Owed an apology as well as cash

Published on Saturday 19 July 2008 14:47

UP TO one million former and current Equitable Life policyholders were last week given fresh hope of compensation for their losses after a report into the company's near collapse unearthed a devastating litany of failures by Government watchdogs.

The 430-page document by Parliamentary Ombudsman Ann Abraham argues that various agencies – including the Government Actuaries Department, the Department for Trade and Industry, the Treasury and the Financial Services Authority (FSA) – failed to regulate Equitable Life effectively for more than a decade.

Abraham is calling on the Government to apologise for its failures to victims and set up a compensation fund that can pay redress to those who lost out.

But experts predict the report is unlikely to lead to swift payouts to those affected, as ministers try to wriggle off the hook and deny financial regulators were at fault.

Even campaigners believe they are in for a long fight. Paul Braithwaite, of the Equitable Members Action Group (Emag), says: "While we hope that Parliament will now honour the Ombudsman's unequivocal recommendation to set up a fund for compensation, we stand prepared to take the Government to judicial review if that's what it takes."

Emag is calling for an urgent resolution. "Thousands of pensioners have died waiting for justice. It is time the Government stopped hiding behind one inquiry after another and does the moral thing to bring this sorry saga to a close."

In her report, Abraham makes no estimate of the losses incurred, or the possible cost of compensation. However, Emag believes policyholders can show a relative loss of about 4.5bn.

The Treasury said last week that the Chancellor, Alistair Darling, will reply formally in the autumn, when MPs return to the House of Commons after their summer break. It denied claims that the Government is assessing the precise extent of its alleged failures in order to make a partial offer of compensation.

What went wrong?

In her report, which took almost four years to prepare, Abraham identifies "serial regulatory failure" for causing the near demise of the company in 2000.

From the late 1980s it was paying maturing policies more than they were entitled to receive. By paying such high returns, it hoped to win new savers.

Chillingly, the cost of such an extravagant bonus policy was being passed on to succeeding generations of policyholders. The only way they could ever receive similar bonuses was if investment returns were unfeasibly high or yet more money was pulled in by Equitable.

The insurer offered guaranteed annuity rates (GARs) to many policyholders in the late 1980s and early 1990s.

As the cost of this guarantee grew, Equitable tried to get round the issue by paying lower bonuses to so-called GAR policyholders. This was challenged in court and the issue went all the way to the House of Lords, where Equitable lost in July 2000.

It then tried to sell itself off but failed to find a buyer, forcing it to shut its doors to new business and axe bonuses for policyholders. Today, the company limps on, a shadow of its former self. Maturity payouts on many policies are among the lowest in the industry with some savers barely getting back what they put in.

How watchdogs failed policyholders

Abraham's report is unique in that it looks at the Government's responsibility for what happened. All other inquiries were set terms of reference by Government ministers that avoided looking into whether poor regulation was to blame. Yet Abraham's report finds that UK regulators were fully aware for a decade that Equitable Life's excessively generous bonus policy risked driving the company into insolvency.

Even an attempt to get Equitable to abide by industry best practice and split the position of chief executive from that of appointed actuary foundered. For six years regulators failed to get the company's boss, Roy Ranson, to give up one of his two roles. This meant there was no potential 'whistleblower' within the organisation.

Despite Equitable drifting closer to collapse, it was allowed to operate as it wanted. As late as March 1999, it was still announcing generous bonus policies, although the state of its parlous finances was, by then, known to regulators.

With the FSA's direct knowledge it took out an insurance policy that supposedly protected it in the event of the House of Lords ruling against its bonus policy. It then emerged the policy was worthless as it specifically excluded a payout if the House of Lords ruled against it.