2)(b) of the 1982 Act.

51 Section 37(2)(c) of the 1982 Act.

52 Section 37(2)(d) of the 1982 Act.

53 Section 37(2)(e) of the 1982 Act.

54 Section 37(2)(f) of the 1982 Act.

55 Sections 37(4) and 44(2)-(4) of the 1982 Act.

56 Section 37(5) of the 1982 Act.

57 Section 68 of the 1982 Act.

58 Section 69 of the 1982 Act.

59 Section 61B and paragraph 4(1) of Schedule 2D to the 1982 Act.

60 Section 61B and paragraphs 4(2) to 4(6) of Schedule 2D to the 1982 Act.

61 Section 54 of the 1982 Act.

62 Section 37(7) of the 1982 Act.

63 See, for example, paragraphs 412 to 416 of Part 2 of this report for further detail about some of these amendments.

64 Those Regulations primarily amended earlier ones made in 1968, see also paragraphs 238 and 239 of Part 2 of this report.

65 The first returns submitted during the period under consideration in this report.

66 The last returns submitted during the period under consideration in this report.

67 As set out in paragraph 33 of the 1984 SLA.

68 See paragraph 38 of the 1984 SLA

69 In paragraph 1 of the 1995 SLA.

70 As set out in paragraph 2 of the 1995 SLA.

71 See paragraph A8 of the 1995 SLA.

72 See paragraph A9 of the 1995 SLA.

73 The Accounts and Statements Regulations required that an actuary should be a Fellow of the Institute of Actuaries or of the Faculty of  Actuaries and, in later years, the actuary’s certificate given in connection with the regulatory returns was required to include a statementregarding compliance with certain of the professional guidance issued by the profession.