The background
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2.1 My report sets out my determinations of complaints which alleged that the regulators of insurance companies had failed properly to exercise their functions in relation to the Society for more than a decade.
2.2 The scope of that report was determined by the limits to my powers to conduct investigations into the actions of those bodies whose actions were the subject of those complaints.
The Equitable Life Assurance Society
2.3 My report does not make findings about the actions of the Society itself and is concerned instead with regulation. However, in Chapter 2 of Part 1 of my report, I set the scene for that regulation. This includes a description of the nature of the Society’s business and of how the problems it faced came about.
2.4 The Society was founded in 1762 and it was incorporated in the United Kingdom as a private unlimited company in 1892. The Society is generally accepted to be the oldest surviving mutual life assurance company in the world.
2.5 As a mutual life insurance company, the Society has no shareholders and is owned by its with-profits policyholders. Those policyholders effectively stand in the position of proprietors, sharing in any profits made or losses incurred in running the Society’s business.
2.6 On 8 December 2000, the Society announced that it would stop writing new business with immediate effect. Since then, the Society has undergone a difficult period and has implemented cuts in the policy values of its with-profits policies or the income derived from its with-profits annuities.
2.7 The announcement by the Society of its closure to new business was prompted by the withdrawal of the last potential bidder from a sales process that had been launched to seek a buyer to acquire the Society following a decision of the House of Lords.
2.8 The operation of the Society’s differential terminal bonus policy in respect of a representative policy for which the default benefit was an annuity paid at a guaranteed rate had become the subject of legal proceedings once doubts arose as to the legality of that policy. The differential terminal bonus policy, which Equitable had adopted since January 1994, involved the paying of different levels of terminal bonus to policyholders exercising their right to take an annuity at the guaranteed rate than were paid to policyholders not exercising such a right.
2.9 The House of Lords held on 20 July 2000 – in Equitable Life Assurance Society v Hyman ([2002] 1 AC 408) – that the Society’s differential terminal bonus policy was unlawful.
2.10 At the time, it was recognised that the Society was distinctive within the life insurance industry and also that this distinctiveness had played a part in the circumstances which had led the Society to close to new business.
2.11 The four central factors which were of importance to the Society’s problems, recognised by the Treasury at the time of its closure, were:
- first, that the Society had for many years operated a policy of full distribution of any surplus through bonuses to its with-profits policyholders and a policy of not building up a free estate, leaving the Society with a comparatively low level of free assets;
- secondly, that the Society, being a mutual, had no access to additional, shareholder capital;
- thirdly, that the Society had offered relatively generous and flexible guarantees on certain types of policy; and
- finally, that the proportion of the Society’s business to which those guarantees applied was much higher than was the case for other companies.
2.12 The closure of the Society to new business as a result of those problems set the scene for the complaints that I have received. While the actions of others, such as the Society itself or its former auditors, became also the subject of complaint to others, the complaints that were made to me concerned the role of the regulators of the Society.
Insurance regulation
2.13 Before 1 December 2001, there were two forms of insurance regulation in the United Kingdom – prudential regulation and conduct of business regulation.
2.14 Prudential regulation was governed by the provisions of the Insurance Companies Act 1982 and by the Regulations made under that Act. Such regulation primarily related to the supervision of the solvency of life insurance companies and their ability to meet and continue to meet their liabilities to policyholders and to fulfil the reasonable expectations of policyholders or potential policyholders.
2.15 Conduct of business regulation was governed by the provisions of the Financial Services Act 1986 and concerned the regulation of the conduct of investment business, including the marketing activities of life insurance companies.
2.16 During the period prior to 5 January 1998, the prudential regulator was the Department of Trade and Industry (the DTI) and its predecessors; from 5 January 1998 to 1 December 2001, the prudential regulator was Her Majesty’s Treasury (the Treasury).
2.17 From January 1999 until 1 December 2001 aspects of the day-to-day prudential supervision of insurance companies were contracted out to the Financial Services Authority (the FSA) – which, in this role, acted on behalf of the Treasury.
2.18 Furthermore, throughout the period relevant to this report legal advice to the prudential regulators was provided by in-house lawyers and, until 26 April 2001, actuarial advice was provided by GAD. Thereafter, actuarial advice was provided to the FSA by actuaries directly employed by the FSA, some of whom had previously worked for GAD.
My jurisdiction
2.19 I am only able to investigate certain action taken by or on behalf of those bodies which are within my jurisdiction.
2.20 Actions taken by all of the bodies which at the relevant time had statutory responsibility for prudential regulation are within my jurisdiction, where those actions are taken in the exercise of the administrative functions of such bodies. Thus the actions of the DTI and the Treasury are within my jurisdiction.
2.21 I am only able to conduct investigations in respect of the actions of GAD and the FSA on a limited basis. I have no power to conduct investigations in relation to conduct of business regulation.
2.22 GAD were not within my jurisdiction until the beginning of this investigation. I may only investigate action taken by GAD on or before 26 April 2001 in the giving of advice concerning the exercise of administrative functions under Part II of the Insurance Companies Act 1982 or any other enactment concerned with the regulation of insurance companies.
2.23 The actions of the FSA are only within my jurisdiction in so far as those actions relate to the prudential regulation of insurance companies during the period from 1 January 1999 to 1 December 2001, when the FSA undertook that regulation on behalf of the Treasury.
2.24 Conduct of business regulation throughout this first period was delegated to a system of industry and practitioner-based, self-regulatory organisations under the supervision of a designated agency. None of those bodies with statutory responsibility for conduct of business regulation is or was within my jurisdiction.
2.25 All of this meant that the scope of my investigation was limited to the actions taken during the period prior to 1 December 2001 by the DTI and the Treasury as the prudential regulators of the Society and to the actions taken by the FSA and GAD on behalf of those regulators.
