Overview
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Introduction
1. On 8 December 2000 the Equitable Life Assurance Society (Equitable) closed to new business after having been unable to find a buyer for the company.Over subsequent months my predecessor received a large number of complaints about Equitable. Initially, many of the complaints related to the actions of the company itself,involving allegations of mismanagement of the Society's affairs or mis-selling of individual policies; both matters outside the Parliamentary Ombudsman's jurisdiction. A minority referred to alleged failures in the regulatory system, contending that the prudential regulators should have taken action at an early stage to protect the interests of Equitable's policyholders. The number of complaints increased significantly from June 2001onwards, after Equitable had announced significant reductions in policy and annuity values.
2. My predecessor initially took the view that it would be inappropriate for him to intervene in the matter on four grounds:
i) First, the Parliamentary Ombudsman has an extremely limited scope for action in relation to complaints about Equitable. The actions of the Society itself, its auditors and actuarial advisers,and those charged with regulating the conduct of Equitable's business are not within jurisdiction. To begin an investigation into only one aspect of the situation, namely the actions of the prudential regulator,might raise policyholders' expectations unreasonably and might pre-empt a more comprehensive response.
ii) Secondly, at that stage no prima facie evidence of maladministration on the part of the regulators had been provided to my Office. Whilst it was clear that policyholders felt a sense of outrage at what had transpired at Equitable and, in particular, in relation to the reduction in the value of their annuities, nonspecific examples of the prudential regulator acting improperly were cited, simply the broad allegation that there must have been ‘serial regulatory failure’for those events to have happened.
iii) Thirdly, it is the normal practice of my Office to give bodies within the Parliamentary Ombudsman's jurisdiction which are the subject of complaints an opportunity to put matters right before deciding whether or not to intervene. The Financial Services Authority (FSA) had been contracted by Her Majesty's Treasury to carry out the functions of the prudential regulator from 1 January 1999 until FSA assumed full responsibility for those functions on1 December 2001. In December 2000 FSA had announced that they would establish an internal review to consider whether they had properly discharged their regulatory functions (both prudential and conduct of business regulation) in respect of Equitable.
iv) Finally, it was unclear initially what action the Government would take in response to the situation at Equitable and whether they would establish an independent and comprehensive inquiry. Subsequently, on 31 August 2001, the Economic Secretary to the Treasury announced that the Government had asked Lord Penrose to conduct an independent inquiry into the situation at Equitable.The inquiry's terms of reference were:
"to enquire into the circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury Ministers."
3. However, my predecessor continued to receive complaints from Equitable policyholders and their Members of Parliament contending that the Penrose Inquiry raised problematical issues. First, because it was to report to Treasury Ministers, and the Treasury had been responsible for the regulation of Equitable for at least some of the period in question. Secondly, it was unclear whether or not the final report would be made public in full, due to questions of professional and legal privilege and the restrictions on disclosure of information contained in domestic and European legislation. Finally,the remit of the Penrose Inquiry would preclude it from making judgments about maladministration and it was uncertain whether it would address a key question for policyholders: that of redress.
4. On 16 October 2001 the internal FSA review of their regulation of Equitable during the period from1 January 1999 to 8 December 2000 (when the Society had closed to new business) was published. This review,known as the Baird Report, found that - with hindsight -there had been some "deficiencies " on the part of FSA in the discharge of their regulatory responsibilities, but also stated that "the die had been cast" by the time that FSA had assumed regulatory responsibility for the Society in relation to those who had already invested in Equitable.
5. In light of the findings of the Baird Report, and the uncertainties relating to the Penrose Inquiry, my predecessor announced in October 2001 that he would conduct an investigation into the prudential regulation of Equitable. The investigation would be limited to the period covered by the Baird Report (which had provided the prima facie evidence of alleged shortcomings on the part of FSA), would be of a single representative complaint (the Parliamentary Commissioner Act 1967 (the 1967 Act)does not provide for class actions) and would involve complainant who had invested in Equitable during that period.
6. On my appointment as Parliamentary Ombudsman on 4 November 2002, I undertook as a matter of priority a review of my Office's investigation. I reported the results of that review to all Members of Parliament in a letter dated 5 December 2002. I explained that, in light of the fact that it had become clear that the Penrose Inquiry, which was looking at all aspects of these events, was prepared to make adverse findings about any of the relevant parties should the evidence justify this, I saw no basis at that time to depart from the decision taken by my predecessor to limit the scope of my Office's investigation to the time period covered by the Baird Report.
7. My Office's investigation is now complete. I consider the outcome of that investigation to be of general interest and I have therefore decided to lay my report before each House of Parliament under section 10(4) of the 1967 Act.
8. The report is in two Parts. Part II contains the detailed investigation report into the representative complaint and sets out the actions of the prudential regulator in relation to Equitable throughout the period under investigation. The report has been anonymised in accordance with my Office's normal practice. This Part (Part I) provides a summary of the key findings (see Appendix), sets those in a wider context and draws to Parliament's attention matters which I consider to be of significance.
Findings and wider context
9. I did not find evidence to suggest that FSA acting as prudential regulator had failed in their regulatory responsibilities during the period under investigation. Nor did I find that the decisions which the prudential regulator had taken as to what action (either formal or informal) was required of them in relation to Equitable were outside the bounds of reasonableness, given the information they held and the legal and actuarial advice which they received. However, what I could not comment on, because of the very strict limitations on my jurisdiction (which are set out in detail in paragraphs 3 to 6 of Part II of this Volume), was the advice and information provided to the prudential regulator which informed those decisions, or the actions or inactions of any of the other key parties to these events, all of whom were outside my jurisdiction. Because of those limitations, which are the result of express provisions of the statute governing my remit, I could look at only a very small part of what is a much larger and more complex picture. My predecessor had expressed strong reservations as to whether such a restricted investigation could properly establish the key determinants in these events, and the lessons to be learned from them. He suggested that an inquiry, which could consider the actions of all the relevant parties to events over the whole time period in question, would have been more appropriate and more likely to deliver the comprehensive account of what happened in this case that policyholders and others were seeking. From my experience of looking into the actions of just one of the relevant parties to these events over a relatively short period of time, I am firmly convinced that he was correct in that view.
The prudential regulatory regime
10. There is, however, one central aspect of the Equitable case which my investigation has served to highlight and which I believe to be key to many of the complaints which my Office has received, and to the general outrage expressed about the role of the prudential regulator in this matter, and which I should therefore draw to the attention of Parliament. That is the fundamental mismatch between the nature and expectations of the prudential regulatory regime under which FSA were required to operate during the period in question, and the understanding and expectations that policyholders and others appear to have had of that regulatory system.
11. The principal actuarial and accounting provisions of the regulatory framework, including the key statutory requirements, are described in paragraphs 8 to 37 of Part II of my report. These clearly demonstrate that the requirements placed on the prudential regulator were firmly grounded in a ‘light touch’ approach to regulation.The philosophy underpinning the regime was that market forces would provide the best means of ensuring that an industry met the needs of its customers. The detailed regulatory provisions were framed to reflect that approach and to avoid over-interference in a company's affairs. It was never envisaged that that regime would provide complete protection for all policyholders. Indeed it was expressly stated in the service level agreement between the Treasury and FSA that:
"The Treasury and FSA agree that it is neither realistic nor necessarily desirable in a climate which seeks to encourage competition, innovation and consumer choice, to seek to achieve 100% success in avoiding company failure. FSA will therefore pursue its supervisory objectives by aiming to minimise,but not eliminate, the risk of company failure by identifying early signs of trouble, and taking preventative action."
12. It is not for me to comment on whether or not the statutory provisions (as set out in the Insurance Companies Act 1982 and the Financial Services Act 1986),in establishing such a regulatory regime, are or were appropriate. That was, and is, a matter for Parliament itself. However, it is important to recognise that the nature of the regime established to protect policyholders determined what the FSA could and could not do in relation to Equitable. It is clear to me from my investigation that the framework within which the prudential regulator was required to work simply did not envisage or allow for the sort of intervention into a company's affairs which complainants have contended should have happened in this case.
13. I am, of course, aware that, with the enactment of the Financial Services and Markets Act 2000, the regulatory system has changed since the events in question. Whether statutory regulatory regimes meet the expectations - reasonable or otherwise - of consumers or are otherwise appropriate are matters for Parliament. It is not, therefore, for me to say whether the new regime has bridged that gap or indeed should seek to do so. I can only draw Parliament's attention to what I perceive to be fundamental mismatch between public expectations of the prudential regulator's role and what the regulator could reasonably have been expected to deliver.
14. When, on 29 October 2001, my predecessor announced that he was starting this investigation, he also announced his intention to await the outcome of the wider Penrose Inquiry before deciding whether or not it would be appropriate for this Office to look at the period before1 January 1999. I have the very deepest sympathy for those who have suffered financial loss as a result of the events relating to Equitable, and I can understand how very distressing the situation in which they now find themselves must be. However, in light of my findings in respect of the period covered by my investigation and the observations I have made in this report, I cannot see what would be gained from my further intervention in the matter. Further, if I were to investigate an earlier period,given my very limited remit, I do not believe that I would be able to meet the expectations of policyholders in terms of the remedies that they are seeking. I consider that I would be offering policyholders false hope were I to suggest otherwise. I have decided, therefore, to exercise my discretion under the 1967 Act not to investigate further complaints about the prudential regulation of Equitable.
