Appendix C: Summary of events jan - jun 00
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Summary of events: C1597/01
January - June 2000
2000
12/01/00
The prudential division provided the conduct of business division with the information that they had received from Equitable about the number of GAR policies sold between April and June 1988. The prudential division said that as few of the sales would have been advised by Equitable, and those would be difficult to identify, it was arguable that the conduct of business division could justify not taking the matter further. They pointed out that Equitable's query on the definition of a top-up remained outstanding, and that in view of the small number of such transactions that would have been advised, they would need to decide whether the matter was worth pursuing.
14/01/00
The FSA director, in a weekly report to the managing director, said that the Court of Appeal's judgment was now expected on 21/01/00. The prudential division had informed the Debt Management Office and the Treasury.
21/01/00
The Court of Appeal gave judgment against Equitable by a majority of two to one. The Court ruled that the discretion afforded to the directors of Equitable by article 65 did not allow them to allot a lower level of bonus simply because an individual policyholder had exercised a right to a GAR. One of the judges who had found against Equitable, however, went on to say at the end of his judgment (in a comment which did not form part of his reasoned decision) that it was legitimate in his view for the Board to have regard to the value of the notional asset share of the different policyholders; he therefore saw no reason why Equitable should not award different bonuses to different types of policyholder and set bonuses for those who had GARs at such a level as not to deprive those who did not [a practice referred to as ring-fencing]. He said that it was possible that that would result in those policyholders who had GARs not doing very much better in cash terms than they had done previously.
Equitable faxed their solicitors' summary of the judgment to the prudential division, who forwarded it on to GAD. On the basis of that document GAD prepared their own assessment, which they sent to the prudential division the same day. They said that most of the advice contained in the guidance issued by the Treasury on 18/12/98 remained valid; in particular, they noted that the guidance had been consistent with the judge's view that bonus levels could be reduced for policyholders with GAR options as a class. They also said that the judgment vindicated the prudential division's position on the necessary reserving levels, which would now be even more appropriate as the judgment meant that there was less incentive for policyholders to forego GARs. While Equitable might have to increase benefits for those who had already taken GARs, so that all such policyholders were treated equally, GAD noted that the cost should be fairly marginal as the level of bonus might be reassessed, thus minimising the increase in annuity benefits, and few policyholders had elected to take the guaranteed rate. They suggested that Equitable be asked to confirm that the judgment did not affect the reinsurance agreement.
21/01/00
FSA's prudential division told the managing director that Equitable had been granted leave to appeal to the House of Lords and that the Court of Appeal's judgment had been suspended until that appeal had been heard.
The prudential division told the conduct of business division that the judgment gave no cause for panic. The judgment was now subject to appeal and the court had allowed Equitable to continue with their practice for determining bonuses pending that appeal. They said that the publicity was likely to dent Equitable's sales, but their reserving requirement would not be affected and so their financial position would be largely unaltered.
22/01/00
FSA's chairman asked whether there was any substance to the media comment that others in the industry thought that FSA had been "indulgent" towards Equitable.
01/00
Equitable continued to advertise and to advise consumers to invest in their with-profits fund.
24/01/00
FSA's prudential division told the other relevant regulators that Equitable had been granted leave to appeal to the House of Lords. They said that they did not believe that the judgment would greatly affect Equitable's statutory financial position, as they had already had to reserve fully for GAR options. However, the judgment was a severe blow for Equitable, and was likely to dampen sales and increase uncertainty.
25/01/00
FSA's Executive Committee met and were told that the prudential division were considering the Equitable judgment.
26/01/00
The prudential division asked GAD for information from the survey that they had carried out in 1998, to ascertain whether companies, other than three which they named, were taking an approach to GARs similar to that taken by Equitable. GAD replied that one additional company was taking a similar approach, while replies from others were unclear on the point. GAD suggested writing to all with-profits insurers to clarify the position.
27/01/00
The director replied to the FSA Chairman's query of 22/01/00. He said that one of the appeal judges had referred to the Treasury's guidance letter to life companies of 18/12/98 (wrongly) as "HMT 'endorsing' the Equitable's position" which may have prompted the comment. In reality, however, a number of companies, including Equitable, believed that FSA had taken a very tough line with them on reserving standards.
28/01/00
FSA's prudential division prepared a preliminary assessment, for internal circulation, of the implications for the insurance industry if the House of Lords were to uphold the Appeal Court's judgment. They pointed out, however, that there was every possibility of the Court of Appeal decision itself being overturned and/or the House of Lords putting forward different arguments as the basis of their decision. The Court had recognised that companies could set different bonuses for different classes of policyholders, but had not accepted the practice of paying different bonuses within the same class on the basis of which option was exercised. Though Equitable would need to revise their bonus policy for future years, the new approach need not lead to any significant additional costs for them; they could, potentially, nullify the benefit of the guarantee by reducing bonuses for all policyholders with GAR options. While the question of compensation to policyholders whose policies had matured in the previous five years could be assessed only after the House of Lords had given judgment, the prudential division considered it unlikely that such costs would impact significantly on Equitable's financial position. The reputational damage would only become evident at a later date.
31/01/00
FSA's legal division circulated a summary of the judgment to the prudential division and to GAD. They said that each of the four judges who had at that stage considered the case had arrived at their respective conclusions for different reasons. The outcome of the appeal to the House of Lords would depend to a significant extent on the panel selected to hear the appeal, and it was likely that they too would differ in the reasons for their decision. It was therefore not possible to predict that decision, and any attempt to do so, or to determine the implications of the Court of Appeal's judgment, would be of little benefit. They said that the Court of Appeal had not dealt with the issue of how Equitable were to comply with the judgment; if the judgment were upheld the means of compliance could significantly affect any implications for the industry.
The prudential division's memorandum of 28/01/00, setting out the implications of the judgment, was circulated to senior Treasury and FSA officials. It concluded that, while Equitable would need to revise its bonus policy for future years, potentially the new approach need not lead to any significant additional costs for the company.
01/02/00
Equitable wrote to policyholders assuring them that the Society remained, and would continue to remain, financially secure. They said that there would be no significant costs for them were the House of Lords to uphold the Court of Appeal's decision. [The prudential division were given a copy of that letter by a FSA employee who was also an Equitable policyholder, but they did not pass it to the conduct of business division. The conduct of business division, however, obtained a copy of the letter by another route. ]
03/02/00
FSA told the Tripartite Standing Committee that there were no immediate concerns resulting from the Appeal Court ruling against Equitable's differential terminal bonus policy. Indeed Equitable's short-term accounting position would actually be stronger if they received less new business. In addition, the position was still not final as there was a strong possibility that the House of Lords would overrule the Appeal Court's decision. Equitable was still a strong brand and therefore likely to be taken over rather than fail. However, failure would have implications for the industry's financial stability and so the position needed to be monitored closely. The Committee noted, however, that Equitable's image had been badly damaged by the court ruling as there had been a public misperception that Equitable had failed to deliver the GARs, whereas it was the bonus payments which had fallen short of expectation.
04/02/00
FSA's prudential division wrote to all companies who had indicated in reply to the 1998 GAD survey that they had written with-profit policies containing GARs, asking how they determined bonus levels for such policies.
08/02/00
The prudential division requested from the enforcement team further information about the investigation into Equitable's sales of pension fund withdrawal schemes; that request was copied to the conduct of business division. The conduct of business division replied that the enforcement team had not found too many problems and that a discipline case was therefore unlikely.
17/02/00
The FSA's relevant managing director updated the Board on the outcome of Equitable's case in the Court of Appeal. He said that implementation of the judgment had been suspended pending the outcome of the appeal to the House of Lords. Meantime, Equitable did not appear to face any immediate financial risk or any additional threat to their independence. If the appeal judgment was upheld, Equitable would need to revise their bonus policy, but potentially the new approach need not lead to significant additional costs. For now, the moderate reduction in new business that the company had been experiencing would actually help to strengthen their finances. The FSA would be writing to other companies adopting similar bonus practices to explore the implications if the judgment were upheld.
01/03/00
A bilateral meeting of the prudential and conduct of business divisions of FSA did not refer to Equitable.
02/03/00
Prompted by responses to the prudential division's letter of 04/02/00, which showed that only a small number of companies were imposing the costs of guarantees only on those policyholders with GAR options, FSA's legal division queried whether it could be argued that such a practice would breach policyholders' reasonable expectations and be contrary to the Court of Appeal ruling. The prudential division replied that they did not think so. They explained that insurers had always declared bonuses by class [of policy], and said that if higher expenses attached to a particular class, they would consider it reasonable to declare a lower level of bonus for that class. They pointed out that the Master of the Rolls had said in his judgment that, if Equitable could not declare a differential rate of bonus, it was possible that they would declare a lower, unified rate. GAD contributed to the discussion, saying that they had little difficulty in concluding that policyholders' reasonable expectations, as defined by three of the four judges who had so far considered the matter, had not been breached by Equitable or by any other company, except to the extent that a breach of contract was of itself a breach of those expectations. They said that asset share and other accepted means of determining terminal bonuses would all require some form of deduction for GAR options; alternatively, any loss to a company arising from such guarantees would usually be allocated to the class which caused it. The legal division commented that the Insurance Companies Act required that FSA undertake their own analysis and that the Court's view was only one factor to be taken into consideration.
09/03/00
The prudential division circulated a note of a meeting that they had had the previous day with the enforcement team about Equitable's sales of income draw down pension products. The note said that the enforcement team had "left to one side" the question of how Equitable had advised GAR policyholders, as the issue remained uncertain in the light of the ongoing court action. The prudential division said that the income draw down investigation did not look too good for Equitable, but was not disastrous from a regulatory solvency point of view.
22/03/00
Equitable published their statutory annual report and accounts for 1999 and declared a bonus of 5%, the same as for 1998, considering that no further decrease in bonus was appropriate. The accounts stated that £200m - as for 1998 - had been included as prudent provision for any additional liabilities which might arise through clients choosing to exercise GAR options under their policies. Their directors' report and accounts made no specific mention of the legal action or of any other contingent liabilities. The Annual Report did however set out the background to the litigation and said that the House of Lords' decision hearing was the next stage.
23/03/00
The fifth quarterly meeting took place between the Treasury and FSA's prudential division. (Equitable was not discussed.)
16/04/00
FSA's Board met. (They did not discuss any matters relating specifically to Equitable.)
15/05/00
In a letter to the appointed actuaries of all life insurance companies, the Government Actuary said that, in the light of amendments that the Treasury had made to the 1994 Regulations, two of the three scenarios promulgated in earlier guidance on resilience testing now appeared unnecessarily severe. He had therefore discussed with FSA revisions to the test which both FSA and GAD considered appropriate. The revisions, which he went on to set out in detail, would apply from the date of coming into force of the amendments to the regulations.
23/05/00
In an internal memo, the prudential division said that the enforcement team had sent Equitable a report of the investigation into sales of their pension fund withdrawal schemes. Once Equitable's response had been received and considered, the matter would go before the Enforcement Committee who, unless Equitable were able to present a credible challenge to the report's findings, were expected to call for a fine and remedial action, including compensation for investors. The level of any fine, and the cost of any compensation, would depend upon the report's conclusions, which could be finalised only in the light of Equitable's response. The prudential division commented that, given Equitable's relatively precarious financial position, they would need to assess the financial implications ahead of any decision.
25/05/00
A conduct of business official visited Equitable in preparation for their series of inspection visits in June. Prudential officers did not attend the meeting and the record of it was not copied to them. Equitable were advised by conduct of business that GAR issues were not on the agenda as they were subject to a ruling in the House of Lords. Equitable said that the only company wide issue for them at the moment was the GAR situation. Outside sources estimated that if Equitable lost it would cost them £1bn, although Equitable estimated it would be more like £50m. Equitable said that business levels had levelled off recently due to the GAR publicity. Complaints, normally around 300 per annum, had increased recently due to GARs. Equitable said they had only a few "carpet-baggers" and were "not a particularly good bag" due to their low free assets, lack of estate and low expense ratio.
29/05/00
The Insurance Companies (Amendment) Regulations 2000 (amending the rules for determining a life insurance company's liabilities) came into effect.
31/05/00
Equitable's then solicitors provided the prudential division with copies of the Agreed Statement of Facts and Issues and the document setting out Equitable's case for the House of Lords' hearing. They said that they had written to solicitors for Mr Hyman seeking consent also to provide a copy of his case, but had received no reply. The prudential division circulated those documents to GAD and legal division.
02/06/00
The prudential division told the legal division and GAD that they did not propose to approach Mr Hyman's solicitors direct for a copy of his case, as the reasons that they would have to give might suggest that they would or could act, depending on the outcome of the hearing. They said that they would not want to generate such an expectation and saw no problem in waiting until the hearing began, when the documents would become public.
05/06/00
The prudential division obtained copies of Equitable's court papers and told GAD that on the basis of a quick scan there did not look to be anything particularly new in them. GAD replied that the Lords' judgment on the application to business decisions about bonus rates of the concept of policyholders' reasonable expectations would be of considerable interest to FSA and to other insurers.
07/06/00
The sixth quarterly meeting took place between the Treasury and FSA's prudential division. Equitable was not discussed.
12/06/00
The House of Lords' hearing began.
12-28/06/00
The PIA carried out a (conduct of business) supervision visit to Equitable.
15/06/00
FSA's Board met. (There was no reference to the Equitable case.)
19/06/00
A bilateral meeting of the prudential and conduct of business divisions was held. (It did not refer to Equitable.)
27/06/00
Equitable applied for a section 68 order for a future profits implicit item of £1.1bn for use in their year 2000 regulatory returns.
30/06/00
Equitable submitted to FSA's prudential division their regulatory returns for the year ended 31/12/99.
