Introduction
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Background
1 In this Part of my report, I set out the work we have done to establish how the regulatory regime relevant to the prudential regulation of Equitable and other insurance companies developed over time. The structure of my report is explained in Chapter 1 of Part 1 of this report.
2 The complaints which were contained within the terms of reference for the investigation are set out in Chapter 4 of Part 1 of the report. In summary, these complaints contended that the public bodies responsible for the prudential regulation of insurance companies and the Government Actuary’s Department (GAD) ‘failed for considerably longer than a decade properly to exercise their regulatory functions in respect of [Equitable] and were therefore guilty of maladministration’1.
3 Specific complaints relate to organisational issues, general operational issues, supervision of regulatory solvency, payment of excess bonuses and the adequacy of procedures to safeguard the reasonable expectations of policyholders and (implicitly) of potential policyholders (PRE2).
4 I explained in Chapter 5 of Part 1 of this report that an essential factor in the consideration of these complaints is the nature of the regulatory functions which pertained at the relevant time. Within Chapter 5 of Part 1 of this report, I also set out in broad outline the key aspects of the regulatory regime relevant to this investigation and the obligations to which the prudential regulators and GAD were subject.
5 This Part of the report describes in more detail how the regime for the prudential regulation of life assurance companies such as Equitable developed over the period from approximately 1970 until December 2001. As is noted elsewhere in this report, ‘prudential regulation’ is primarily concerned with the solvency of insurance companies and the soundness and prudence of their management. Since 1973, the legislation has included the concept of PRE and the protection of PRE as a basis for regulatory intervention.
6 The rest of this Part of the report explains the main duties and powers of the regulators and the mechanisms available to them and outlines the role of GAD in relation to the regulation of life insurance companies. It summarises the relevant primary legislation and statutory instruments that were in force in the United Kingdom, the European directives, some of the professional guidance produced for appointed actuaries and the ‘service level agreements’ entered into by bodies within my jurisdiction.
Bodies within my jurisdiction
7 The government departments primarily concerned with the prudential regulation of insurance companies over the relevant period were the Department of Trade and Industry (the DTI) and its predecessor departments and Her Majesty’s Treasury (the Treasury).
8 Chronologically, responsibility rested with and/or administrative functions were undertaken by the Board of Trade (the BT) (18701970)3, the DTI (1970-74), the Department of Trade (the DoT) (1974-1983), the DTI (1983-98) and, as from 5 January 19984, the Treasury. GAD, one of the Chancellor of the Exchequer’s departments, was created in 1919 to provide actuarial advice to all government departments.
9 Under section 5 of the Parliamentary Commissioner Act 1967 (the 1967 Act), I have power to investigate action taken in the exercise of administrative functions by or on behalf of the government departments and other public bodies listed in Schedule 2 to that Act. The listed bodies over time included the BT, the DoT, the DTI and the Treasury.
10 Through an amendment to the 1967 Act which came into force on 15 November 2004, GAD has been brought within my jurisdiction, but only in respect of its actions in advising on or before 26 April 2001 in relation to the exercise of certain functions relating to the regulation of insurance companies5.
11 The actions of the Financial Services Authority (FSA) fall within my jurisdiction only in so far as they relate to functions contracted out6 to it by the Treasury in respect of the prudential regulation of insurance companies under arrangements which were in place between 1 January 1999 and 1 December 2001 and its actions are deemed to be those of the Treasury.
12 The actions of the Securities and Investments Board Limited (SIB), the Personal Investment Authority Limited (PIA), those of the FSA prior to 1 January 1999 and those of Equitable and its appointed actuary are not within my jurisdiction. This report accordingly does not address the regime for conduct of business regulation7 for which the SIB, PIA, and FSA were responsible.
13 This Part of the report also refers to the professional guidance which was available to appointed actuaries during the relevant period, in particular that issued by the Faculty of Actuaries and Institute of Actuaries (F&IA), as a relevant factor for GAD and the prudential regulators. The actuarial profession is not within my jurisdiction8.
Legal identity of Equitable
14 The treatment of various undertakings which carry on insurance business under the legislation (and the implications of certain provisions) differs in some respects dependent upon the legal status of the undertaking concerned. Information about Equitable is provided in Chapter 2 of Part 1 of this report.
Appendices to this Part of the report
15 This Part of my report has a number of appendices9. Appendix A shows the derivations of the relevant provisions of the Insurance Companies Act 1982. Appendix B contains information about the frequency of exercise of powers of intervention under the Insurance Companies Act 1982. Appendix C contains specimen forms from the regulatory returns which life insurancecompanies were required to submit to the prudential regulators during the time covered by this report.
16 Appendix D contains the annex to the Service Level Agreement between the prudential regulators and GAD, which set out the priority order ratings for the scrutiny of those regulatory returns. Finally, appendix E contains a Government paper on ‘the regulatory regime pursuant to which Equitable Life was regulated during the period 1973 to 2001’10.
Early history of the legislation and organisation of information
17 Specific legislation in relation to life assurance companies dates back to 177411. Rudiments of the current regulatory regime were contained in the Life Assurance Act 1870, which was enacted following a high incidence of failure of life assurance companies12 and included requirements for the establishment of a separate long-term fund, actuarial investigation at specified intervals and annual returns to the BT, with returns to be made available to policyholders on request and powers for policyholders to petition for winding up.
18 The promoters of that legislation described the aim of regulation as being ‘perfect freedom withperfect publicity’13, with limited government intervention in the affairs of insurance companies, an approach which has survived (with some adaptation) in modern times.
19 Over the late nineteenth and early twentieth centuries the legislation continued to develop, to cover more classes of insurance and eventually to include powers for the BT to appoint inspectors for companies of dubious solvency and (with leave of the court) to petition for their winding up. In 194614, following further incidents of failure of insurance companies15, former requirements for such companies to deposit money with the court were replaced with a ‘solvency margin’ requirement for companies conducting general business, with the aim of anticipating and preventing insolvency arising. The Insurance Companies Act 1958 (the ICA 1958) was then enacted to consolidate the Assurance Companies Acts 1909 to 1946.
20 The Companies Act 1967 (the CA 1967), Parts I and II of which were introduced in the light of concerns about fraud in nonlife areas of insurance business and a perceived need for greater disclosure by companies generally, provides a convenient starting point for my account. A summary of the main provisions of Part II of that Act provides a ‘base line’ from which to assess the evolution of the prudential regulation regime for insurance companies since the 1970s. 21 The prudential regime is described as it applied over the following phases: Phase 1: 1967 1972 Phase 2: 1973 1980 Phase 3: 1981 1990 Phase 4: 1991 1993 Phase 5: 1994 1999 Phase 6: 2000 2001.
Footnotes
1 Complainants alleged that this maladministration had resulted in injustice to them and sought redress for the injustice they claimed to have sustained.
2 Where appropriate to the context, the acronym ‘PRE’ should be taken to refer to the reasonable expectations of potential policyholders as well as those of existing policyholders in the following text.
3 In 1970, the functions of the BT under the relevant legislation were transferred so as to be exercisable concurrently by the Secretary of State and the BT. On the coming into force of section 54(2) of the Insurance Companies Amendment Act 1973, the powers and duties under the relevant legislation were to be exercisable by the Secretary of State alone.
4 See the Transfer of Functions (Insurance) Order 1997 SI No. 2781, which transferred functions of the Secretary of State for Trade and Industry under the Insurance Companies Act 1982 and other specified insurance legislation to the Treasury, or in some instances to the Treasury and the Secretary of State concurrently.
5 See the Parliamentary Commissioner Order 2004 SI No. 2670. The advice by GAD which may be the subject of an investigation by me is that given on or before 26 April 2001 which relates to the exercise of functions under Part II of the Insurance Companies Act 1982, or any other enactment relating to the regulation of insurance companies within the meaning of that Act.
6 See the Contracting Out (Functions in Relation to Insurance) Order 1998 SI No. 2842, empowering the Treasury to authorise another person or its employees to exercise specified functions on behalf of the Treasury.
7 ‘Conduct of business regulation’ primarily concerns the marketing and sale of insurance companies’ products and the provision of related advice to current and potential investors.
8 References to the actuarial profession and its publications are made only to set the account of the prudential regulation in context.
9 At pages 266 to 321.
10 This was one of two documents which together comprised the initial response of the public bodies to the complaints set out within the terms of reference for the investigation. The other, which is summarised within Chapter 4 of Part 1 of this report, is reproduced in full in Part 4 of the report.
11 When the Life Assurance Act of that year prohibited all such insurance unless the policyholder had an ‘insurable interest’ in the life or death of the person insured.
12 In particular, the failure of the Albert Life Assurance Company in 1869, which had taken over the business of twenty other societies. Concern had also been expressed that UK companies would be ‘shut out’ of overseas countries where more stringent legislation applied (notes for the Jubilee Lecture of the Institute of Actuaries Students’ Society on 18 January 1977 by a senior official of the DTI).
13 Recorded in the notes referred to in footnote 12.
14 Under section 3 of the Assurance Companies Act 1946. The required solvency margin was the greater of £50,000 or onetenth of the general premium income of the company in its preceding financial year. For the purposes of other legislation concerning the winding up of companies by the court, a company conducting general business was to be deemed to be unable to pay its debts if its assets did not exceed its liabilities by that amount.
15 The notes referred to in footnote 12 mention 34 such failures between 1919 and the promotion of the 1946 Act.
