My assessment of the Government's Response: recommendations
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- But what of the Government’s response to my recommendations, containing as it does an ‘alternative proposal’ initiating what has been called the ‘Chadwick process’? I have three concerns about that proposal which I should draw to Parliament’s attention.
Breaking the link between injustice and remedy
- My first concern is that the Government in their response have broken the link between injustice resulting from maladministration and the provision of any remedy.
- Leaving aside the extent to which the Government in their response accept that maladministration occurred and that injustice resulted from such maladministration, the Government have asserted that financial regulation is a special case and that it is never appropriate for financial compensation to follow directly from regulatory failure constituting maladministration, regardless of the consequences for individual citizens of that failure.
- The Government’s alternative proposals therefore proceed on an approach which does not accept the moral or any other imperative to provide an effective remedy for wrongs committed in the course of financial regulation.
- This approach will limit eligibility for any future payment to those who have suffered ‘disproportionate impact’ and will limit the ‘liability’ of the regulators (and thus the amount of the ex gratia payment to be made) to the proportion of responsibility for any losses subject to an eligible claim that are deemed
to be due solely to the acts and omissions of those regulators. - I do not accept the basis of this approach – and I dealt extensively with it within Chapter 14 of Part 1 of my report.
- The regulators whose actions I investigated did not have statutory immunity at the relevant time. Parliament had not qualified my jurisdiction to exclude the acts and omissions of the relevant bodies. Indeed, Parliament clearly intended when it established the regulatory regime covered in my report that I should investigate those actions and, where injustice occurred, that I should seek a remedy in line with my normal practice.
- I therefore see no basis on which it can be said that Parliament has approved the approach adopted by the Government. Nor is it the case, as the Minister claimed in the House on
26 March 2009, that the Government:
‘... have said all along that it is not normal practice for the Government to compensate for regulatory failure, and that is not the response just of this Government – it has been the response of successive Governments.’
- That there was never any prospect of a financial remedy (which was that primarily sought by those who complained to me) if I found that injustice had resulted from maladministration was not explained by the Government at any time before or during my investigation, such as:
- in their representations made to me in
May 2004 when I was consulting on whether to initiate the investigation which led to
my report; - in March 2005 in response to the complaints made about the actions of the regulators, when asked to comment on the allegations contained in those complaints;
- in July 2005 when commenting on the remedy sought by complainants;
- when providing, in November 2005, a view on what policyholders and annuitants could expect from the system of regulation relevant to the events recounted in my report; or
- during any of the regular meetings held
with my investigation team between September 2004 and January 2007.
- As the Public Administration Select Committee reported, ‘this argument began to emerge, by the Economic Secretary’s own admission, only in 2007, when the Ombudsman’s investigation was nearing completion’. Indeed, that argument was only first put to me after the public bodies had seen my provisional findings in draft.
Lack of clarity about the Chadwick process
- My second concern relates to the Chadwick process itself. I have already explained that the Government’s response to my report contained no timetable for the conclusion of his work. This is particularly unfortunate given the very extensive time that has already been taken by the series of inquiries, investigations and other proceedings which have marked the Equitable affair.
- This is reinforced by the fact that at least part of the work to be undertaken by Sir John – the attribution of relative blame to the various parties – could have been undertaken many years ago if the Government had set up the comprehensive inquiry that I explained in the Foreword to my report should have been established.
- There are other aspects of the Government’s alternative proposal which are of concern to me. Those who have been waiting a very long time for the resolution of their claims for compensation have not been provided with any detail about the process which is now to be undertaken.
- Although Sir John has been asked to assign blame between a number of parties, it is not clear how this is to be done and what safeguards there are to be to protect the interests of those, such as the Society and its former directors and actuaries, who are presumably to be the possible subject of adverse findings of fact.
- It may be, although it is also not clear, that there is now to be an adversarial or hearings-based approach. If that is so, it is not clear how such a process will ensure the ‘equality of arms’ between the participants.
- Those who complained to me (and some others among the relevant parties) are in the main unable to fund professional representation – and I have seen no convincing basis for them being asked so to do. They came to the Ombudsman established by Parliament to adjudicate on their complaints. Parliament intended that this service would be free and would lead to the effective resolution of such complaints. Any approach which now required a complicated, legal process would undermine this intention.
The use of the Penrose Report
- This brings me to my final concern. In my evidence to the Select Committee, I drew the attention of the Committee to the highly selective use of the Penrose Report within the Government’s response.
- In particular, one of Lord Penrose’s conclusions – that the Society was principally the author of its own misfortune – was central to the Government’s response even though it was quoted only in part and without any regard to the rest of the relevant sentence. None of his other conclusions, several of them critical of the regulators, was cited. That was misleading.
- In other respects, the reliance of the Government on the Penrose Report also appears to be selective.
- For example, the Government rejected my finding that the failure to insist on the splitting of the Society’s ‘dual role’ (in which one person held both the posts of Chief Executive and Appointed Actuary) or otherwise to undertake a closer scrutiny of its affairs constituted maladministration. And yet the Penrose Report, in paragraph 227 of Chapter 19, expressed very similar concerns to mine, saying:
‘The joint holding of these offices … increased the responsibility of the regulators to check independently and objectively the validity of the assumptions underlying the calculation of mathematical reserves, implicit items and PRE. However, challenge was ineffective.’
- Nor is it clear on what basis the Penrose Report can be said to enable the making of adverse findings of fact when assessing the relative culpability of the various actors, as Sir John has been asked to do.
- As Lord Penrose made clear, his report did not seek to form the basis for the allocation of blame. This was, indeed, brought to my attention by the then Financial Secretary of the Treasury, who told me in May 2004 in response to my consultation on whether I should conduct an investigation:
‘Lord Penrose’s report presents a narrative of the events at Equitable Life over many years. His purpose was to discover what had led to the situation of the Society as at 31 August 2001 so as to learn lessons for the future. As he makes clear in the postscript to his report he was not seeking to provide answers to the questions of “who is at fault for the problems encountered by the Society, and who deserves redress as a consequence?”’
Summary
- In summary, the Government’s alternative proposal:
- does not maintain a direct link between the injustice sustained and a remedy for the wrongs which caused that injustice;
- is unclear in many respects as to how the process will proceed, what it will take into account and how it will do so; and
- depends on a highly selective use of the content of the Penrose Report to justify the Government’s position.
- It is in this context that I must assess whether the Government’s response constitutes compliance with the recommendations which I made in my report and which have been endorsed by a Parliamentary committee.
