Appendix C: Summary of events jul - dec 99
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Summary of events: C1597/01
July - December 1999
1999
02/07/99
The legal division told the prudential division that their paper of 25/06/99 had inaccurately described the advice that the legal division had given concerning the approach to be taken in determining policyholders' reasonable expectations. However, the prudential and legal divisions had since agreed the steps needed to reach a decision on those expectations.
The prudential division replied to the letter of 18/06/99 from Equitable's solicitors confirming that the supplemental agreement relating to the subordinated loan did not require alteration to the 18/08/97 section 68 order.
05/07/99
The hearing began in the High Court. Equitable's solicitors sent the prudential division copies of the skeleton arguments.
The prudential division sent FSA's managing director and the conduct of business division a note outlining some of the background to the legal action. They said that FSA would need to consider the impact of the judgment on Equitable's financial position and, unless the judgment were to settle the matter definitively, to undertake a significant exercise to determine whether they should intervene to ensure that Equitable's approach was consistent with policyholders' reasonable expectations. They set out a list of questions which would need to be addressed when considering the issue and said that they might have to invite representations or additional evidence from policyholders before reaching a final view. They did not expect the judgment to impact on the level of reserves Equitable needed to cover their liabilities to policyholders. They said that Equitable were co-operating fully with them over the issue.
The prudential division attached a document setting out three possible outcomes to the legal action, and analysing the implications of each both for Equitable and for FSA. Should Equitable win, they would continue with their current practice in respect of terminal bonuses and would remain solvent, though relatively weak. FSA would need to continue to monitor closely Equitable's solvency and decide whether there were grounds for intervention on the basis of policyholders' reasonable expectations, or whether the court ruling should be considered definitive. Under the second scenario, where Equitable won in part (their current bonus practice was judged acceptable but past practice was not), Equitable would have to pay compensation to some policyholders, though the cost was unlikely to be substantial relative to their reserves (perhaps £400m). There could also be a downgrading of their credit rating, with resultant reputational damage. The implications under this scenario for FSA were much as for the first, with the additional need to review their guidance in the light of the judgment, and to consider the implications for other companies that had adopted a similar practice. The third scenario considered was one where the court ruled that Equitable could not reduce the terminal bonus for policyholders choosing to take a guaranteed annuity. The reinsurance would then be invalid, though Equitable had established that there was scope for replacing it; should that not be possible Equitable would only just cover the required minimum solvency margin after taking full account of future profit implicit items. They would need to consider a drastic reduction in terminal bonus payments to policyholders with GAR options, irrespective of whether or not those options were exercised or, if that was not acceptable to the court, a reduction in bonuses for all with-profit policyholders. Equitable would aim to cut bonuses gradually over three years to meet policyholders' reasonable expectations, which might precipitate a takeover bid or a reduction in business. The prudential division would need to determine the company's solvency position and, if the required minimum margin was breached, to require a short-term scheme for restoration of a sound financial position. Even if the regulatory solvency margin were not breached, the prudential division would need to obtain financial projections, along with a plan for strengthening the position in the short to medium term. If there were a significant risk that Equitable would be unable to meet their liabilities to policyholders, consideration would have to be given to closing the company to new business or suspending their authorisation. Close monitoring of the company's business would be required. The prudential division would also need to assess the consistency of speed of bonus reduction with policyholders' reasonable expectations; perhaps to encourage Equitable to look to reducing surrender values relative to maturity values; and to be alert to the potential for a wider loss of confidence across the industry. They would need to monitor surrender values, to see that they were not so generous as to adversely effect the solvency position, and to address concern that policyholders were losing out through early surrenders. They noted the potential for allegations that FSA should have prevented Equitable from writing new business earlier.
06/07/99
FSA's prudential division sent a holding reply to Equitable's request for a section 68 order for a future profits implicit item for the year to December 1999.
07/07/99
FSA's Executive Committee suggested that the prudential director circulate the 05/07/99 note on Equitable and the possible consequences for FSA.
15/07/99
The managing director told the FSA Board that the test case on Equitable's handling of GARs had begun. The legal position was, however, complex and it seemed unlikely that the court would resolve all the issues. The prudential division were undertaking some contingency planning.
GAD told Equitable that they would defer consideration of the justification that the company had provided for their assumptions as to the proportion of policyholders who would take guaranteed annuities until they had seen the outcome of the court case. They added, however, that they had some difficulty in accepting that reductions of between 17½% and 30% [see 30/03/99] were consistent with the "few percentage points" quoted in guidance note DAA11 [13/01/99].
19/07/99
Equitable replied challenging GAD's interpretation of guidance note DAA11. They said that there were a number of factors in respect of which the requirement to assume 100% take-up of GAR options might be relaxed. They contended that the reduction of "a few percentage points" should be applied to each factor individually, rather than to the combined effect of them all. They went on to say that the guidance referred to the allowance being a few percentage points of the reserve, rather than of the assumed take-up rate; that meant that even where they had assumed a take-up rate of 70%, the reduction in the overall reserves was less than 10%. [GAD and the prudential division did not dispute this interpretation as the existence of the reinsurance agreement meant that reserving at the higher level would not affect Equitable's net liability.]
27/07/99
The third quarterly meeting between the Treasury and FSA's prudential division took place. GARs were discussed, but Equitable was not mentioned.
11/08/99
At their third bilateral meeting the prudential and conduct of business divisions discussed progress with the Equitable court case. The prudential division said that they had transcripts of the entire hearing and had prepared summaries. They said that the judgment was expected on 09/09/99 and that the case could go either way.
12/08/99
The prudential division's summary of the court case was circulated within that division and sent to the legal division and GAD. In a covering memo, which was copied without attachments to the conduct of business division, the prudential division said that while the case could go either way, the most likely outcome was that Equitable would win, but with some criticism that they had not made their bonus practice clear to policyholders. Equitable's Counsel had argued that policyholders' reasonable expectations would not be met for those without GARs if they did not receive their asset share because they had to meet the cost of paying GAR policyholders more than their asset share.
A manuscript note by FSA's legal adviser agreed that the result of the case was impossible to call.
17/08/99
GAD wrote to all life insurance companies about proposed revisions to regulations and to the resilience tests.
27/08/99
Equitable responded to the consultation exercise on proposed changes to regulations and to the resilience tests. Equitable said that the consultation had implied that the proposed changes to resilience test 2 were intended to make it less severe; however, for a company with a mix of fixed interest assets across all durations they did not believe that the changes would have that effect. They believed that the revised regulations and, in particular, the revised resilience tests were likely to lead to the need for substantially higher reserves.
31/08/99
In reply GAD said that they were puzzled by some of Equitable's comments. They suggested that companies could arrange their investments in such a way that they could be reasonably resilient to the investment changes postulated in the revised test 2.
c31/08/99
The prudential division prepared a risk assessment of Equitable as part of piloting a new approach to company assessment. This suggested that Equitable should be seen as a high financial risk because of the level of benefits guaranteed to policyholders, the relatively low free asset position and the difficulty they would face in raising external finance. They would be particularly vulnerable to a sustained and significant fall in equity prices or other changes in economic circumstances. Equitable presented low organisation, strategic and management risk and appeared well managed and efficient; there was a need, however, to obtain more information, particularly about systems and controls. Environmental risk was regarded as low, though there was some reputational risk as a result of the dispute over how the costs of GAR options were met. Equitable's cultural attitude was said to tend towards "arrogant superiority" which, it was suggested, could blind them to the financial risks of guaranteeing high benefit levels. They were said, however, to be open with the regulator, who had no particular concerns about the level of co-operation. They generally had a good record of compliance with FSA's prudential and conduct of business divisions. Equitable had taken heed of regulatory concerns about the level of reversionary bonuses and had made some effort to reduce them. Further reductions would be needed in future years if the risk was to be significantly reduced. They had a high exposure to GAR options, for which a reserve of £1.5bn had been established, and it was arguable that a higher reserve should have been set. About half of the reserve was covered by reinsurance which was needed to show a reasonably healthy level of free assets. Equitable could need to pay compensation to GAR option policyholders if they lost the court case. A marginal note commented that Equitable's "strong reputation" in the insurance market was "already tarnished".
08/09/99
FSA's Executive Committee noted that the Equitable judgment was expected on the following day and that FSA would need to consider how to respond.
Equitable replied to GAD's letter of 31/08/99 about the proposed changes to the resilience tests saying that they still disputed the assertion that the new test 2 (coupled with the new reinvestment formula) was less severe than the old.
09/09/99
A private sector rating agency affirmed the credit and financial strength ratings on Equitable as A+ [a reduction from the AA rating of 29/04/98]; they said that the outlook was stable.
The High Court ruled that Equitable were entitled to operate their differential terminal bonus policy. Mr Hyman was granted leave to appeal.
GAD told FSA's prudential and legal divisions that they had seen nothing in the judgment that was inconsistent with the general guidance which FSA had issued on the application of GARs and the terminal bonus. However the judgment had clearly suggested that policyholders' reasonable expectations might extend further than contractual rights. FSA might need to consider intervening in respect of those policyholders whose expectations may not have been met, though the numbers and amounts involved were likely to be quite low.
10/09/99
FSA's legal division provided the prudential division, the managing director and GAD with a summary of the judgment and a brief outline of the implications for FSA. They said that the judgment provided the first real judicial support for the principle that policyholders may have a reasonable expectation of benefits over and above those contractually guaranteed. GAD's comment, that it appeared not to affect FSA's guidance on reserving, was noted. The judgment had described the factors that might shape policyholders' reasonable expectations. Those factors, which had been agreed by expert witnesses, were: the terms of the contract with the policyholder; statements made to policyholders by the company; past practice of the company; and practice in the industry. The legal division said that they would not take issue with any of that and commented that it was useful support to FSA policy. The court had found that Equitable's practices and their communications with policyholders had produced a reasonable expectation among holders of policies containing GARs that the guaranteed rate would be applied to the full and unadjusted terminal bonus. The legal division said that, on the evidence that they had seen, FSA would be likely to come to the same conclusion. The court had taken the view, however, that policyholders' reasonable expectations did not become a contractual right and was only one of a number of factors that the directors had to take into account when exercising their discretion; the balance between that and other factors was a matter for them and not for the court. The legal division said that they did not find that conclusion surprising. While the court had found that the directors had properly had regard to policyholders' reasonable expectations, [albeit that they had not then fulfilled those expectations] the legal division said that the question for FSA went beyond that; they would have to consider whether sufficient or due regard had been paid to the concept and whether to take action under section 45 of the Insurance Companies Act to ensure that the criteria of sound and prudent management were fulfilled. They said that those criteria included: carrying on the business with integrity; and conducting business with due regard to the interests of policyholders. Were they then to conclude that due regard had not been given to policyholders' reasonable expectations, there would be "a real awkwardness" in taking action, in part because of the need to rely on grounds primarily directed at good management, soundness and prudence, rather than conduct of business. It was noted that the prudential division had decided to defer a decision on taking action until the appeal had been concluded. It was also noted that FSA had some evidence that, when discussing options with policyholders on maturity of the policies, Equitable had not told policyholders that the terminal bonus was conditional. The legal division said that that was not a matter for the prudential division and was before the PIA.
The prudential division copied the memo to the conduct of business division and Treasury.
13/09/99
An internal conduct of business minute said that they had held a low profile on this important case and as a consequence had not fully investigated the scope of the problem. Statements to customers about pre-FSA business were not within their scope, although the giving of any misleading statements at maturity of a policy could be within the scope of the PIA. However, if the judgment held, then that would be less likely.
14/09/99
FSA's Executive Committee discussed the judgment and its implications [there is no record of what was said].
The prudential division noted that the conduct of business division would wish in due course to consider whether Equitable had misrepresented the GAR policies, although their scope for action was likely to be limited as those polices had generally been sold
pre-1988.
In an internal e-mail, copied to the prudential division, the director of FSA's conduct of business division referred to the legal division's memo of 10/09/99 and said that he was puzzled by the reference to the question of Equitable's advice to policyholders being before the PIA, as he understood the contracts in question to have been sold before 1988. He said that he was therefore unclear as to whether PIA had any standing in the matter and he asked the conduct of business division to consult the legal division and enforcement team to establish what they should be advising PIA to do. He said that, if they were to investigate, they should probably not await the outcome of the appeal since none of the points at issue in the litigation would seem to bear on whether Equitable's communications were compliant.
15/09/99
The director of the prudential division, to whom the above had been copied, told the conduct of business director that he was keen to look at the issues from the perspective of all the FSA constituent bodies, and to consider any possible action in the same way. He said that that would probably mean that they should not decide on any action until the appeal court's decision was known. If the judgment were overturned it was possible that action would be warranted under the Insurance Companies Act, and he wanted to avoid a situation where such action might be constrained or prejudiced by earlier action by others. The prudential director said that they could consider the matter further in the light of an analysis that they had agreed should be undertaken while the appeal was pending.
16/09/99
Equitable told all policyholders that the court had approved their bonus practice.
FSA's managing director told the FSA Board that the Equitable judgment might have wider consequences for interpreting policyholders' reasonable expectations. The Board noted the position.
20/09/99
The prudential division asked GAD when they expected to complete their scrutiny report on Equitable's 1998 regulatory returns. GAD replied that the report had been submitted to FSA on 20/05/99. They said that two matters had been outstanding at that stage. Those were the final wording of the reinsurance treaty - which they said they had yet to see - and a decision as to whether to challenge some of Equitable's assumptions in setting reserves for GAR options. They said that no formal consideration had yet been given to the points raised in Equitable's letter to them of 19/07/99 (in which they had attempted to justify assuming a lower take-up for GAR options than was required under the guidance).
The prudential division wrote to Equitable outlining the proposed agenda for a company visit that they intended to make in December, as part of the standard three yearly cycle of visits, to discuss Equitable's overall position and future plans. They said that they would be accompanied by GAD. They listed the areas that they would expect to cover during the visit as: overview of corporate management structure; general market outlook and business strategy; marketing approach; the role of the appointed actuary; systems and controls; and investment policy and asset management. [The letter was not copied to the conduct of business division.]
In an internal memo, copied to the prudential division, the conduct of business division set out what they saw as the implications of the judgment for the PIA rules. They said that there was little that they could do about what GAR policyholders might have been told when buying their policies as most, if not all, such policies had been sold before 29/04/88 (when the relevant rules came into effect). Though it had been suggested that some guarantees had been given after that date, they had seen no evidence of that. When a policy matured, it would be incumbent upon the company (or the independent adviser where appropriate) to advise the policyholder of all available options, and of the consequences of each. Leaving aside the question of companies offsetting the value of a guarantee against the terminal bonus, they said that they had no evidence to suggest that policyholders were being wrongly advised at that stage. The prudential division had queried whether certain bonus notices were in breach of conduct of business rules. They said that, historically, they had not considered bonus notices to fall within PIA's jurisdiction, because that jurisdiction was concerned only with selling and marketing, whereas bonus notices were considered to be part of a company's administrative functions. However, PIA Rule 4.1 said that any communication must be clear, fair and not misleading. While it was not clear that that would extend to bonus notices, they said that they had reviewed Equitable's bonus notices for 1997, 1998 and 1999, and had concluded that there was nothing seriously wrong with them. They proposed a meeting with the prudential division and others with an interest [held on 21/10/99] to discuss next steps.
23/09/99
In a memo to the prudential division, the conduct of business division said that they did not consider Equitable's bonus notices to be poorly presented or inaccurate and did not therefore intend to take action under Rule 4.1 of the PIA rules [see previous paragraph]. They went on to say that they had not previously taken such action in respect of documents issued once post-sale information had been provided, since the ongoing servicing of policies did not seem to fit comfortably with their remit. They would therefore have to have serious concerns about a document before taking action against a company in such circumstances. The prudential division noted in manuscript at the foot of the memo "A surprisingly unqualified endorsement for the bonus notices"; they copied it to the legal division and to GAD.
24/09/99
GAD advised the prudential division in respect of Equitable's application of 30/03/99 for a future profits implicit item of £1bn. They confirmed that the calculations provided were in line with the guidance and that the company's estimate of future profits appeared to be fair. The sum applied for was only about one third of the sum for which Equitable could have applied, and was substantially less than they had been allowed in 1998. GAD had no real doubts that the sum could be reasonably accepted by FSA. They went on to say however that, as some element of future surplus had been assumed to be used to pay part of premiums arising under the reinsurance treaty, Equitable should be asked for confirmation that that would not adversely affect their application. GAD suggested a form of words to be used, and said that they were confident that the company would be able to provide such confirmation. They suggested that the prudential division ask for a copy of the treaty as finally signed. They enclosed a copy of Equitable's letter of 19/07/99 (about the assumed rate of take-up of guaranteed annuities) and said that they were not inclined to take the matter further at that time. Though they remained somewhat uncomfortable that Equitable's reserving assumptions were not fully in line with guidance note DAA11, the reinsurance meant that while assuming a higher take-up rate of GARs would increase Equitable's gross liability, their net liability would remain unchanged. They suggested that the matter might be discussed again at the proposed FSA visit. GAD concluded that their detailed scrutiny of the returns was now closed.
28/09/99
FSA's prudential division wrote to Equitable on the lines suggested by GAD. They said that they could not recommend approval of a section 68 order for a future profits implicit item for 31 December 1999 until they had received the requested further confirmation regarding the reinsurance. They also asked to see the final signed reinsurance agreement.
30/09/99
The reinsurer signed the reinsurance agreement.
10/99
[According to the Baird report, around this time the FSA's enforcement team reported the results of the investigation they had begun on 22/06/99 into Equitable's sales of pension fund withdrawals. The report was copied to the conduct of business division on 14/01/00.]
01/10/99
GAD told the prudential division that they believed the High Court's judgment had been more favourable to Equitable on policyholders' reasonable expectations than the legal division had implied. They believed that the judgment had indicated that sufficient or due regard had been, and continued to be, given to policyholders' reasonable expectations.
11/10/99
At their fourth bilateral meeting, the prudential division set out the implications of the judgment both for themselves and for the conduct of business division. They said that in their view, although Equitable had had regard to policyholders' reasonable expectations, they had not met them, so there was the possibility of intervention. In terms of conduct of business issues, misleading bonus notices may have been provided or companies may have moved policyholders into new contracts without guarantees.
14/10/99
Equitable sent the prudential division a revised application for a section 68 order for a future profits implicit item of £1bn as at 31/12/99, confirming they had taken full account of the reassurance arrangements. They also enclosed a final signed version of the reinsurance treaty which had been signed by Equitable on 11/10/99. This said (as had the February 1999 draft) that if claims exceeded £100m at any 31 December, negotiations would take place to find a mutually agreeable restructuring of the treaty to include a redefinition of the adjustment premiums in respect of future years.
c14/10/99
FSA's prudential division sent the reinsurance treaty to GAD, asking them to check it and confirm that they could now allow Equitable's application for a future profits implicit item.
21/10/99
FSA's prudential, conduct of business, legal divisions, the conduct of business policy team, and the enforcement team met to discuss what action PIA should be taking in respect of the guaranteed annuity issue generally, and Equitable in particular. In a note to GAD, the prudential division said that, in relation to Equitable, PIA were likely to conclude that they did not have powers to take action in respect of misleading bonus notices "(if they were misleading)" as bonus notices were probably outside their remit. They wanted to establish whether sufficient GAR policies fell within their remit to justify an investigation (should they consider there to be grounds to launch one) into the sales process. To that end, the prudential division would write to Equitable asking them how many GAR policies they had sold after April 1988, and the number of top-ups sold since June 1988 (when Equitable stopped selling policies with GAR options). In relation to other companies, they said that PIA would consider looking at whether there were any companies that had sold a significant number of such policies after 1988 and what their practices had been. They asked GAD to collate the relevant information from the results of the 1998 survey.
The managing director told the FSA Board that FSA would await the outcome of the appeal in the Equitable case before considering whether further action was called for. A review of resilience testing, which he said had been reported to the Board in September, had been made more urgent by the desirability of having a little more flexibility in the rules, ahead of what could be volatile and thin markets around the end of the year. Revised guidance had now been issued.
In preparation for their meeting arranged for 26/11/99 the prudential division asked the other regulators involved with Equitable for information to be used in preparing a draft Overall Assessment and Co-ordinated Supervisory Programme.
22/10/99
GAD told the prudential division that the confirmation that Equitable had provided in their letter of 14/10/99 was as they had requested, and the application for a future profits implicit item of £1bn was therefore acceptable. They added that the signed reinsurance agreement was totally in accord with the draft examined in detail in April 1999.
27/10/99
Responding to the prudential division's request of 21/10/99, the conduct of business division said that their risk rating for Equitable was average; the last visit had taken place in June 1998, at which time there had been no outstanding issues; the latest activity had been tracking the guaranteed annuity case; the next visit was planned for the second quarter of 2000; and that they "Aim to meet Compliance Management before end Q4 1999".
29/10/99
FSA's prudential division asked Equitable for details of policies containing GAR options sold after 29/04/88, and of top-ups made after the same date.
03/11/99
The prudential division recommended to the Insurance Supervisory Committee that Equitable's application for a section 68 order for £1bn of future profits to be treated as an implicit item to count towards regulatory solvency be granted. They said that, while there was some debate at the margins between Equitable and GAD about the reserves required for GAR options, the prudential division were generally satisfied that Equitable were adequately reserved for their exposure to GAR options, which had "been largely offset" through reinsurance. The court judgment was subject to appeal and it was possible that further cases might arise in the future in relation to Equitable's differential terminal bonus policy. They said, however, that that should not affect Equitable's financial position since the regulations required them to reserve fully for all policies containing a GAR option. Equitable could have qualified for an implicit future profits item of almost twice that sought. GAD had reviewed the calculations and were content that the concession should be granted.
08/11/99
The Insurance Supervisory Committee approved the application for a section 68 order without further discussion.
09/11/99
The Treasury issued the section 68 order.
10/11/99
Equitable told FSA's prudential division they would have no difficulty establishing the number of GAR option policies sold between 29 April and June 1988, but asked for clarification of what was meant by "top-ups" since, they said, the flexibility of their policies meant that there were a number of events that might be so called. They also pointed out that policyholders making top-up payments would generally do so on the basis of independent financial advice or on their own initiative, rather than on the basis of advice from Equitable.
11/11/99
In response to the prudential division's request of 21/10/99, GAD identified seven companies, including Equitable, whose possible exposure to GAR options suggested further investigation by PIA.
The fourth quarterly meeting took place between the Treasury and FSA's prudential division. Equitable was not discussed.
15/11/99
FSA's prudential division wrote to Equitable asking for information required to prepare for the planned supervisory visit.
17/11/99
In preparation for the forthcoming meeting of the regulators on 26/11/99, FSA's prudential division produced an overall assessment of the Equitable Life Group. They said that the group was deemed medium to high risk. That rating was predominantly influenced by Equitable's financial position and exposure to GAR options. No particular problems had been identified by PIA, which had assessed both of the firms that they supervised [i.e. Equitable and Equitable Unit Trust Managers Ltd] as average risk. The prudential division had been monitoring Equitable's exposure over pensions mis-selling, and were reasonably confident that they had adequately reserved for that exposure, which was not large enough to be of material concern for them. The Investment Management Regulatory Organisation (IMRO) had significant concerns about Equitable's compliance with their requirements and had put them on a high risk monitoring cycle. Both IMRO and the prudential division had identified concerns about Equitable's attitude to regulation, and the prudential division had concerns over their "slight institutional arrogance" about being a mutual. The paper set out Equitable's financial position, including reference to the relatively low free assets; traditionally high levels of bonus; the use of future profits implicit items and subordinated debt; the high level of exposure to guaranteed annuities; the reliance on reinsurance; and the potential for Equitable to have to pay compensation should they lose at appeal. The paper said that Equitable had gone too far in distributing surplus to policyholders, to the extent that they were dangerously under capitalised and exposed to a market downturn. Furthermore, while they were not alone in being caught out by the GAR issue, they had not woken up to it quickly enough, and communication to policyholders of their change in policy in relation to bonuses had been decidedly unclear and had left them open to criticism.
18/11/99
The managing director told the FSA Board that the Court of Appeal hearing was set for 29/30 November.
24/11/99
The prudential division produced a paper addressing the issue of what proportion of policyholders might reasonably be assumed, for reserving purposes, not to exercise a GAR option. They said that a decision was required at the Insurance Supervisory Committee meeting of 06/12/99. They considered that 5% was the maximum proportion of policy proceeds that companies could prudently assume would be taken in non-guaranteed form. That equated to an assumption that 20% of policyholders would opt to take the maximum tax free cash sum (which was 25% of the total fund value) and take the rest of the benefits as a guaranteed annuity. It was clear from the 1998 regulatory returns that a number of companies had interpreted the Government Actuary's guidance as permitting an assumption that 10% of policy proceeds would be taken in
non-guaranteed form. The prudential division thought it unlikely that companies that had reserved on that basis would then raise strong objections to being told to increase their provision for GARs from 90% to 95%. Equitable, however, might raise more of an objection, since they had reserved in 1998 at 80% and were known to consider even that as excessively prudent. Because of the reinsurance, Equitable's solvency position would remain unchanged were they to be required to reserve to 95%, although they would then appear to have a higher gross liability and to be more reliant on the reinsurance than they would like.
25/11/99
Equitable sent the prudential division a substantial volume of information in preparation for their visit. Instead of a financial condition report, Equitable sent financial projections dated 23/04/99 and a Board report of 22/10/99 on revenue and solvency matters.
26/11/99
The prudential division forwarded Equitable's reply of 10/11/99 to the conduct of business division. They said that it was PIA's definition of top-up that was relevant, rather than their own, and they asked for advice as to how they should respond. They also asked whether PIA still needed to know how many top-up payments had been made, given that Equitable had said that such payments would not normally follow advice from the company. [PIA did not respond to the prudential division or to Equitable.]
FSA's prudential division sent Equitable a draft agenda for their 06/12/99 visit which did not refer to GARs. They confirmed that they had received from Equitable the skeleton arguments for the appeal.
The meeting of regulators responsible for Equitable took place. FSA's prudential division and IMRO were present, but the conduct of business division sent their apologies. IMRO said that in their experience Equitable's regulatory history was poor; they had received warnings and breached rules. Compliance was weak,
under-resourced, inexperienced and out of touch with the business. It was a high risk area and on a ten month visit cycle. However, they also reported efforts that the company was making to improve the situation. The prudential division reiterated the points raised in their overall assessment (of 17/11/99). It was agreed that the prudential division would update both the overall assessment and the co-ordinated supervisory plan after their visit to Equitable.
29/11/99
The appeal hearing opened.
01/12/99
The Tripartite Standing Committee discussed whether the resilience tests were still appropriate in the light of lower interest rates. There was also some discussion of what role, if any, the regulator had in managing concentration in the industry. It was suggested that FSA could make it clear to troubled firms that they should take action to resolve their problems sooner rather than later.
02/12/99
Appeal Court hearings in open court finished.
03/12/99
Equitable told the prudential division that they had written 22,224 GAR policies between 29 April and 30 June 1988, after which such policies were no longer offered. They said that exceptional levels of business had been generated by the imminent withdrawal of the product. As Equitable had only 300 sales staff it was likely that most of those buying policies at that time would have done so on their own initiative, rather than on the advice of one of the company's representatives.
06/12/99
FSA's prudential division and GAD visited Equitable as part of their three yearly cycle of company visits. There was some limited discussion of the GAR issue (FSA have said that the purpose of the meeting was to discuss issues other than GARs or the court case, which were already receiving adequate attention). Equitable said that the reinsurance scheme had been extended to cover group business as well as individuals. That meant that the net liability to Equitable, which had reduced as a result of the reinsurance from £1.56bn to £760m, would reduce further to £560m. That liability would further decrease over the following year when some 10% of GAR business would come off the books. The prudential division said that FSA and the Government Actuary would be writing to the industry before the end of the year explaining more clearly the approach that they expected to be adopted to reserving for GARs; that could result in a need for Equitable to increase their reserves. Equitable confirmed that that would not impact on the reinsurance treaty. They recognised that their declared bonus rates would have to be further reduced if the current level of investment return persisted, though they proposed to pause before making further cuts to see if yields would improve. They said that if declared bonuses remained at 5%, terminal bonuses were likely to increase as they would otherwise be allocating less than they had earned in the previous four years.
07/12/99
In response to a query to the FSA helpline about a policy which had been taken out in 1983, the conduct of business division said [inaccurately for those joining between late April and June 1988] that the guarantees were given well before the 1986 Act came into force and that their current rules re disclosure and "clear, fair and not misleading" did not therefore apply.
10/12/99
The prudential and conduct of business divisions held their fifth bilateral meeting. The prudential division said they had now received information from Equitable on the numbers of policies sold after April 1988, which they would pass to the conduct of business division.
16/12/99
The managing director told the FSA Board that the appeal against the judgment in Equitable's court case had been heard, but that it was not yet known when judgment would be given.
16-22/12/99
The prudential and legal divisions discussed with GAD further draft guidance to companies on reserving for GAR options.
20/12/99
The prudential division told Equitable about the enhanced lead supervision arrangements that FSA would introduce by June 2000. Lead supervision for Equitable would start immediately. The prudential division, as lead supervisor, would maintain an overall assessment of Equitable; produce a co-ordinated supervisory plan; and act as a central point of contact for group wide issues - ensuring that information which was relevant to more than one entity reached relevant parts of FSA. They pointed out, however, that they were not the sole point of contact and would not seek to interfere with existing supervisory relationships.
22/12/99
The Government Actuary issued further guidance (DAA13) on reserving for GARs. He said that having reviewed most companies' returns for 1998, some inconsistency was apparent in the way that companies were interpreting the guidance issued on 13/01/99. Clarifying the term "a few percentage points" used in the earlier guidance, he said that that referred to the total aggregate allowance that might be made for all other forms of benefit (whether cash or other forms of annuity) and should not exceed 5%. He said that it would not be prudent to assume that more than 20% of policyholders would choose to take the maximum cash lump sum, which in the case of most pension contracts would equate with a 5% reduction in reserves.
FSA's prudential division wrote to the managing directors of all life insurance companies enclosing copies of the Government Actuary's letter (the original having been sent to companies' appointed actuaries), asking to be told if companies foresaw any difficulties in complying with the guidance.
