Determinations of injustice

7.1 When determining in general terms whether or not any maladministration which I have found to have occurred has resulted in injustice to those who have complained to me, I first identify what were the consequences of that maladministration and then I assess whether those consequences constitute an injustice for which no or no sufficient remedy has been provided.

7.2 The consequences of my first finding of maladministration, related to the ‘dual role’ were, first, that the prudential regulators and GAD became overly reliant on the information provided by one person within the Society – through his completion of the returns and through the meetings that those regulators and GAD often had with only that person. The Society was also not prompted and/or invited by the prudential regulators to address the unsatisfactory nature of the ‘dual role’.

7.3 A further – and important – consequence of this failure was that the system of prudential regulation, designed on the basis that the Appointed Actuary (with operational independence from the executive management of a life insurance company) would play a central role, operated in a dysfunctional manner during this period in respect of the Society.

7.4 The maladministration which I have found to have occurred resulted in the effective operation of the system of prudential regulation in respect of the Society, and the governance of the Society, becoming compromised. There was effectively no ‘whistle-blower’ during this period within the Society, to the detriment of the proper governance of the Society and of the prudential regulation of the Society.

7.5 The consequences of my second finding of maladministration, related to the scrutiny of the Society’s regulatory returns for each year from 1990 to 1993 were, first, that the prudential regulators and GAD could not be satisfied that the Society was acting prudently and with proper regard to the reasonable expectations of its policyholders. Another consequence of this failure is that the Society was never asked to justify whether it could afford its bonus declarations or how it proposed to sustain the level of bonus that it declared.

7.6 A further consequence was that the impression was given to existing and potential policyholders that the Society was financially sound and able to pay generous bonuses, when the prudential regulators and GAD could not have been sure that either was the case.

7.7 The maladministration which I have found to have occurred led to lost opportunities to seek further understanding as to whether the Society’s business model was inherently prudent or whether that model exposed the Society’s members to unnecessary risks.

7.8 The consequences of my third finding of maladministration, related to the intimation of the Society’s differential terminal bonus policy were, first, that the prudential regulators were disabled from discharging their duties.

7.9 Another consequence of that failure was that the Society was not asked by the prudential regulators and/or GAD to justify its approach in the light of the reasonable expectations of its existing policyholders and/or of the contents of its advertising, which did not draw to the attention of potential policyholders (or existing policyholders, especially those considering making further contributions to policies which did not contain guaranteed annuity rates) that such a policy existed.

7.10 A further consequence of this failure was that the Society took its decisions, such as not to consider ring-fencing new entrants into a different fund, rejecting certain approaches that it received from those interested in acquiring the Society’s business, and/or as to the validity of its general practices, in a context in which the Society could reasonably believe that it had secured regulatory approval – albeit tacit approval – for its new bonus policy and associated practices.

7.11 The maladministration I have found to have occurred resulted in the loss of a number of critical opportunities. Such opportunities included those to test the appropriateness of the differential terminal bonus policy and to ensure that the illustrations and advertisements provided to existing and potential policyholders explained the Society’s policy and practice.

7.12 Opportunities were also lost to take decisions about the future direction of the Society in full knowledge of the reserving requirements to which it was subject and to which the prudential regulators and GAD would eventually draw attention. The Society lost the option to make provision gradually over time for the costs arising each year from those requirements as those costs accumulated.

7.13 The maladministration which I have found also resulted in the problems which caused the Society eventually to close to new business being obscured until July 1998 and to the loss of opportunities for the Society and for the prudential regulators and/or GAD to begin to address those issues much earlier than they all eventually did.

7.14 The consequences of my fourth finding of maladministration, related to scrutiny of the Society’s regulatory returns for each year from 1994 to 1996 were, first, that an early opportunity was lost to address the issue of the Society’s practice as to reserving for guaranteed annuity rates. Another consequence was that the Society’s liabilities were considerably understated.

7.15 The maladministration which I have found to have occurred reinforced that which I have found in relation to the introduction of the differential terminal bonus policy, in that the problems which caused the Society eventually to close to new business were further obscured and opportunities were lost to address those issues earlier.

7.16 The consequences of my fifth finding of maladministration, related to the presentation of the Society’s two valuation results were, first, that those reading the Society’s returns during this period were capable of being misled as to the strength of the Society’s true financial position.

7.17 Another consequence was that those who used the information and conclusions drawn from the returns by rating agencies and other third parties – including financial advisers, industry publications, and those briefing Ministers – were enabled to rely on information that did not contain a complete and accurate assessment of the Society’s true position. They were thus actively misled.

7.18 A further consequence was that GAD were unable, with respect to the Society’s 1995 returns, to verify the financial position of the Society, as they were not able on that occasion reasonably to be satisfied that the Society’s chosen valuation method had produced a result at least as strong as the minimum prescribed in the Regulations as they lacked the information needed to be so satisfied.

7.19 The maladministration which I have found to have occurred resulted in the reader of the returns not having the information that was before GAD and which, arguably, should have been available to all readers of the Society’s published returns.

7.20 No action was taken when it was clear that those readers were misconstruing the information that was provided. Maladministration also resulted in those who expressed concerns about the Society’s solvency being reassured on grounds which were not sustainable.

7.21 The consequences of my sixth finding of maladministration, related to financial reinsurance were, first, that the Society was permitted to declare a bonus in March 1999. Had the Society not done so, a warning would have been given to those considering investing in the Society for the first time or to those considering making further contributions to existing policies that the Society was in significant financial difficulty.

7.22 Another consequence of those acts and omissions was that the solvency position of the Society, as published by 1 May 1999 within its 1998 returns, was misrepresented. Those reading the Society’s published 1998 returns would have been misled as to the strength of the Society’s financial position. That reinforced the misleading message of the strength of the financial position of the Society which had been given by the declaration of a bonus a month earlier.

7.23 A further consequence of the acts and omissions of the prudential regulators and GAD was that the ongoing weakness of the Society’s financial position was hidden from public view in the Society’s published returns for 1999 and 2000. Those considering their options – whether to invest, to make further contributions to existing policies, to convert a policy into an annuity, or simply to stay – were given a wholly misleading picture of the true position faced by the Society and of its solvency position due to the unreasonable credit taken for the reinsurance arrangement.

7.24 The maladministration which I have found to have occurred resulted in the true financial position of the Society being concealed and misrepresented through the publication of returns which contained a misleading picture of the Society’s solvency position.

7.25 That maladministration also resulted in existing and potential policyholders making highly important decisions – some of which were irreversible – about their financial affairs without the benefit of information which the system of prudential regulation was designed to provide to them, in order to enable them to make informed choices.

7.26 The consequences of my seventh finding of maladministration, related to the potential impact of the Hyman litigation on the Society were, first, that the prudential regulators and GAD could not be certain that the Society’s policyholders and those potential policyholders considering investing or continuing to invest in the Society were being given complete and accurate information about what were the extent and nature of the possible effects should the House of Lords deliver a judgment that was adverse to the Society.

7.27 Existing and potential policyholders were thus denied information about their potential exposure to significant risk, which was an integral part of informed decision-making as to their financial options.

7.28 Another consequence of those acts and omissions was that the Society and the prudential regulators and GAD lost an opportunity to consider, either separately or together, whether the scenario planning and other work they had undertaken as preparation for managing the possible outcomes of the Hyman litigation was sufficient to address the full range of factors which had exposed the Society to the range of problems which it faced during that period.

7.29 The maladministration which I have found to have occurred meant that the prudential regulators could not have been certain that the reality that an adverse judgment would crystallise for the Society was not being distorted.

7.30 Any such distorted reality might inform the published returns and the other publications that the Society produced during that period. The prudential regulators could not have been sure that existing and potential policyholders had the full information necessary to take informed decisions.

7.31 The consequence of my eighth finding of maladministration, related to the failure to record the decision to permit the Society to remain open to new business was that no proper and contemporaneous record exists as to the basis for that decision. The maladministration which I have found resulted in an absence of documentary evidence to support the basis for an important decision taken by the FSA.

7.32 The consequences of my ninth finding of maladministration, related to the basis on which the decision was taken to permit the Society to remain open to new business were, first, that policyholders lost any opportunity to receive the benefit of the sound and robust exercise of the discretionary powers that Parliament had conferred on the prudential regulators in order to protect the interests of such policyholders.

7.33 Another consequence of this failure was that those who invested for the first time during this period – which could not have occurred had certain intervention action such as the withdrawal or suspension of the Society’s authorisation to write new business been taken – or who bought annuities, or who made further contributions to existing policies where there was no contractual requirement to do so, made those decisions in an environment in which accurate and complete information about the financial position of the Society was not available to them.

7.34 No warning had been given by the prudential regulators, as would have been provided by the exercise of intervention powers such as the withdrawal of authorisation, of the seriousness of the financial position that the Society was in.

7.35 A further consequence of this failure was that compensation for mis-selling, if any were provided, became an additional liability falling to be met by those existing policyholders.

7.36 The maladministration which I have found to have occurred resulted in those ‘late joiners’ and certain other existing policyholders making decisions about their financial affairs without the accurate and complete information necessary to make those decisions on an informed basis.

7.37 The consequence of my final finding of maladministration, related to the information provided by the FSA after closure was that reassurance was given to those who contacted the FSA to enquire about the financial position of the Society when that reassurance was not soundly based. Those who had regard to the information provided by the FSA made decisions about their financial affairs having regard to the incomplete and inaccurate information that was provided.

7.38 The maladministration which I have found to have occurred resulted in misleading information about the position of the Society being provided to existing policyholders, in a situation in which those policyholders were entitled to have regard to that information because of its source.

7.39 All of the above specific consequences of the determinations of maladministration that I have made also had three general consequences:

• that the Society’s published returns were unreliable;
• that there were lost opportunities to address critical issues earlier; and
• that regulatory decisions were taken on a basis which had insufficient regard to the range of powers that the prudential regulators possessed.

7.40 I considered whether the consequences which I have determined flowed from the maladministration I have found to have occurred constitute injustice to those who have complained to me. Having done so, I make five findings of injustice, being:

• first, financial loss, where that has occurred, and/or lost opportunities to take informed decisions as a result of reliance on the information contained in the Society’s returns for 1990 to 1996;
• secondly, the loss of opportunities in the period between July 1991 and April 1999 to take informed decisions in full knowledge of the exposure of the Society to guaranteed annuity rates and of the risks that such exposure generated;
• thirdly, financial loss, where that has occurred, to anyone who joined the Society or who paid a further premium that was not contractually required in the period after 1 May 1999 and/or lost opportunities to take those decisions on an informed basis;
• fourthly, financial loss, where that has occurred, and/or the loss of opportunities to take informed decisions to those individuals who can show, having regard to their particular circumstances, that they relied on deficient information provided by the FSA in the post-closure period, that such reliance was reasonable in the circumstances, and that it led to any such losses; and
• finally, a justifiable sense of outrage on the part of all those who complained to me at the failings of those operating the regulatory system during the period prior to the Society’s closure to new business.