Out-Law News 3 min. read
21 Jan 2009, 12:06 pm
The scheme forms part of the Government's long awaited response to a report published by the Parliamentary Ombudsman last July, which found that the prudential regulation of the company "failed comprehensively" for over a decade.
Equitable Life's problems date back to the early 1990s when its directors realised the company did not have enough reserves to meet guaranteed annuity rates (GARs) included in certain with-profits retirement policies.
A GAR is a promise to pay out an annuity at a fixed rate when the policyholder retires. A period of low inflation and low interest rates meant GARs had become significantly higher than other annuity rates.
In 1993, Equitable Life's directors began to allocate bonuses at different rates to different policyholders, effectively paying lower bonuses to policyholders with annuity rate guarantees. But in July 2000, this practice was declared unlawful by the House of Lords, leaving the UK's oldest mutual life assurance company with a £1.5 billion liability.
In December 2000, Equitable Life closed its with-profits fund to new business and over the following months drastically reduced bonuses for all its policyholders.
More than one million policyholders are believed to have been affected, with campaign groups estimating their total loss at over £4 billion.
Over the years a number of investigations have examined different aspects of the Equitable Life saga. In the most recent of these, the Parliamentary Ombudsman considered the role of the regulators. Her report identified ten instances of maladministration in the way Equitable was supervised by the authorities, resulting in five instance of injustice to policyholders.
The Government has now accepted some of these findings. In a detailed response to the Ombudsman, it agrees that regulators should have questioned some aspects of Equitable Life's regulatory returns and the way the company took credit for a reinsurance treaty. It also accepts that certain statements made by the FSA about the company's solvency after it had closed to new business were potentially misleading.
Other findings made by the Ombudsman, however, are still disputed. And even where it accepts maladministration, the Government does not always accept that injustice took place as a result.
The Government has also resisted the Ombudsman's call for a compensation fund to be set up within six months and all payouts to be made within two years. Instead, it proposes a scheme for making ex gratia payments to those "disproportionately affected" by losses it believes were caused by maladministration.
Identifying which policyholders have been hardest hit by their losses and assessing what their investments would have been worth had the regulators not failed in their duty is likely to take considerably longer than the two years envisaged by the Parliamentary Ombudsman.
The Government has asked former Lord Justice of the Court of Appeal Sir John Chadwick to advise on the extent of the losses attributable to maladministration, as opposed to losses caused by market conditions or the actions of Equitable Life itself.
By making the payment ex gratia, the Government is not accepting it has any legal liability to pay compensation and is hoping to avoid setting a precedent for future claims.
"Parliament has recognised over many years that it is not generally appropriate for the taxpayer to pay compensation even when there is regulatory failure" said Yvette Cooper, Treasury Chief Secretary in her statement to the House of Commons.
"The responsibility to minimise risks and to prevent problems occurring in a particular financial institution lies, first and foremost, with the people who own and run that institution.
"There would be serious repercussions for the taxpayer, the relationships between Governments and financial markets and for the nature of regulation were the taxpayer to provide a remedy for all losses every time the regulator fails to prevent a financial institution getting into trouble," she added.
Life insurance expert Bruno Geiringer of Pinsent Masons sees the Government's decision as a missed opportunity to restore confidence and security in pensions saving.
"There have been such significant changes in the regulatory regime since Equitable's problems came to light that the likelihood of something similar happening again is remote. Yet the proposed payment scheme gives no encouragement to people to do the right thing and save for their retirement," he said.
"For the many Equitable policyholders, it must hurt deeply to see the Government admit mistakes have been made but not agree to pay proper compensation, especially at a time when billions of pounds are being pumped into the banks."