April 2001

Equitable’s Chairman telephones FSA’s Managing Director A with ‘a disturbing resumé of the position’. The Chairman says that he is increasingly worried by a combination of the hostile atmosphere at the roadshows and in the press. The Chairman also says that relations with the action groups have deteriorated, as those groups were trying to have a say in the approval of the new Board or to get ‘one of their “own”’ on to it, to which the Chairman was refusing to accede.

FSA’s Managing Director reports to FSA’s Chairman that there was a possibility by late May of ‘near anarchy on the Board and/or the departure of key members of the remaining executive in the face of policy-holder resentment’.

Managing Director A comments that FSA needed to be clear about their responsibilities and ‘game plan’ for the period prior to Equitable’s annual general meeting.

FSA supervisors and management meet to discuss Equitable (and another insurance company). FSA’s note of the meeting records:

It was noted that the AGM, which was scheduled for 23 May, could prove extremely difficult. It was possible that some or all of the action groups would put up slates of candidates. [Equitable’s Chairman] might end up with a hostile Board, or alternatively it was possible that a “hung parliament” outcome might occur. [The Director of Insurance] would speak to [the Society’s Chairman] to find out in more detail what his handling plan is. [Insurance Division] would also clarify whether there were circumstances in which we would wish to use our (limited) powers in this area.

FSA hold an Equitable Life Lawyers Group meeting. The Group express concern that Equitable had still not made a public statement on the market value adjuster and Chief Counsel A says that she intended to raise the issue with Equitable at a meeting on 03/04/2001.

Concern is also expressed that FSA had still not been provided with important information on the reinsurance aspect of the sale to Halifax and Legal Adviser A notes that issues on some of the other agreements remained outstanding.

Legal Adviser A says that a request for a section 68 Order relating to the 2000 returns ‘had not been received but it would be needed’ and that Line Manager E had written to Equitable about this. (See 27/03/2001 [entry 1].)

It is noted that the Regulation 72 issue had been dealt with. Chief Counsel B informs the group that he had advised PIA and FSA that Equitable could not circumvent the Personal Investment Authority Ombudsman complaints procedure. However, the Chief Counsel had subsequently been shown a letter from solicitors which had raised issues about whether his advice had been correct. The group update the status of the items on the legal issues list.

PIA send FSA a copy of correspondence about Equitable’s complaints handling arrangements, along with a draft letter which they proposed to send in reply to Equitable.

The draft letter notes that Equitable had asked what impact being a closed fund would have on complaints handling requirements and obligation to contribute to the funding of the Financial Ombudsman Service.

PIA quote a relevant section of their Complainants Sourcebook and say that they hoped that this clarified the position.

PIA send FSA and GAD a copy of a note of a telephone conversation with Equitable about PIA’s letter of 29/03/2001 about the rectification scheme.

[17:05] GAD confirm that they are happy to discuss actuarial issues with Equitable directly and ask PIA for a copy of their letter.

The Deputy Director General of Fair Trading writes to FSA’s Chairman about Equitable and the Unfair Terms in Consumer Contracts Regulations 1999. The Deputy Director General explains that she is writing in place of the Director General who was prevented by a conflict of interest in dealing with Equitable matters.

The Deputy Director General says that the OFT have already begun enforcement action against Equitable following more than 60 complaints about the way they used the market value adjuster. She explains that the OFT’s key concern was not with the amount of the market value adjuster but with Equitable’s ‘absolute discretion’ clause. She says:

Equitable has explained how it exercises this discretion in practice but it is clear that there is no transparency and consumers cannot take an objective view of how it will be used. We think Equitable may be able to meet our concerns by giving an undertaking to limit the exercise of the discretion so that the term is used fairly and in a way that is – within the limitations imposed by varying market conditions – predictable and objectively verifiable by consumers. However, we would need to undertake a good deal of research before we could be confident that the undertaking effectively met our serious consumer protection concerns.

The Deputy Director General notes the general review of with-profits business announced by FSA on 23 February 2001 and that this would overlap with their work.

She explains that, therefore, the OFT have been considering the best way forward. She suggests that it might be more sensible for FSA to take the lead on this, including the complaints lodged with the OFT, ‘given the ambit of the review and your expertise in the area’.

PIA send FSA copies of correspondence from Halifax about the initiative (planned for 9 April 2001) to allow Equitable’s former sales force to begin to sell Halifax Equitable products.

An enclosed letter from Halifax explained the training and the revision of the sales process that had been carried out. The letter also set out the short and long term arrangements that had been put in place to detect, as far as was possible, cases of mis-selling.

FSA’s Legal Adviser A provides Line Manager E with his thoughts (dated 2 April 2001) on the management agreement with Clerical Medical.

Amongst other issues, the Legal Adviser says that he is concerned that a clause provides that the management of the company could be subcontracted, which would mean that FSA had no direct power in relation to the subcontractor, who might not be a regulated entity. Legal Adviser A notes that the agreement might be terminated upon the direction of the regulator.

[18:03] Line Manager E replies, answering some of the questions raised by the Legal Adviser.

FSA and GAD meet Equitable. FSA’s note of the meeting includes the following:

Solvency position

Equitable say that their year-end position was close to being finalised but had not changed materially from that reported previously and that they would provide the information requested about the section 68 Order application shortly. Equitable say that they were clear that their ongoing solvency position would be improved by the Halifax deal.

The issue of whether the relevant certificates in the 2000 returns would be signed off by the Society’s former or current auditors and appointed actuaries is discussed.

Market value adjuster

GAD ask about Equitable’s approach to payouts on policies at maturity and whether the justification underlying the market value adjuster on non-contractual surrenders meant that there was also a need to reduce levels of terminal bonus on contractual surrenders. FSA note:

Whilst [Equitable’s Chief Executive] conceded that maturity payouts were currently in excess of “smoothed asset shares”, he said that they had no plans further to reduce terminal bonus at this stage. The current levels of maturity were in line with predictions, so there were no arguments for making a reduction on the grounds that underlying assets were having to be sold unexpectedly and at disadvantageous prices. He thought it fairly fundamental that the effect of smoothing on a with-profits policy meant that there would be some consistency in the levels of benefits paid even if the markets were unstable. [An Equitable actuary] noted also that the interim rate of return (IRR) had already been adjusted down to 8% per annum in February and on the basis of current experience there was no need to adjust this further. [The Chief Executive] said it was also a consideration that current maturity values were being met from cash realised when equities were sold earlier in the year when the FTSE 100 was around the 6,200 level. [The actuary] confirmed however that the IRR was kept under constant review.

The possible use of a differential market value adjuster for GAR and non-GAR policyholders so that non-contractual surrenders reflected their asset share is discussed.

Equitable’s Chief Executive says that he considered the approach to be reasonable and notes that the House of Lords’ ruling related to contractual maturities, the implications for non-contractual withdrawals being unclear.

FSA’s Head of Life Insurance notes that the information about Equitable’s market value adjuster on FSA’s website was being updated to focus on surrender values rather than exit penalties.

Compromise scheme

Equitable suggest that it would be useful if Line Manager E attended the next scheme steering group meeting. FSA say that there had been a ‘breakdown in communications’ about meetings on the compromise scheme and that it is important that FSA were kept in touch and were provided with relevant papers.

Board appointments

Equitable say that they were in the process of making offers for Board positions but that no positions were being offered to candidates put forward by the action groups ‘since none were considered to have been of sufficient calibre’.

Control arrangements

FSA raise some concerns over the control and contact arrangements. Equitable hand FSA a copy of an internal submission to their audit committee on corporate governance and the responsibilities and procedures arising from the outsourcing of their administration to Halifax Equitable Clerical Medical.

Other issues

Equitable report that they had been asked by the Personal Investment Authority Ombudsman for copies of Board papers but, as they were not content to accede to the request, they held a meeting to discuss mis-selling issues instead. Equitable say that they had understood that the Personal Investment Authority Ombudsman would continue to deal with some individual complaints, but, for generic mis-selling complaints, would wait for the conclusion of FSA’s work on post-Court of Appeal advice.

The Head of Life Insurance states that FSA were strongly resisting demands from policyholders for compensation.

Equitable’s Chief Executive says that the Society was awaiting advice from Counsel on possible legal action but that he was ‘instinctively … reluctant to embark on lengthy legal processes where there was little prospect of success’.

PIA send GAD a copy of their letter to Equitable about the rectification scheme of 29 March 2001.

[11:13] GAD thank them for this and ask for a copy of the Independent Actuarial Expert’s report.

Equitable send FSA a copy of their solicitors’ paper on the determination of voting classes for the GAR compromise scheme.

[10:46] Line Manager E distributes the note, along with an Equitable progress report as at 4 April 2001. This included an outline timetable and the contents list for the Independent Actuarial Expert’s report.

FSA’s Lead Supervisor file includes a copy of a report produced by IMRO of their ‘periodic visit’ to Equitable Investment Fund Managers Limited. The visit took place from 26 to 30 March 2001.

The report explains that the aims of such visits were:

(a) to identify instances of investor risk; (b) to obtain reasonable assurance that Firms are complying with IMRO’s Rules; and (c) to assess whether they continue to meet the fit and proper criteria for authorisation.

Under ‘significant findings’, the report states that IMRO had been unable to satisfy themselves that Equitable Investment Fund Managers Limited’s complaints handling procedures and recording systems were correctly identifying, recording and classifying complaints.

FSA’s Director of Insurance informs the Head of Life Insurance (copied to Managing Director A, Head of GCD, Chief Counsel A and a PIA official) of a telephone call he had taken from one of Equitable’s proposed new directors. The proposed director was concerned about a PIA investigation into his former employer.

The Director of Insurance records two issues that the proposed director was concerned about:

• The first concerned his own position. Was it likely that after his appointment we might decide that anything coming out of the PIA work suggested he was inappropriate for the job.
• The second concerned possibly “contagion” for the Equitable. Was there any possibility that the PIA might do something spectacular to [the company] before (possibly immediately before) the AGM or the vote on the compromise scheme, such that his earlier connection with [the company] might embarrass the [Equitable] and make it vulnerable to generalised “run by rogues” criticism.

The Director of Insurance says that he had told the proposed director that he thought both possibilities were unlikely to transpire but that he would revert to the proposed director if, on reflection, he had reason to doubt this view. The Director of Insurance also records that he had told the proposed director that FSA ‘could not subordinate proper action in relation to one company to considerations of the interests of another’.

The Director asks the Head of Life Insurance and PIA for any information that they could give on the current situation with the investigation into the former employer. He says:

Notwithstanding what I said to [the proposed director], we probably do have some influence over the timing and presentation of events and should consider whether it would be proper/appropriate to exercise it in the wider interests of policyholders.

FSA’s Head of Consumer Protection provides FSA’s Chairman with a draft reply to the Deputy Director General of Fair Trading’s letter of 03/04/2001, saying:

I have agreed with [the Director of Insurance] (as well as [the Director of Consumer Relations]) that there would be advantage in being able to deal with these cases ourselves …

FSA’s Line Manager E circulates a note of the Compromise Scheme Steering Group meeting that he had attended the previous day. The Line Manager sets out the draft outline timetable, the details of the plans for consultation of policyholders, and the possible legal representation of policyholder classes.

The Line Manager says that he had had a brief discussion with Equitable’s Appointed Actuary after the meeting, during which he had talked about the information and analysis FSA would expect to see to enable them to express a view on the scheme.

FSA seek advice from GAD on the letter from Halifax of 02/04/2001.

[15:15] GAD say that, as far as the actuary who attended the meeting could recall, the Director of Insurance:

… asked a fairly general question about the impact of the abolition of the [Minimum Funding Requirement] – this abolition had just been announced the day before – on Equitable. The thrust of the question … was whether the supply of long dated gilts might increase, should pension funds liquidate some of their holdings. Gilt yields might then fall.

GAD agree that it was a matter for Equitable rather than Clerical Medical and suggest that FSA should pursue the matter with Equitable’s Chief Executive, should they wish to do so.

FSA’s Director of GCD writes to FSA’s Director of Consumer Relations saying that:

As I understand it, there have been a series of discussions with the OFT, in which it has been plain that they would not seek to take action against the Equitable under their unfair terms in consumer contract powers, if the Equitable made clear in a public statement the criteria they would apply when calculating the MVA.

We have encouraged the Equitable to do this over a fair period, but so far without success.

The Director of GCD suggests that, as her division had lead responsibility for the Unfair Terms in Consumer Contracts Regulations, she and the Director of Insurance, as a fellow regulator in the same field, might want to discuss how to take matters forward.

FSA write to Equitable’s solicitors as ‘there is concern about the power of the Action Groups to vote for new Directors, engage in spoiling tactics by seeking Special resolutions etc’.

FSA ask whether Equitable’s Memorandum and Articles, reprinted on 19 May 1995, was the current version and whether there had been any amendments made since then.

[16:05] Equitable’s solicitors reply that they understood that this version was the up to date one but say that they would confirm this with Equitable.

FSA’s Insolvency Practitioner replies to Line Manager E’s note of 06/04/2001 [11:17] asking a number of questions, including: about the timing of receipt of the ‘Explanatory Statement’; whether Equitable wish FSA to provide a statement for inclusion in the documentation; and:

Will each policyholder be sent a statement showing the value of his policy now and after the proposed uplift. If this includes a statement of asset shares then, from [Equitable’s Chief Executive’s] comments on 4 April, the aggregate asset shares might exceed the present market value of assets. Can they avoid showing any aggregate financial position?

[13:29] Line Manager E provides some comments on these questions. On the last point, he says:

It will be based on some figures that will clearly need to be explained to policyholders. They have not finally settled which “valuation” figure to use, but they are likely to go with a year end valuation.

[17:57] GAD comment:

[The Insolvency Practitioner] asks … which “value” the Society will quote to policyholders in any statement they receive. From [Line Manager E’s] reply it looks that they expect to use year-end valuation reserves from the regulatory returns (which exclude terminal bonus). They are unlikely to use aggregate asset shares – even though these represent the policyholders’ interest in the fund – because they feature in neither the regulatory returns nor the companies act accounts. However we would wish to keep an eye on what they are proposing, so please can you keep us in the picture.

GAD also ask to be invited to any meeting with Equitable’s Appointed Actuary about the scheme.

Further to FSA’s letter of 27/03/2001, Equitable apply for two section 68 Orders to require them to prepare their returns on a particular basis.

The first is to require the proceeds of the sale of Permanent Insurance to be included in the returns as at 31 December 2000, as a binding agreement had been in place at that time (although subject to regulatory approval). Equitable state that the sale had been completed on 16 February 2001.

The second is to require Equitable to use an aggregate rate of interest for the fixed interest assets held.

GAD send FSA two further points from the meeting with Equitable on 04/04/2001 that they say might be worth recording.

The first is that Equitable’s Chief Executive had said that Equitable reserved the right to impose a specific surrender penalty to improve the financial position of the fund. GAD say that they had indicated that this would be potentially unfair to departing policyholders, which might raise regulatory issues with FSA and the OFT.

The second point concerned the 2000 returns, as GAD would have concerns if these were solely signed off by the individual who had been Appointed Actuary as at 31 December 2000, as:

He has been displaced successfully as finance director, appointed actuary and chief executive, and may yet be the subject of possible action by either the society, its members, or the actuarial profession. Accordingly, we believe that it would be prudent to seek another actuary’s signature on these returns.

FSA’s Director of Consumer Relations tells the Director of GCD that her division would take forward, in discussion with the Director of Insurance, the work on the Unfair Terms in Consumer Contracts Regulations 1999 and the complaints about Equitable’s use of the market value adjuster.

[19:56] The Director of Insurance comments:

I have already expressed the view that we should take the lead on responding to complaints against the [Equitable] on [unfair contract terms] grounds. As I understand it we gain our new powers on 1 May. But that should not inhibit us from taking matters up with the Society before then so that we have a settled position (and hopefully they have done whatever is necessary) by 1 May. We will in any case come under immediate pressure as soon as complainants know that we are in the lead.

I understand that OFT have offered to share their expertise with us, at least in the early months. It will be [the Director of Consumer Relations’] call whether we accept this, but my instinct is that we should (and that we should gain whatever public advantage/protection we can by so doing). Some people will inevitably complain that we are insufficiently impartial and that we will give insufficient weight to the interest of individual policyholders, given our interest in seeing an outcome that is in the interests of policyholders as a whole. I think this would be unreasonable (and probably to misunderstand the approach we will take to our responsibilities under the [unfair contract terms] legislation), but it will not stop people thinking and saying it.

FSA’s Chief Counsel A asks the Director of GCD if they could discuss Line Manager E’s note of 06/04/2001 about the compromise scheme, as she was concerned about appointing lawyers to represent each policyholder class.

After an exchange of correspondence, the Director of GCD later agrees (on 11 April 2001) that it would be a good idea to speak with Counsel about the matter.

In reply to 09/04/2001 [19:56], FSA’s Director of Consumer Relations agrees that it would be a good idea, and in their interests, for FSA to involve the OFT.

[15:50] The Head of Life Insurance tells Line Manager E that FSA ‘will need to reach an agreed view as to what exactly we consider that [Equitable] need to do to satisfy us on [unfair contract terms]’.

[16:02] Line Manager E sets out his understanding of the position as being:

i) Equitable have replied to the OFT’s last letter, offering to go forward on the basis I agreed with OFT;

ii) we and Equitable are awaiting a response from OFT confirming they continue to hold the view that they had expressed previously;

iii) when that has been done, or when a suitable opportunity next arises (such as in material about the GAR compromise scheme, or as part of the next with-profits guide), we will work with Equitable to get them to put out material that gives the clarification that we all want to see;

iv) there is a need to take forward the same issue on an industry wide basis, and the with profits review appears the most sensible place for that work to take place.

FSA’s Legal Adviser D sends the Director of GCD a copy of her note of 05/04/2001 [11:27].

[11:22] The Director comments that it is ‘important to remember the importance of the board representing the policyholders fully, even though this may look to make it more difficult short term for the management to secure a resolution of the GAR/non GAR issue’.

FSA ask GAD for assistance in relation to the wording of the draft section 68 Order which they had discussed on 27/03/2001. FSA say: ‘There has now been discussion about “segments” and I wondered if something needed to be said to cover the concept of those segments. Do they need to be defined, perhaps by explicit reference to the three categories set out in Equitable’s draft letter? Or is “relevant asset portfolio” enough?’. FSA set out part of the wording of a draft Order that had been prepared in December 2000.

[12:19] GAD say that they think the section 68 Order should make reference to the three segments as described in Equitable’s letter of 23/03/2001. GAD suggest a form of words and ask Legal Adviser A to confirm whether he thinks this is okay.

FSA’s Line Manager E sends the Head of Life Insurance, Legal Adviser A and Line Supervisor C and GAD a draft paper for the Insurance Supervisory Committee and draft section 68 Order for the valuation of Permanent Insurance.

The Line Manager explains that: ‘I have put that the order expires on 30 December 2001 – since it seems to me that the revised valuation has to apply as at end 2000, up until the cash was paid over, and for [at] least until the day on which the returns are submitted’.

The Line Manager also explains that he had tried not to focus on the impact of an Order not being granted and the valuation in the regulatory returns remaining at £25m (rather than £150m), instead focusing on consistency with the Companies Act accounts.

[17:36] The Head of Life Insurance says ‘OK by me’.