Remedy and recommendations
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9.1 My approach to the provision of remedies for injustice or hardship resulting from maladministration is set out in my document, Principles for Remedy, published in October 2007. My underlying principle is to seek to ensure that the relevant public body restores someone to the position he or she would have been in, had the maladministration not occurred. If that is not possible, the relevant body should compensate them appropriately.
9.2 I received submissions from the public bodies which sought to persuade me that it would not be appropriate in the circumstances of this case to adopt my usual approach to questions of remedy. I was not persuaded by those submissions.
9.3 It is my normal practice, where someone has been inconvenienced or made to feel a justifiable sense of outrage at the way that they have been treated, to recommend that an apology is made and that consideration is given to whether that apology should be accompanied by a tangible recognition of such inconvenience or outrage.
9.4 Where financial loss is established, I would normally expect that, where appropriate, such a loss should be remedied in full, with payment of interest where that is relevant.
9.5 In that context, there are four questions that I need to address in this case before making any recommendations designed to remedy the injustice that I have found has been sustained on this occasion, namely:
- whether complainants have suffered a financial loss in absolute terms – that is, have they suffered an identifiable or quantifiable loss at all?;
- if so, whether complainants have suffered a financial loss in relative terms – that is, have they suffered a loss that they would not otherwise have suffered had they invested or saved elsewhere than the Society?;
- if so, whether there is a sufficient link between the acts and omissions of the bodies whose actions have been investigated and found to be deficient with that relative loss; and
- if there is, what would be appropriate in all the circumstances of this case to recommend by way of a remedy?
9.6 If I were to find no financial loss, or were to conclude that any such loss sustained was not sufficiently linked to maladministration, or were to consider that it would not be appropriate to recommend a remedy for any such loss, I would then need to consider whether it would be appropriate to recommend a remedy for the opportunities that I have found were lost as a result of maladministration.
9.7 I also need to consider whether any injustice has already been remedied by other means. Where that is so, I would not expect a further remedy to be provided, as it is an important principle that any recommendation I make should not lead to a complainant making a profit or gaining an unreasonable advantage.
9.8 As for absolute loss, I am very far from concluding that everyone who has complained to me about the prudential regulation of the Society has suffered a financial loss. Still less do I conclude that everyone who has saved with, or invested in, the Society during the period covered in my report has suffered such a loss.
9.9 It seems to me that it is a natural and unavoidable consequence of one of the basic premises of the allegations underpinning the complaints that have been made about the events covered in this report – namely, that distribution took place of the resources of the Society in what is said to be an imprudent manner which it could not afford – that some people have gained from their savings and investments with the Society more than they would have done had any such distribution not occurred.
9.10 However, there is no avoiding the fact that those who are, or were at the relevant time, members of the Society experienced the series of policy value and bonus cuts during the period after it closed to new business in December 2000. Details of those cuts are set out within Chapter 2 of Part 1 of my report.
9.11 That is sufficient evidence in my mind to persuade me to conclude that, for many people at least, financial loss has been sustained. In coming to that conclusion, I have also borne in mind the acceptance, which appears to be common ground among all the parties, that such losses were suffered across the with-profits industry at the relevant time. That loss generally occurred does not seem to be controversial.
9.12 That brings me to relative loss. Did those who have complained to me, and those in a similar position to those complainants, suffer a loss that they would not have suffered had they saved or invested elsewhere?
9.13 The Society has dealt with many types or categories of mis-selling complaints, or claims based on breach of contract. However, the most analogous category of complaint to the maladministration on the part of the prudential regulators and GAD is the complaints which were made due to the Society’s failure to disclose the existence of guaranteed annuity rates.
9.14 I sought information from the Society as to what the outcome had been to the cases of those people who, not being caught by the effects of the Compromise Scheme, had complained to the Financial Ombudsman Service about such alleged mis-selling on the part of the Society. I understand that those cases were assessed using a comparative loss assessment using the performance of an average competitor of the Society as a comparator. That information shows that relative loss was established in approximately 60% of those cases concerning complaints ofthis type.
9.15 I understand that the cases dealt with by the Financial Ombudsman Service followed on from a review conducted by the Society, at the request of the FSA, of any mis-selling which related to the failure to disclose the existence of guaranteed annuity rates. In the course of that review, the Society also adopted an analagous comparative approach to assessing loss. Under that review, approximately 78% of those with mis-selling complaints of this type were found to have suffered a relative loss.
9.16 Those who have complained to me are in substantially the same circumstances as those who complained to the Society or to the Financial Ombudsman Service, with the exception that they were caught by the effects of the Compromise Scheme and thus could not pursue such complaints.
9.17 When the above information is considered together, it seems to me that this demonstrates that, for many of those covered by my recommendations, it could be established that a loss has been sustained, relative to what would have transpired had those individuals saved or invested with a comparable with-profits fund.
9.18 I therefore conclude that it would be difficult to sustain an argument that no person affected by ‘the Equitable affair’ had suffered a relative loss.
9.19 I also conclude that the individual circumstances of each complainant and other people similarly affected are key to establishing whether those people are in the category of those who have suffered relative loss. Accordingly, whether relative loss in a particular case has been sustained has to be determined at an individual level.
9.20 As for whether there is a sufficient link between the acts and omissions of the bodies whose actions have been investigated and found to be deficient with any relative loss that is established, I conclude that there was such a link.
9.21 The aim of the system of regulation was to protect the interests of policyholders through the supervision of the affairs of insurance companies, in the manner in which Parliament intended and using the means that Parliament provided.
9.22 In the light of my determinations, set out in this guide, I conclude that there is a direct link between the acts and omissions of the prudential regulators and the information that throughout the period covered by my report was before those people who were making savings and investment decisions regarding the Society.
9.23 Those acts and omissions are also directly linked to the knowledge about the solvency position of the Society that policyholders and potential policyholders possessed during the period on or after 1 May 1999.
9.24 The prudential regulators, and no-one else, were given the functions of scrutinising the returns that the Society submitted and of verifying its solvency position. No other party can be said to be at fault because those regulators, acting with the advice and assistance of GAD, acted with maladministration.
9.25 I now turn to what I consider that it is appropriate to recommend as a remedy for the injustice that I have found resulted from maladministration on the part of the prudential regulators and GAD.
First recommendation
9.26 My first recommendation is that, in recognition of the justifiable sense of outrage that those who have complained to me feel about the maladministration in the form of the serial regulatory failure that I have identified in this report, the public bodies should apologise to those people for that failure.
Second recommendation
9.27 My second – and central – recommendation is that the Government should establish and fund a compensation scheme, with a view to assessing the individual cases of those who have been affected by the events covered in this report and providing appropriate compensation.
9.28 The aim of such a scheme should be to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.
9.29 I consider that addressing relative loss in this way would be the most appropriate remedy for the injustice that I have found resulted from maladministration. Such an approach would remedy any financial loss that has occurred and also the loss of opportunities to invest elsewhere than the Society. It is thus not necessary to give further consideration to what additional remedy it would be appropriate to recommend to remedy the lost opportunities that have been sustained.
9.30 The scope of such a scheme should cover all those who have suffered similar injustice to those who have complained to me. That should include not just residents of the United Kingdom but all those who have sustained the injustice that I have found resulted from maladministration.
9.31 I consider that it would be reasonable to expect such a scheme to be established within six months of any decision by Government and Parliament to do so.
9.32 I recognise that how best to establish and administer any compensation scheme is a matter for Government and Parliament to decide. However, I would offer, as a contribution to that debate, my view of the principles which should govern any such compensation scheme.
9.33 It seems to me that such a scheme:
- should be independent and constituted along the lines of a tribunal or adjudication panel, with three members – one representing broadly the interests of those affected and one representing those of the relevant public bodies, with an independent chair;
- should operate in a transparent manner, with the basis being made public of the decisions as to how compensation should be calculated, as to what procedure will govern the consideration of individual cases, and as to the criteria which will be taken into account when considering those cases. Those decisions should only be made after appropriate consultation is undertaken, including with those directly affected; and
- should be simple, not imposing undue burdens, whether evidential or procedural, on those making claims to the scheme.
9.34 The above principles would, I hope, be accepted widely as being an appropriate and effective mechanism of decision and delivery of the remedy that I have recommended should be provided.
9.35 I hope, also, that it would be accepted that this mechanism has to have, as its guiding principle, the need to deliver as speedy a remedy as is possible in the circumstances, while recognising the complex issues that would need to be addressed and resolved.
9.36 In my view, the scheme should take no longer than two years from the date of its establishment to complete its work.
9.37 I recognise that the public interest is a relevant consideration and that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case.
9.38 Furthermore, I am acutely conscious of the potential scale of what I have recommended and that acceptance of my central recommendation might entail opportunity costs elsewhere through the diversion of resources.
9.39 In that context, I invite Parliament to consider the issues that have been raised in this report and the recommendations that I have made and to further reflect on what its response to my report should be.
9.40 Having alerted Parliament to the injustice that I have found was sustained in consequence of maladministration, I would be very happy to assist Parliament in its deliberations in any way that I can.
