The basis for the determination of the complaints
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My approach
4.1 In simple terms, when determining complaints that injustice has been sustained in consequence of alleged maladministration, I generally begin by comparing what actually happened with what should have happened.
4.2 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 general and specific, which applied at the time. I call this establishing the overall standard.
4.3 In Chapter 5 of Part 1 of my report, I set out the general standard relevant to the investigation, as derived from established principles of good administration and from public law principles. I then go on to set out the specific standard relevant to the investigation, i.e. the specific legal and administrative framework of prudential regulation.
4.4 Having established the overall standard, I then assess the facts in accordance with that standard. First, I assess whether an act or omission on the part of the body complained about constituted a departure from the applicable standard. If so, I then assess whether that act or omission was so unreasonable, or fell so far short of acceptable standards of good administration, as to constitute maladministration.
The regulatory regime
4.5 The regulatory regime which developed over time to deliver prudential regulation and which pertained at the time relevant to this report had four cornerstones:
- The concept of ‘freedom with publicity’;
- The central place of the Appointed Actuary within the regulatory regime;
- The protection of the ‘reasonable expectations’ of both policyholders and potential policyholders; and
- The criteria of ‘sound and prudent management’.
4.6 Those cornerstones laid the foundations on which were built:
- the powers, duties and means conferred on the prudential regulators – which gave prominence to the protection of policyholders’ reasonable expectations and ensuring the fulfilment of the statutory criteria of sound and prudent management.
4.7 The statutory framework which governed this system of regulation had four chief component parts:
- European Directives concerning life assurance;
- the Insurance Companies Act 1982;
- secondary legislation made under the Insurance Companies Act 1982; and
- certain other domestic statutory provisions related to the activity of insurance companies.
4.8 The prudential regulation of insurance companies such as the Society was primarily undertaken through two mechanisms: the submission of regulatory returns and the scrutiny of those returns.
4.9 Each company was required to submit annual returns containing detailed information about the business and financial strength of the company in a prescribed format. Once checked by the prudential regulators for completeness, those returns were placed in the public domain at Companies House.
4.10 Scrutiny of those returns was undertaken by GAD on behalf of the prudential regulators until April 2001. The prime aims of this scrutiny were to ensure that the company had complied with the statutory and other obligations imposed on it, to verify the financial position of the company, and to check that the company was able to meet its liabilities and to fulfil the reasonable expectations of its policyholders and/or its potential policyholders.
4.11 The prudential regulators and GAD also obtained information through visits to, and meetings with, insurance companies and through information provided to them by such companies on an ad hoc basis. GAD also undertook industry-wide analysis, which informed their scrutiny of the returns.
The legal and administrative obligations of the prudential regulators and GAD
4.12 Chapter 5 of Part 1 of my report, supported by the relevant detail in Part 2, provides a detailed overview of the general and specific legal and administrative obligations which the prudential regulators and/or GAD had at the relevant time.
4.13 From that overview, I identified the following key legal and administrative obligations which I use in my consideration of the manner in which those regulators and/or GAD discharged their obligations. I also set out below what I would expect to have seen if the prudential regulators and/or GAD were fulfilling these obligations.
(i) The prudential regulators were under statutory duties, imposed by the specific regime contained within the Insurance Companies Act 1982 and the Regulations made under it:
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to consider the regulatory returns with a view to ensuring that those returns were complete and accurate (in the sense of them being compliant with the applicable Regulations).
In complying with this duty, I would expect the prudential regulators to have considered the regulatory returns submitted by insurance companies and, if those returns appeared to be inaccurate or incomplete in any respect, to have communicated with the company with a view to the correction of any such inaccuracies and the supply of deficiencies. -
and to ensure that an insurance company valued its assets and determined its liabilities in accordance with the requirements that were imposed on it by the applicable Regulations.
In complying with this duty, I would expect the prudential regulators to have considered whether the way in which an insurance company valued its assets and determined its liabilities as set out within the regulatory returns had been undertaken in accordance with the relevant requirements and, if it appeared that the company had used a valuation basis that was not compliant with those requirements, to have considered whether to take action to remedy the position.
(ii) The prudential regulators were also under a general public law duty to give proper consideration to the use of their powers of intervention where the circumstances had or may have arisen which gave grounds for the use of such powers.
- In complying with this duty, I would expect the prudential regulators to have considered the use of their powers in the light of any information that they possessed – whether from the content of the regulatory returns, from contact with an insurance company, or from other sources – which gave rise to questions about the solvency position of that company, or about whether it was acting in line with the interests of its policyholders or in accordance with the reasonable expectations of those policyholders, or potential policyholders, or about whether it was acting soundly or prudently.
(iii) The prudential regulators were also under a general public law duty to exercise their statutory powers in a right and proper way, in accordance with the presumed intention of the legislature which conferred those powers, in good faith, reasonably, for a proper purpose, and with procedural propriety.
- In complying with this duty, I would expect the prudential regulators to have dealt appropriately with any regulatory issues which arose in relation to any insurance company other than through the scrutiny process and to have acted in such a manner as to ensure the effective operation of the regulatory regime as Parliament had established it – informed as that regime was by the concepts of ‘freedom with publicity’, the protection of the reasonable expectations of policyholders and potential policyholders, and the fulfilment of the criteria of sound and prudent management.
(iv) Both the prudential regulators and GAD were under an obligation generally to act in accordance with established principles of good administration.
In complying with this obligation, I would expect the prudential regulators and/or GAD:
- to have acted in accordance with their general and specific legal duties and powers;
- to have acted in accordance with their own published and internal policy and guidance;
- to have taken proper account of established good practice, including professional practice;
- to have taken reasonable decisions based on all relevant considerations and ignoring irrelevant ones;
- to have kept proper and appropriate records as evidence of their activities, including a record of the reasons for their decisions; and
- to have provided information, where it was appropriate to do so, which was clear, accurate, complete and not misleading.
