equitable life part 5 guide and summary

HC 815-V

Equitable Life:a decade of regulatory failure

Part five: guide to the main report and summaryof findings and recommendations

Equitable Life:a decade of regulatory failure

Part five: guide to the main report and summary offindings and recommendations

Fourth report

Session 2007-2008Presented to Parliament pursuant toSection 10(4) of the Parliamentary Commissioner Act 1967

Ordered byThe House of Commonsto be printed on16 July 2008

HC 815-VLondon: The Stationery Office206.00

Crown Copyright 2008The text in this document (excluding any Royal Arms and departmental logos) may be reproduced free of charge in any format or mediumproviding that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown copyright andthe title of the document specified.Any queries relating to the copyright in this document should be addressed toInformation Policy Division, OPSI, St Clements House, 2-16 Colegate, Norwich, NR3 1BQ.Fax: 01603 723000 or e-mail: [email protected].

Part five: guide to the main report and summary of findings and recommendations 3

Section 1: Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Section 2: The background

The Equitable Life Assurance Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Insurance regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

My jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Section 3: The complaints that were made and the Governments initial response . . . . . . . . . . . . . . . . . . . . . . . 15

Section 4: The basis for my determination of the complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Section 5: Findings of fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Section 6: Determinations of maladministration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Section 7: Determinations of injustice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Section 8: Disposal of the complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Section 9: Remedy and recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Section 10: Annexes

Annex A - Terms of Reference and Statement of Complaint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Annex B - Disposal of the heads of complaint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Contents

Equitable Life: a decade of regulatory failure4

recommendations concerning questionsof remedy.

Part 2 contains a factual description of thehistorical development of the regime that wasrelevant to the prudential regulation of lifeinsurance companies during the period prior to1 December 2001.

Part 3 contains a detailed chronology of eventsrelating to the prudential regulation of theSociety during the relevant period.

Part 4 contains some key primary andsecondary documents, reproduced in full or inpart, which I consider are either key to a fullunderstanding of the matters that I haveinvestigated or which help to place mydetermination of the relevant complaints in awider context.

1.6 This document focuses on providing a summary ofmy findings. It therefore provides the readerprincipally with a guide to Part 1 of my full report.However, some Chapters of Part 1 are themselves asummary of more detailed evidence anddocumentation contained in Parts 2, 3 and 4.

1.7 So this document does not tell the full story and isnot intended to do so. It is deliberately brief andfocuses primarily on the complaints that I receivedand my determination of them.

1.8 I would encourage anyone who wishes to knowmore about the events which form the backgroundto, and context for, this investigation, or about thedetailed regime relevant to the prudentialregulation of life insurance companies during theperiod in question, or who wishes to read adetailed account of the way in which theprudential regulation of the Society wasundertaken, to read Part 1 in full.

1.1 This document provides a guide to the full reportof my investigation into the prudential regulationof The Equitable Life Assurance Society (theSociety) during the period prior to 1 December2001. It also summarises the findings andrecommendations of that report.

1.2 The guide sets out in summary form theconclusions which I have reached in that report.However, it does not aim to explain the fullrationale for those conclusions or to set out everyconsideration that has been taken into account inreaching those conclusions.

1.3 This guide is not a substitute for reading Part 1 ofmy report, to which the reader is referred if theywish to understand the reasons for my findings anddeterminations or to see on what evidence I havebased those findings and determinations. Aglossary of terms used within my report is also setout in Part 1.

1.4 The investigation which led to my report centredon allegations of regulatory failure on the part ofthe public bodies responsible for the prudentialregulation of insurance companies in the periodprior to 1 December 2001, as those responsibilitieswere discharged in the case of the Society.

1.5 The full report of my investigation is in four Parts(or volumes):

Part 1 describes the background to myinvestigation, summarises the evidence andrepresentations submitted to me by the partiesto the complaints, explains the tests I haveapplied in determining those complaints, setsout my key findings of fact and contains mydeterminations as to whethermaladministration occurred and, if so,whether it has resulted in any unremediedinjustice. It concludes by setting out my

5Part five: guide to the main report and summary of findings and recommendations

Section 1: Introduction

prudential regulators and/or the GovernmentActuarys Department (GAD) which are relevantto this investigation.

Chapters 6, 7 and 8 set out a summary of theway in which the prudential regulation of theSociety was undertaken in three time periods:

the first period being prior to 20 June 1998;

the second period being from 20 June 1998to 8 December 2000, when the Societyclosed to new business;

the third period being the post-closureperiod from 8 December 2000to 1 December 2001, when myjurisdiction ends.

Chapter 9 contains the preliminaryassessments which I have made in respect ofdisputed questions concerning what standardof regulation it would be appropriate to applywhen reviewing the acts and omissions of thoseundertaking the prudential regulation of theSociety, and what powers were available tothose regulators.

Chapter 10 sets out the results of my review ofthe evidence I have obtained and contains myfindings of fact.

Chapter 11 sets out my determinations as towhether the acts and omissions of theprudential regulators and/or GAD constitutemaladministration.

Chapter 12 sets out my determinations as towhether any such maladministration has led toinjustice to those who have complained to me.

6 Equitable Life: a decade of regulatory failure

The structure of Part 1

1.9 The structure of Part 1 of my report is as follows.

Chapter 1 is an introductory Chapter.

Chapter 2 sets the scene for the investigation Ihave conducted, focusing on the events whichform the background to, and the context for,my investigation, and also on the other reviews,inquiries and litigation which have taken place(or which continue to take place) in respect ofthe Society.

Chapter 3 explains the involvement of myOffice in respect of the events related to theSociety and which led to my decision toconduct this investigation. It also outlines thelegal and administrative framework for theinvestigation and describes the process that Ihave used to conduct it.

Chapter 4 sets out the general and detailedcomplaints that have been made to me aboutthe prudential regulation of the Society. It alsosets out the initial response to those complaintsof the public bodies whose actions were thesubject of complaint.

Chapter 5 sets out the basis for mydetermination of the complaints. It describesmy general approach to investigatingcomplaints of injustice sustained as aconsequence of maladministration; and setsout both the general principles of goodadministration and public law and the specificlegal and administrative framework ofprudential regulation applicable to myconsideration of those complaints. It concludeswith a summary of the key obligations of the


Chapter 13 contains my disposal of eachcomplaint within the terms of reference for theinvestigation, setting out which I have upheld infull, which I have upheld in part, and which Ihave dismissed.

Chapter 14 considers questions of remedy andcontains my recommendations.

Chapter 15 contains my concluding remarks.

Equitable Life: a decade of regulatory failure8


2.1 My report sets out my determinations ofcomplaints which alleged that the regulators ofinsurance companies had failed properly toexercise their functions in relation to the Societyfor more than a decade.

2.2 The scope of that report was determined by thelimits to my powers to conduct investigations intothe actions of those bodies whose actions werethe subject of those complaints.

The Equitable Life Assurance Society

2.3 My report does not make findings about theactions of the Society itself and is concernedinstead with regulation. However, in Chapter 2 ofPart 1 of my report, I set the scene for thatregulation. This includes a description of the natureof the Societys business and of how the problemsit faced came about.

2.4 The Society was founded in 1762 and it wasincorporated in the United Kingdom as a privateunlimited company in 1892. The Society is generallyaccepted to be the oldest surviving mutual lifeassurance company in the world.

2.5 As a mutual life insurance company, the Society hasno shareholders and is owned by its with-profitspolicyholders. Those policyholders effectivelystand in the position of proprietors, sharing in anyprofits made or losses incurred in running theSocietys business.

2.6 On 8 December 2000, the Society announced thatit would stop writing new business with immediateeffect. Since then, the Society has undergone adifficult period and has implemented cuts in thepolicy values of its with-profits policies or theincome derived from its with-profits annuities.

2.7 The announcement by the Society of its closure tonew business was prompted by the withdrawal ofthe last potential bidder from a sales process thathad been launched to seek a buyer to acquire theSociety following a decision of the House of Lords.

2.8 The operation of the Societys differential terminalbonus policy in respect of a representative policyfor which the default benefit was an annuity paidat a guaranteed rate had become the subject oflegal proceedings once doubts arose as to thelegality of that policy. The differential terminalbonus policy, which Equitable had adopted sinceJanuary 1994, involved the paying of different levelsof terminal bonus to policyholders exercising theirright to take an annuity at the guaranteed ratethan were paid to policyholders not exercising sucha right.

2.9 The House of Lords held on 20 July 2000 in Equitable Life Assurance Society v Hyman([2002] 1 AC 408) that the Societys differentialterminal bonus policy was unlawful.

2.10 At the time, it was recognised that the Society wasdistinctive within the life insurance industry andalso that this distinctiveness had played a part inthe circumstances which had led the Society toclose to new business.

2.11 The four central factors which were of importanceto the Societys problems, recognised by theTreasury at the time of its closure, were:

first, that the Society had for many yearsoperated a policy of full distribution of anysurplus through bonuses to its with-profitspolicyholders and a policy of not building up afree estate, leaving the Society with acomparatively low level of free assets;

Section 2: The background


investment business, including the marketingactivities of life insurance companies.

2.16 During the period prior to 5 January 1998, theprudential regulator was the Department of Tradeand Industry (the DTI) and its predecessors; from5 January 1998 to 1 December 2001, the prudentialregulator was Her Majestys Treasury (the Treasury).

2.17 From January 1999 until 1 December 2001 aspects ofthe day-to-day prudential supervision of insurancecompanies were contracted out to the FinancialServices Authority (the FSA) which, in this role,acted on behalf of the Treasury.

2.18 Furthermore, throughout the period relevant tothis report legal advice to the prudential regulatorswas provided by in-house lawyers and, until26 April 2001, actuarial advice was provided byGAD. Thereafter, actuarial advice was provided tothe FSA by actuaries directly employed by the FSA,some of whom had previously worked for GAD.

My jurisdiction

2.19 I am only able to investigate certain action taken byor on behalf of those bodies which are within myjurisdiction.

2.20 Actions taken by all of the bodies which at therelevant time had statutory responsibility forprudential regulation are within my jurisdiction,where those actions are taken in the exercise of theadministrative functions of such bodies. Thus theactions of the DTI and the Treasury are within myjurisdiction.

2.21 I am only able to conduct investigations in respectof the actions of GAD and the FSA on a limitedbasis. I have no power to conduct investigations inrelation to conduct of business regulation.

secondly, that the Society, being a mutual, hadno access to additional, shareholder capital;

thirdly, that the Society had offered relativelygenerous and flexible guarantees on certaintypes of policy; and

finally, that the proportion of the Societysbusiness to which those guarantees appliedwas much higher than was the case forother companies.

2.12 The closure of the Society to new business as aresult of those problems set the scene for thecomplaints that I have received. While the actionsof others, such as the Society itself or its formerauditors, became also the subject of complaintto others, the complaints that were made tome concerned the role of the regulators ofthe Society.

Insurance regulation

2.13 Before 1 December 2001, there were two forms ofinsurance regulation in the United Kingdom prudential regulation and conduct of businessregulation.

2.14 Prudential regulation was governed by theprovisions of the Insurance Companies Act 1982and by the Regulations made under that Act. Suchregulation primarily related to the supervision ofthe solvency of life insurance companies and theirability to meet and continue to meet theirliabilities to policyholders and to fulfil thereasonable expectations of policyholders orpotential policyholders.

2.15 Conduct of business regulation was governed bythe provisions of the Financial Services Act 1986and concerned the regulation of the conduct of


2.22 GAD were not within my jurisdiction until thebeginning of this investigation. I may onlyinvestigate action taken by GAD on or before26 April 2001 in the giving of advice concerning theexercise of administrative functions under Part II ofthe Insurance Companies Act 1982 or any otherenactment concerned with the regulation ofinsurance companies.

2.23 The actions of the FSA are only within myjurisdiction in so far as those actions relate to theprudential regulation of insurance companiesduring the period from 1 January 1999 to1 December 2001, when the FSA undertook thatregulation on behalf of the Treasury.

2.24 Conduct of business regulation throughout thisfirst period was delegated to a system of industryand practitioner-based, self-regulatoryorganisations under the supervision of a designatedagency. None of those bodies with statutoryresponsibility for conduct of business regulation isor was within my jurisdiction.

2.25 All of this meant that the scope of my investigationwas limited to the actions taken during the periodprior to 1 December 2001 by the DTI and theTreasury as the prudential regulators of the Societyand to the actions taken by the FSA and GAD onbehalf of those regulators.


The general and specific complaints

3.1 My investigation undertaken after wideconsultation with those affected began in July2004. It was conducted in accordance with theprovisions of the Parliamentary CommissionerAct 1967.

3.2 I have received 898 complaints referred by MPs inrespect of 1,008 people. I also received 1,309 directrepresentations from a further 1,480 individuals.

3.3 With the help of the various action groupsrepresenting complainants, fifteen people wereselected to act as lead complainants. Those peopleepitomise the position of all the principal groups ofcurrent and former policyholders and annuitantswho had complained to me. The lead complainantsauthorised members of the action groups to act astheir personal representatives during the course ofthe investigation.

3.4 The general complaint made was that:

the public bodies responsible for theprudential regulation of insurancecompanies and the Government ActuarysDepartment failed for considerably longerthan a decade properly to exercise theirregulatory functions in respect of theEquitable Life Assurance Society and weretherefore guilty of maladministration.

3.5 Eighteen detailed complaints were made. Thoseheads of complaint were labelled complaint A tocomplaint R and are set out in full in Annex A ofthis document. Those detailed complaints,together with the general complaint, formed thebasis for my investigation.

3.6 All the complainants claimed that they hadsuffered financial and other injustice as a result of

alleged maladministration by the prudentialregulators and sought full redress for that injustice.

The Governments initial response

3.7 I put those complaints to the Treasury, the FSA,and GAD. Their initial response, in summary, wasthat:

(i) there had been no failure on the part of any ofthe prudential regulators or GAD properly toexercise their functions in respect of theSociety. At all times those regulators and GADhad acted reasonably and properly, in thecontext of and having regard to the regulatoryregime as it had been at the relevant time;

(ii) the nature and scope of that regime had beendetermined by legislation and by regulatorypolicies which informed and were adoptedunder the applicable legislation. At all times,the policies adopted had been proper ones andhad been the result of choices whichParliament and Ministers had been fullyentitled to make;

(iii) none of the complaints made by thecomplainants disclosed reasonable grounds forconcluding that any of the public bodiesresponsible for the prudential regulation of theSociety or GAD had been guilty ofmaladministration.

3.8 I was not satisfied that this response resolved thecomplaints which had been made to me and so Idecided to continue my investigation.

3.9 I appointed an in-house team of investigators toconduct the investigation. I also appointed bothlegal and actuarial advisers to assist me and myinvestigation team. In addition, I arranged for the

Section 3: The complaints that were made and the Governmentsinitial response


the relevant working documents and emails ofthose officials and actuaries; and

publicly available material (such as actuarialpapers and discussions); and historical andother material held at the National Archives,the British Library, and the libraries of the DTI,the Institute of Actuaries, and the Institute ofChartered Accountants of England and Wales.

3.12 At the end of January 2007, I sent the public bodiesa first draft of my provisional views on relevantfacts, whether maladministration had occurred and,if so, whether it had resulted in any injustice tocomplainants. This followed the sharing of draftexcerpts from the factual background Parts of thisreport with the parties to the complaints.

3.13 In March 2007, I disclosed the provisional report ofmy actuarial advisers to the public bodies. Thosebodies, in April 2007, made substantialrepresentations to me about my draft report andabout the content of the professional advice thathad informed that draft report. In the light of thoserepresentations, I agreed to conduct a fundamentalreview of my draft report and to seek furtherprofessional advice.

3.14 The revised draft report that was the result of thatreview was issued in February 2008 to all theinterested parties. My final report takes intoaccount all the responses I received to those drafts.

actuarial advice I received to be peer reviewed. Theadvice of both sets of professional advisers hasgreatly informed (and is fully integrated into) myreport.

Terms of reference

3.10 The terms of reference for the investigation were:

To determine whether individuals were causedan injustice through maladministration in theperiod prior to December 2001 on the part ofthe public bodies responsible for theprudential regulation of the Equitable LifeAssurance Society and/or the GovernmentActuarys Department; and to recommendappropriate redress for any injustice socaused.

Conduct of the investigation

3.11 In carrying out the investigation, we have reviewed:

the operational and policy files of the publicbodies whose actions were under investigation;

all the documentary evidence from othersources that was available to Lord Penrosewhen he conducted an inquiry into the eventswhich led to the Society closing to newbusiness, the report of which was published in2004;

transcripts of evidence given to the Penroseinquiry, to the Baird inquiry, an internal FSAinquiry in 2001 into their role in the relevantevents, and to my first investigation by currentand former officials and actuaries connectedwith the prudential regulation of the Society;


My approach

4.1 In simple terms, when determining complaints thatinjustice has been sustained in consequence ofalleged maladministration, I generally begin bycomparing what actually happened with whatshould have happened.

4.2 So, in addition to establishing the facts that arerelevant to a complaint, I also need to establish aclear understanding of the standards, both generaland specific, which applied at the time. I call thisestablishing the overall standard.

4.3 In Chapter 5 of Part 1 of my report, I set out thegeneral standard relevant to the investigation, asderived from established principles of goodadministration and from public law principles. Ithen go on to set out the specific standard relevantto the investigation, i.e. the specific legal andadministrative framework of prudential regulation.

4.4 Having established the overall standard, I thenassess the facts in accordance with that standard.First, I assess whether an act or omission on thepart of the body complained about constituted adeparture from the applicable standard. If so, I thenassess whether that act or omission was sounreasonable, or fell so far short of acceptablestandards of good administration, as to constitutemaladministration.

The regulatory regime

4.5 The regulatory regime which developed over timeto deliver prudential regulation and whichpertained at the time relevant to this report hadfour cornerstones:

The concept of freedom with publicity;

The central place of the Appointed Actuarywithin the regulatory regime;

The protection of the reasonable expectationsof both policyholders and potentialpolicyholders; and

The criteria of sound and prudentmanagement.

4.6 Those cornerstones laid the foundations on whichwere built:

the way in which regulation was undertaken in which information provided through theregulatory returns and the role played by theAppointed Actuary in ensuring that thisinformation was so provided were given acentral place; and

the powers, duties and means conferred on theprudential regulators which gave prominenceto the protection of policyholders reasonableexpectations and ensuring the fulfilment of thestatutory criteria of sound and prudentmanagement.

4.7 The statutory framework which governedthis system of regulation had four chiefcomponent parts:

European Directives concerning life assurance;

the Insurance Companies Act 1982;

secondary legislation made under the InsuranceCompanies Act 1982; and

certain other domestic statutory provisionsrelated to the activity of insurance companies.

Section 4: The basis for my determination of the complaints


4.13 From that overview, I identified the following keylegal and administrative obligations which I use inmy consideration of the manner in which thoseregulators and/or GAD discharged their obligations.I also set out below what I would expect to haveseen if the prudential regulators and/or GAD werefulfilling these obligations.

(i) The prudential regulators were under statutoryduties, imposed by the specific regimecontained within the Insurance Companies Act1982 and the Regulations made under it:

to consider the regulatory returns with aview to ensuring that those returns werecomplete and accurate (in the sense ofthem being compliant with the applicableRegulations).

In complying with this duty, I would expectthe prudential regulators to haveconsidered the regulatory returnssubmitted by insurance companies and, ifthose returns appeared to be inaccurateor incomplete in any respect, to havecommunicated with the company with aview to the correction of any suchinaccuracies and the supply ofdeficiencies.

and to ensure that an insurance companyvalued its assets and determined itsliabilities in accordance with therequirements that were imposed on it bythe applicable Regulations.

In complying with this duty, I would expectthe prudential regulators to haveconsidered whether the way in which aninsurance company valued its assets anddetermined its liabilities as set out withinthe regulatory returns had been

4.8 The prudential regulation of insurance companiessuch as the Society was primarily undertakenthrough two mechanisms: the submission ofregulatory returns and the scrutiny of thosereturns.

4.9 Each company was required to submit annualreturns containing detailed information about thebusiness and financial strength of the company in aprescribed format. Once checked by the prudentialregulators for completeness, those returns wereplaced in the public domain at Companies House.

4.10 Scrutiny of those returns was undertaken by GADon behalf of the prudential regulators until April2001. The prime aims of this scrutiny were toensure that the company had complied with thestatutory and other obligations imposed on it, toverify the financial position of the company, and tocheck that the company was able to meet itsliabilities and to fulfil the reasonable expectationsof its policyholders and/or its potentialpolicyholders.

4.11 The prudential regulators and GAD also obtainedinformation through visits to, and meetings with,insurance companies and through informationprovided to them by such companies on an ad hocbasis. GAD also undertook industry-wide analysis,which informed their scrutiny of the returns.

The legal and administrative obligationsof the prudential regulators and GAD

4.12 Chapter 5 of Part 1 of my report, supported by therelevant detail in Part 2, provides a detailedoverview of the general and specific legal andadministrative obligations which the prudentialregulators and/or GAD had at the relevant time.


undertaken in accordance with therelevant requirements and, if it appearedthat the company had used a valuationbasis that was not compliant with thoserequirements, to have considered whetherto take action to remedy the position.

(ii) The prudential regulators were also under ageneral public law duty to give properconsideration to the use of their powers ofintervention where the circumstances had ormay have arisen which gave grounds for the useof such powers.

In complying with this duty, I would expectthe prudential regulators to haveconsidered the use of their powers in thelight of any information that theypossessed whether from the content ofthe regulatory returns, from contact withan insurance company, or from othersources which gave rise to questionsabout the solvency position of thatcompany, or about whether it was actingin line with the interests of itspolicyholders or in accordance with thereasonable expectations of thosepolicyholders, or potential policyholders,or about whether it was acting soundly orprudently.

(iii) The prudential regulators were also under ageneral public law duty to exercise theirstatutory powers in a right and proper way, inaccordance with the presumed intention of thelegislature which conferred those powers, ingood faith, reasonably, for a proper purpose,and with procedural propriety.

In complying with this duty, I would expectthe prudential regulators to have dealtappropriately with any regulatory issues

which arose in relation to any insurancecompany other than through the scrutinyprocess and to have acted in such amanner as to ensure the effectiveoperation of the regulatory regime asParliament had established it informedas that regime was by the concepts offreedom with publicity, the protection ofthe reasonable expectations ofpolicyholders and potential policyholders,and the fulfilment of the criteria of soundand prudent management.

(iv) Both the prudential regulators and GAD wereunder an obligation generally to act inaccordance with established principles of goodadministration.

In complying with this obligation, Iwould expect the prudential regulatorsand/or GAD:

to have acted in accordance withtheir general and specific legal dutiesand powers;

to have acted in accordance withtheir own published and internalpolicy and guidance;

to have taken proper account ofestablished good practice, includingprofessional practice;

to have taken reasonable decisionsbased on all relevant considerationsand ignoring irrelevant ones;

to have kept proper and appropriaterecords as evidence of their activities,including a record of the reasons fortheir decisions; and


to have provided information, whereit was appropriate to do so, whichwas clear, accurate, complete andnot misleading.


5.1 In Chapters 6, 7 and 8 of Part 1 of my report,supported by the relevant detail in Parts 3 and 4,I set out how the prudential regulation of theSociety was undertaken during the period fromwhen the Societys returns for 1990 were submittedto the prudential regulators until the end of myjurisdiction on 1 December 2001 with the cominginto force of the current regulatory regime.

5.2 As I explained in Section 4, my approach todetermining complaints of maladministrationleading to injustice is to assess the facts against theoverall standard that I have established is relevantto the investigation.

5.3 First, I assess whether an act or omission by thebody complained about constitutes a departurefrom the applicable standard. These are myfindings of fact.

5.4 My review of all the evidence, submissions andother material and my application of the overallstandard to that evidence have led me to make tenprincipal findings of fact.

My first finding of fact

5.5 The role of the Appointed Actuary was, at thetime relevant to this report, a central componentof the system of prudential regulation ofinsurance companies.

5.6 Given this regulatory role, which was onecornerstone of the system of prudential regulationin the United Kingdom, an Appointed Actuaryneeded to ensure that he or she had sufficientindependence from the executive management ofa life insurance company to enable him or her toundertake effectively the responsibilities (to thecompany, to its policyholders, and to theprudential regulators and GAD) that were

conferred on the Appointed Actuary and to enablehim or her to do so in line with the intention ofParliament when it had created the role in 1973.

5.7 If an Appointed Actuary was unable to secure orretain the necessary degree of operationalindependence, this would raise serious questionsabout the ability of the Appointed Actuary inthose circumstances to perform the regulatoryfunctions conferred on him or her.

5.8 My first finding of fact is that, in June 1991, theprudential regulators approved, when they shouldnot have done, the appointment of a new ChiefExecutive without insisting that he should demitoffice as the Societys Appointed Actuary andwithout applying subsequently a closer degree ofscrutiny of the Societys affairs.

5.9 Furthermore, for the next six years, thoseregulators failed to consider the use of theirpowers to seek the removal of that person from hisdual role, despite the assurance that had beengiven at the time of his appointment that he wouldhold such a dual role for 18 months only. Yet thedual role existed from 1 July 1991 to 31 July 1997.

5.10 After having considered the representations I hadreceived, I concluded that the way in which theDTI, as prudential regulators, handled the creationand continued existence of the dual role fell shortof the standard that could reasonably be expectedof such regulators.

My second finding of fact

5.11 Each year, the Society, like every other insurancecompany, was required to submit annual returns tothe prudential regulators. Those returns set out aconsiderable amount of detail about the businessof the Society, about its liabilities, about the assets

Section 5: Findings of fact


the affordability and sustainability of thebonuses previously declared by the Society,which appeared to raise the expectations ofthe Societys policyholders which might notbe met.

5.16 On the information before GAD, the Societysapproach to discounting meant that a significantamount of any future surplus would be requiredsimply to fund current guaranteed benefits.

5.17 This occurred in a situation in which GAD knewthat the Society had informed its policyholdersthat, subject to smoothing, the additional returnsthey would receive by way of future bonusdeclarations would reflect the future investmentperformance of the with-profits fund.

5.18 In addition, serious questions arose from theinformation within the returns about whether theSociety could afford the level of bonus it waspaying and whether it could continue to pay out atthat level. This occurred in a situation in which, asGAD knew, the Society was unique in illustrating toits policyholders the full policy fund value,including terminal bonus.

5.19 From the information before GAD, it was not clearhow the Society could fund guaranteed futurebonuses (applying the guaranteed investmentreturn) or manage to pay future discretionarybonuses, in line with the reasonable expectationsof the Societys policyholders that such bonuseswould continue to be paid.

5.20 Despite those questions, raising issues concerningthe prudence of the Societys approach andwhether the Society would be able to fulfil thereasonable expectations of its policyholders, noaction was taken by GAD to seek to resolve thosequestions or to raise them with the prudentialregulators.

covering those liabilities, and about the solvencyposition of the Society.

5.12 As I have noted, the submission and scrutiny ofthose returns were the two prime mechanisms ofprudential regulation during the period covered bythis report.

5.13 The Societys returns for the years 1990 to 1993raised certain issues about the approach that theSociety was adopting to its business, which thescrutiny process was designed to highlight in orderto enable the prudential regulators, acting withadvice and assistance from GAD, to ascertainwhether there was any need to raise and pursuethose issues.

5.14 My second finding of fact is that, with regard tothe scrutiny of the Societys annual regulatoryreturns for the year ends for 1990 to 1993, GAD, inproviding advice to the prudential regulators, failedto satisfy themselves that the way in which theSociety had determined its liabilities and hadsought to demonstrate that it had sufficient assetsto cover those liabilities accorded with therequirements of the applicable Regulations.

5.15 Accordingly, those regulators were unable to verifythe solvency position of the Society as they wereunder a duty to do. The aspects in respect of whichthe Societys returns for these years raisedquestions which should have been identified,pursued and resolved were:

the valuation rate of interest used to discountthe liabilities, which appeared to be imprudentand/or impermissible (discounting liabilitieswell below the guaranteed face value ofpolicies); and


5.21 After having considered the representations I hadreceived, I concluded that the failures by GAD, aspart of the scrutiny process, to raise and seek toresolve questions within the Societys regulatoryreturns for each year from 1990 to 1993, related to(i) the valuation rate of interest used to discountthe Societys liabilities and (ii) to the affordabilityand sustainability of the Societys bonusdeclarations, fell short of what could reasonably beexpected of GAD.

My third finding of fact

5.22 As is well known, the Society wrote policiescontaining guaranteed annuity rates. Those policiesguaranteed the rate at which the proceeds availableat retirement (based on the sum assured plusassociated bonuses) would be converted to apension and thus the minimum amount ofpension available at retirement.

5.23 The Society stopped providing guaranteed annuityrates on new policies from June 1988, although newmembers of some existing group schemescontinued to be provided with policies containingguaranteed annuity rates until the early 1990s.

5.24 The Societys guaranteed annuity rates continuedto apply to the benefits that would be purchasedby any future premiums (including in relation torecurrent single premium policies) that might bepaid in respect of policies which already enjoyedthis guarantee.

5.25 Those guaranteed annuity rates were both moreflexible, in that they applied over a wide range ofages without penalty, and potentially morewidespread than was the case with similarguarantees provided by other companies. Inaddition, policyholders could pay future premiumpayments and still benefit from the same

guaranteed annuity rate at the same range of ages.

5.26 No new fund was established by the Society at thetime of the changes it made to exclude guaranteedannuity rates and, subsequently, guaranteedinvestment returns from the policies it wrote. Thusthe assets held in respect of the different classes ofpolicy thereby created were held in one fund.

5.27 Nor was there a separate bonus series declared orany differentiation in treatment between thevarious classes of with-profits policyholders interms of the level of bonuses declared by theSociety, despite the changes in policy terms andthe associated guarantees that had occurred.

5.28 In late 1993 and early 1994 and continuously fromApril 1995 onwards, the Societys guaranteedannuity rates became generally more favourablethan then current annuity rates, due to loweringinterest rates and improved mortality. This meantthat the cost of providing the guaranteed annuitybenefit exceeded the total policy fund, which wasonly sufficient to provide the lower benefitavailable at the current annuity rate.

5.29 In order to deal with this situation, the Societyintroduced what came to be known as thedifferential terminal bonus policy, by restricting thevalue of benefit paid to the amount of the totalpolicy fund.

5.30 The Society said that this was done to enable it tocontinue to reflect the Societys philosophy of fulland fair distribution to all its policyholders in itsbonus policy and to pay each policyholder justtheir share of the fund.

5.31 Under the Societys differential terminal bonuspolicy, the amount of final bonus payable when apolicyholder took benefits would be dependent onthe form in which those benefits were taken and


My fourth finding of fact

5.36 As noted above, the Society submitted annualreturns to the prudential regulators. Further issuesarose in respect of the Societys returns for 1994 to1996.

5.37 My fourth finding of fact is that, in carrying outthe scrutiny of the Societys annual regulatoryreturns for each year from 1994 to 1996, GAD, inproviding advice to the prudential regulators, failedto satisfy themselves that the way in which theSociety had determined its liabilities and hadsought to demonstrate that it had sufficient assetsto cover those liabilities accorded with therequirements of the applicable Regulations. Thoseregulators were thus unable to verify the solvencyposition of the Society.

5.38 The matters arising from the Societys returnswhich GAD failed to address and resolve to asatisfactory conclusion were:

the continuation of the two issues which hadarisen within the returns for 1990 to 1993(questions concerning discounting through theuse of imprudent and/or impermissiblevaluation interest rates and the affordabilityand sustainability of the Societys bonusdeclarations);

what appeared to be arbitrary changes to theassumed retirement age for personal pensionpolicies, contrary to European Directives andthe applicable domestic Regulations;

the absence of explicit reserves for prospectiveliabilities for capital gains tax and for pensionsreview mis-selling costs, stating instead thatsuch liabilities were covered by implicit marginsin the valuation basis; and

so, if the guaranteed annuity benefit was selected,the amount of the final bonus was reduced.

5.32 My third finding of fact is that GAD identified theintroduction of a differential terminal bonus policywhen scrutinising the Societys 1993 returns inOctober 1994, but failed to inform the prudentialregulators, as GAD should have done, of thatintroduction or to raise the matter with theSociety.

5.33 This failure by GAD to raise the matter occurreddespite there having been full disclosure by theSociety within its 1990 returns of the extent andlevel of the guaranteed annuity rates within itsolder policies and despite the Society referring tosuch guarantees when it disclosed the introductionof the differential terminal bonus policy in its 1993returns. GAD also noted that this policy had theeffect of reducing the final bonus payable topolicyholders.

5.34 That failure also occurred despite GAD knowing, orhaving information before them which suggested,both that the Society had told its policyholdersthat the Society would only change bonus policygradually and also that the Societys With-ProfitsGuides did not (at that time) inform itspolicyholders of the differential terminal bonuspolicy.

5.35 After having considered the representations I hadreceived, I concluded that the failures by GAD,when they identified the introduction of theSocietys differential terminal bonus policy as partof their scrutiny of the 1993 returns, (i) to informthe prudential regulators about the policy, (ii) toraise the matter with the Society, or (iii) to seek toidentify what the rationale was for the introductionof the policy and how it was being communicatedto policyholders, fell short of the standard thatcould reasonably be expected of GAD.


the absence of reserves in respect ofguaranteed annuity rates, which by then GADshould have known were biting and shouldtherefore have been provided for.

5.39 GAD failed to identify all of those matters, topursue them with the Society, or to seek to resolvethe issues that they raised.

5.40After having considered the representations I hadreceived, I concluded that the failure by GAD, as partof the scrutiny process, to question and seek toresolve questions within the Societys regulatoryreturns for each year from 1994 to 1996, related to(i) the valuation rate of interest, (ii) the affordabilityand sustainability of bonus declarations, (iii)apparently arbitrary changes to the assumedretirement ages, and (iv) the holding of no explicitreserves for the liabilities associated with prospectiveliabilities for capital gains tax, for pensions mis-sellingcosts, and for guaranteed annuity rates, fell short ofwhat could reasonably be expected of GAD.

My fifth finding of fact

5.41 Most insurance companies used the valuationmethod and basis set out in the applicableRegulations to calculate their MathematicalReserves.

5.42 However, throughout the period covered by thisreport, insurance companies were entitled to usean approach which differed from the statutoryminimum basis, so long as the alternative methodthat was used produced Mathematical Reservesthat were at least as high as that which would havebeen produced using the statutory minimum basis.

5.43 During the period covered by this report, theSociety always used an alternative valuationmethod within its returns.

5.44 In order to seek to demonstrate compliance withthe Regulations, the Society set out informationabout the amount of its Mathematical Reservesusing a basis that its Appointed Actuary consideredwas compatible with the method set out in theRegulations. This was done in an appendix at theend of Schedule 4 of the Societys returns.

5.45 My fifth finding of fact is that GAD failed incertain respects to act, when they should haveacted, to question the Societys practice ofproducing two valuations within the regulatoryreturns but omitting crucial information from oneof those valuations. After 1996, the Societycontinued to produce two valuations but publishedthe missing information.

5.46 That information was the amount of the resiliencereserves required in the Societys appendixvaluation, produced to demonstrate compliancewith the Regulations. That omission meant that theSociety appeared financially stronger than it wasand that its solvency position was capable of beingmisconstrued.

5.47 While GAD asked the Society for the missinginformation in all but one year, GAD did not takesteps to ensure that a reader of the returns hadthat information.

5.48 Even though the Society was not in breach of anyof the applicable Regulations by presenting itsvaluations in the way that the Society did, GADrecognised at the time that this position meantthat the Societys returns, which were the mainmechanism through which freedom with publicitywas delivered, might mislead those who read them.

5.49Although the Society was permitted to produce analternative valuation from that specified in theapplicable Regulations, it was required, by thoseRegulations, to demonstrate that its chosen


misconstruing the financial strength of theSociety, fell short of what it was reasonable toexpect from GAD.

My sixth finding of fact

5.55 During 1998, the prudential regulators and GADbecame aware that the Society had not madeprovision for the liabilities arising from guaranteedannuity rates contained within certain of itspolicies and those regulators required that theSociety should do so within its 1998 returns.

5.56 That requirement had led to an immediate increaseof 1,600 million in the amount of reserves requiredto be shown as at 31 December 1998, as well asadditional associated resilience reserves. As a result,the Society investigated means whereby thoseadditional liabilities could be offset in order notto disclose a much weaker financial position inthose returns.

5.57 Had such offsetting action not been taken, the1998 regulatory returns would have shown such aweak financial position that the Societys future asan independent mutual would have beenthreatened and its continued ability to write newbusiness and declare bonuses would have beenin doubt.

5.58 The prudential regulators told the Society inDecember 1998 that they would take action if theyconsidered that the 1998 bonus declaration madeby the Society was imprudent. The Societytherefore needed to take urgent action toeither raise capital or to reduce itsMathematical Reserves.

5.59 The Society did this through a financialreinsurance arrangement. Within its publishedreturns for 1998, 1999, and 2000, the Society took

alternative valuation was at least as strong as thatspecified in those Regulations.

5.50 GAD considered that such demonstration wasprovided through the provision by the Society toGAD but not through the returns of theamount of the reserves omitted from the Societysalternative valuation. However, GAD failed to askfor this information in November 1996 whenconducting their scrutiny of the Societys 1995returns. GAD were therefore unable to verifywhether those returns had complied with theapplicable Regulations.

5.51 In addition, from November 1993 onwards GAD hadpossessed information, in the form of ratings of theSociety produced by Standard & Poors an expertratings agency, which showed that the position wasnot only capable of being misconstrued but alsothat it was being misconstrued.

5.52 Standard & Poors erroneously concluded that theSociety was stronger than it really was. This was as adirect result of the information which GAD knewwas missing from the returns. Those ratings werealso provided to GAD by the Society and retainedon GADs files and were used by the prudentialregulators as part of briefing for Ministers and inother ways.

5.53 GAD took no action to raise or to seek to resolvethese issues.

5.54 After having considered the representations I hadreceived, I concluded that the failures by GAD (i) toask for the information they needed in respect ofthe Societys 1995 returns to enable them to besure that the Society had produced a valuation thatwas at least as strong as the minimum required bythe applicable Regulations, and (ii) to pursue theinformation before them that the omittedinformation had led to the users of the returns


credit for the arrangement that it had enteredinto with IRECO.

5.60The amount of the credit taken for those yearswas, respectively, 809 million, 1,098 million, and808 million. The Societys Mathematical Reserveswere reduced by more than those amounts,however, as the resilience reserves it was requiredto hold were also reduced. The prudentialregulators permitted those credits to be taken.

5.61 The Societys published returns for 1998 showedthat it had excess available assets and implicit itemsof 1,516 million over the required minimum margin,the returns for 1999 showed the excess asset figureas 2,747 million, and those for 2000 showed afigure of 411 million.

5.62 My sixth finding of fact is that the FSA permittedthe Society, when they should not have done so, totake credit within its 1998 returns, which weresubmitted on 30 March 1999 and which wereavailable to the public by 1 May 1999, for a financialreinsurance arrangement which had not beenconcluded either at the valuation date or at thedate that those returns were submitted. This wasdone without an appropriate reporting concessionbeing given.

5.63 Moreover, even leaving that aside, the FSApermitted the Society within its returns for 1998,1999, and 2000 to take credit for the financialreinsurance arrangement that did not reflect theeconomic substance of that arrangement.

5.64This was despite the fact that GAD had identifiedthe potential problems with the proposed financialreinsurance arrangement and had informed the FSAof those problems, recognising that thisarrangement had little or no value for thepurposes of the determination of the Societyssolvency position.

5.65 After having considered the representations I hadreceived, I concluded that the failure by the FSA,acting on behalf of the prudential regulators, to(i) ensure that the financial reinsurancearrangement was not taken into account within theSocietys 1998 returns without an appropriateconcession being given, and (ii) ensure that thecredit taken by the Society within its returns for1998, 1999, and 2000 properly reflected theeconomic substance of that arrangement, fell shortof the standard that could reasonably be expectedof such regulators.

My seventh finding of fact

5.66As is well known, the Society sought clarity as tothe validity of its differential terminal bonus policythrough seeking the view of the Courts. While thatlitigation was proceeding through the Courts, theSociety and the prudential regulators undertook scenario planning to consider the likelyimpact of a range of possible outcomes to thatlitigation.

5.67 Consideration was given to what those scenarioswould mean for the financial position of theSociety and for its freedom to maintain thepolicies it had adopted to manage its affairs, andwhat other consequences the possible outcomesof the Hyman case could have for the Society andits members.

5.68 Even assuming that the financial reinsurancearrangement which the Society had entered into,and for which it proposed to take a substantialoffset within its 1998 regulatory returns, entitledthe Society so to do, the continuation of thatarrangement was contingent on the Society beingable to continue to apply its differential terminalbonus policy. Yet that ability was precisely the issueat stake in the Hyman proceedings.


5.73 After having considered the representations I hadreceived, I concluded that the failure of the FSA,acting on behalf of the prudential regulators, topursue the issue of the proper disclosure, withinthe Societys regulatory returns for 1998 and 1999,of the potential impact on the Society of it losingthe Hyman litigation fell short of the standard thatcould reasonably be expected of such regulators.

My eighth and ninth findings of fact

5.74 Following the decision of the House of Lords in theHyman case, the Society had been faced with anextremely serious situation. That decision hadprofound effects.

5.75 The financial reinsurance arrangement that theSociety had entered into was, as a result of theending of the Societys differential terminal bonuspolicy, to lapse. Without the credit that had beentaken for that arrangement, a serious questionarose as to whether the Society could or wouldcontinue to meet its required solvency margin.

5.76 The Society was immediately faced with a significantreduction in what the Society regarded as the assetsavailable to meet the costs in respect of thosepolicyholders who chose to take benefits calculatedwith regard to guaranteed annuity rates. Those costshad to be shared, almost certainly by benefitreductions, across all policyholders as any ring-fencing of policyholders with annuity guaranteeshad been declared unlawful by the House of Lords.

5.77 This gave rise to inbuilt conflicts between theinterests of different classes of policyholders that,in the circumstances facing the Society at the time,could not be resolved using the normalmechanisms available to life insurance companiesand which meant that the Societys situation wasinherently unstable.

5.69 Furthermore, if the Society were found not to havebeen able to apply its differential terminal bonuspolicy, the question would arise as to how toremedy the position of those policyholders withpolicies which contained guaranteed annuity rateswho had retired since 1 January 1994, but who hadnot been provided with the option of takingbenefits without the reduction in terminal bonusapplied under the Societys differential terminalbonus policy. The question of compensating suchpolicyholders would thus arise if the Society lostthe Hyman case.

5.70 My seventh finding of fact is that the FSA failed topursue the failure by the Society to includecontingent liability notes within its regulatoryreturns for 1998 and 1999 regarding the potentialimpact of losing the Hyman litigation. This failureto check why the Society had not included anysuch disclosure in those returns occurred despitethe reminders by the prudential regulators that theSociety should do so, reminders given prior to thesubmission of the Societys 1998 returns.

5.71 No action was taken to seek to ensure that theSociety had a sound basis for not publiclydisclosing the fact that the outcome of thelitigation could have profound effects, including forthe operation of its differential terminal bonuspolicy (and hence its reserving practices) effectswhich would have a significant impact on thesolvency position of the Society and on theamount of money available to meet the liabilities ithad to its policyholders and the future bonusexpectations of those policyholders.

5.72 This failure by the FSA to act also occurred inrelation to the Societys 1999 returns in a context inwhich the FSA knew that the Society had informedits policyholders that no significant costs would beimposed on the Society if it lost the Hyman case.


5.78 In that context, the Society decided to put itselfup for sale. The question arose as to what theregulatory response to that decision should be. TheFSA decided not to intervene to require theSociety to close to new business whilst it sought abuyer.

5.79 I make two findings of fact concerning the decisionto permit the Society to remain open to newbusiness following the decision of the House ofLords in the Hyman case.

5.80My eighth finding of fact is that the FSA failed torecord that decision. No contemporaneous recordwas made of that decision or of the factors andevidence which were taken into account by theFSA when they took it, or what alternative options,if any, the FSA had considered. That decision washighly significant for the interests both of existingand potential policyholders.

5.81 My ninth finding of fact is that, having establishedfrom those involved the basis on which the FSAtook that decision, the decision to permit theSociety to remain open at that time was notgrounded in a sound factual or legal basis.

5.82 Relevant considerations such as the nature of theSocietys business, which meant that it was not justnew policyholders who were potentially affectedby the decision were not taken into account. Noproper consideration was given to the use of thefull range of powers that the prudential regulatorspossessed.

5.83 After having considered the representations I hadreceived, I concluded that the failure by the FSA,acting on behalf of the prudential regulators, torecord their decision to permit the Society toremain open to new business, following its loss ofthe Hyman litigation fell short of the standard thatcould reasonably be expected of such regulators.

5.84 I also concluded that the basis on which thedecision was taken by the FSA, acting on behalf ofthe prudential regulators, to permit the Society toremain open to new business was unsound, nottaking into account all relevant considerations andnot having a proper legal and factual basis and thatthis fell short of the standard that could reasonablybe expected of such regulators.

My tenth finding of fact

5.85 In the period between the Societys closure to newbusiness on 8 December 2000 and the end of myjurisdiction in relation to relevant events on1 December 2001, the FSA, acting on behalf of theTreasury as the prudential regulators of insurancecompanies, were contacted by many hundreds ofthe Societys policyholders who were concernedabout the position that the Society was in andabout their own future options.

5.86The FSA during this period also issued generalinformation relating to the Society throughupdates, website material, and factsheets.

5.87 As the Society prepared proposals for a schemeof arrangement under the Companies Act 1985, tocompromise the competing claims of theSocietys policyholders, the FSA were alsocontacted by policyholders about the Societysproposals and about the attitude of the FSA tothose proposals.

5.88My final finding of fact is that the informationprovided by the FSA in the post-closure period wasmisleading and unbalanced, with assurances beingprovided that the Society was solvent, when thatwas in considerable doubt and was not the viewthat was always held within the FSA, who, on behalfof the prudential regulators, had exercised formalintervention powers on the grounds that the


Society was likely to be in breach of its regulatorysolvency requirements.

5.89Nor were the assurances given by the FSA that theSociety was at that time fulfilling and always hadfulfilled all of its other regulatory requirementsappropriate, when the FSA knew that this was notthe case.

5.90 After having considered the representations I hadreceived, I concluded that the misleadinginformation, about the Societys solvency positionand its record of compliance with other regulatoryrequirements, that was produced by the FSA, actingon behalf of the prudential regulators, during theperiod after the Society closed to new business fellshort of the standard that could reasonably beexpected of such regulators.


6.1 In section 5, I set out the ten findings I have madethat the acts or omissions of the prudentialregulators and/or GAD fell short of the standardthat could reasonably be expected of them.

6.2 Having done so, I then go on to assess whetherthose acts or omissions were so unreasonable, orfell so far short of acceptable standards of goodadministration, as to constitute maladministration.The assessments that I have made on thesequestions are set out in Chapter 11 of Part 1 of myreport.

6.3 I have made ten determinations ofmaladministration one against the DTI, fouragainst GAD, and five against the FSA. I have doneso because I am satisfied that the departures thateach finding represent were unreasonable in thecircumstances and/or fell far short of acceptablestandards of good administration.

6.4 Those determinations are:

that the failures (i) to insist, when approving theappointment in June 1991 of a new ChiefExecutive, that he should demit office as theSocietys Appointed Actuary, and (ii) during theperiod from 1 July 1991 to 31 July 1997, toconsider the use of their powers to seek toremove that person from such a dual roleconstitutes maladministration by the DTI;

that the failure, as part of the scrutiny process,to question and seek to resolve questionswithin the Societys regulatory returns for eachyear from 1990 to 1993, related to (i) thevaluation rate of interest used to discount theSocietys liabilities and (ii) to the affordabilityand sustainability of the Societys bonusdeclarations, constitutes maladministration byGAD;

that the failures, when the introduction of theSocietys differential terminal bonus policy wasidentified as part of the scrutiny of the 1993returns, (i) to inform the prudential regulatorsabout the policy, (ii) to raise the matter withthe Society, or (iii) to seek to identify what therationale was for the introduction of the policyand how it was being communicated topolicyholders, constitutes maladministration byGAD;

that the failure, as part of the scrutiny process,to question and seek to resolve questionswithin the Societys regulatory returns for eachyear from 1994 to 1996, related to (i) thevaluation rate of interest, (ii) the affordabilityand sustainability of bonus declarations, (iii)apparently arbitrary changes to the assumedretirement ages, and (iv) the holding of noexplicit reserves for the liabilities associatedwith prospective liabilities for capital gains tax,for pensions mis-selling costs, and forguaranteed annuity rates, constitutesmaladministration by GAD;

that the failures (i) to ask for the informationGAD needed in respect of the Societys 1995returns to enable them, as part of the scrutinyprocess, to be sure that the Society hadproduced a valuation that was at least as strongas the minimum required by the applicableRegulations, and (ii) to pursue the informationbefore them that the omitted information hadled to the users of the returns misconstruingthe financial strength of the Societyconstitutes maladministration by GAD;

that the failures (i) to ensure that the financialreinsurance arrangement was not taken intoaccount within the Societys 1998 returnswithout an appropriate concession being given,and (ii) to ensure that the credit taken by the

Section 6: Determinations of maladministration


Society within its returns for 1998, 1999, and2000 properly reflected the economicsubstance of that arrangement constitutesmaladministration by the FSA;

that the failure to pursue the issue of theproper disclosure, within the Societysregulatory returns for 1998 and 1999, of thepotential impact on the Society of it losing theHyman litigation constitutes maladministrationby the FSA;

that the failure to record their decision topermit the Society to remain open to newbusiness, following its loss of the Hymanlitigation constitutes maladministration by theFSA;

that the unsound basis on which the decisionwas taken to permit the Society to remainopen to new business, following its loss of theHyman litigation constitutes maladministrationby the FSA; and

that the misleading information, about theSocietys solvency position and its record ofcompliance with other regulatoryrequirements, that they produced during theperiod after the Society closed to new businessconstitutes maladministration by the FSA.


7.1 When determining in general terms whether or notany maladministration which I have found to haveoccurred has resulted in injustice to those whohave complained to me, I first identify what werethe consequences of that maladministration andthen I assess whether those consequencesconstitute an injustice for which no or no sufficientremedy has been provided.

7.2 The consequences of my first finding ofmaladministration, related to the dual role were,first, that the prudential regulators and GADbecame overly reliant on the information providedby one person within the Society through hiscompletion of the returns and through themeetings that those regulators and GAD often hadwith only that person. The Society was also notprompted and/or invited by the prudentialregulators to address the unsatisfactory nature ofthe dual role.

7.3 A further and important consequence of thisfailure was that the system of prudential regulation,designed on the basis that the Appointed Actuary(with operational independence from the executivemanagement of a life insurance company) wouldplay a central role, operated in a dysfunctionalmanner during this period in respect of the Society.

7.4 The maladministration which I have found to haveoccurred resulted in the effective operation of thesystem of prudential regulation in respect of theSociety, and the governance of the Society,becoming compromised. There was effectively nowhistle-blower during this period within theSociety, to the detriment of the proper governanceof the Society and of the prudential regulation ofthe Society.

7.5 The consequences of my second finding ofmaladministration, related to the scrutiny of theSocietys regulatory returns for each year from

1990 to 1993 were, first, that the prudentialregulators and GAD could not be satisfied that theSociety was acting prudently and with properregard to the reasonable expectations of itspolicyholders. Another consequence of this failureis that the Society was never asked to justifywhether it could afford its bonus declarations orhow it proposed to sustain the level of bonus thatit declared.

7.6 A further consequence was that the impression wasgiven to existing and potential policyholders thatthe Society was financially sound and able to paygenerous bonuses, when the prudential regulatorsand GAD could not have been sure that either wasthe case.

7.7 The maladministration which I have found to haveoccurred led to lost opportunities to seek furtherunderstanding as to whether the Societys businessmodel was inherently prudent or whether thatmodel exposed the Societys members tounnecessary risks.

7.8 The consequences of my third finding ofmaladministration, related to the intimation of theSocietys differential terminal bonus policy were,first, that the prudential regulators were disabledfrom discharging their duties.

7.9 Another consequence of that failure was that theSociety was not asked by the prudential regulatorsand/or GAD to justify its approach in the light ofthe reasonable expectations of its existingpolicyholders and/or of the contents of itsadvertising, which did not draw to the attention ofpotential policyholders (or existing policyholders,especially those considering making furthercontributions to policies which did not containguaranteed annuity rates) that such a policyexisted.

Section 7: Determinations of injustice


lost to address the issue of the Societys practice asto reserving for guaranteed annuity rates. Anotherconsequence was that the Societys liabilities wereconsiderably understated.

7.15 The maladministration which I have found to haveoccurred reinforced that which I have found inrelation to the introduction of the differentialterminal bonus policy, in that the problems whichcaused the Society eventually to close to newbusiness were further obscured and opportunitieswere lost to address those issues earlier.

7.16 The consequences of my fifth finding ofmaladministration, related to the presentation ofthe Societys two valuation results were, first, thatthose reading the Societys returns during thisperiod were capable of being misled as to thestrength of the Societys true financial position.

7.17 Another consequence was that those who usedthe information and conclusions drawn from thereturns by rating agencies and other third parties including financial advisers, industrypublications, and those briefing Ministers wereenabled to rely on information that did notcontain a complete and accurate assessment ofthe Societys true position. They were thusactively misled.

7.18 A further consequence was that GAD were unable,with respect to the Societys 1995 returns, to verifythe financial position of the Society, as they werenot able on that occasion reasonably to besatisfied that the Societys chosen valuationmethod had produced a result at least as strong asthe minimum prescribed in the Regulations as theylacked the information needed to be so satisfied.

7.19 The maladministration which I have found to haveoccurred resulted in the reader of the returns nothaving the information that was before GAD and

7.10 A further consequence of this failure was that theSociety took its decisions, such as not to considerring-fencing new entrants into a different fund,rejecting certain approaches that it received fromthose interested in acquiring the Societys business,and/or as to the validity of its general practices, in acontext in which the Society could reasonablybelieve that it had secured regulatory approval albeit tacit approval for its new bonus policy andassociated practices.

7.11 The maladministration I have found to haveoccurred resulted in the loss of a number of criticalopportunities. Such opportunities included thoseto test the appropriateness of the differentialterminal bonus policy and to ensure that theillustrations and advertisements provided toexisting and potential policyholders explained theSocietys policy and practice.

7.12 Opportunities were also lost to take decisionsabout the future direction of the Society in fullknowledge of the reserving requirements to whichit was subject and to which the prudentialregulators and GAD would eventually drawattention. The Society lost the option to makeprovision gradually over time for the costs arisingeach year from those requirements as those costsaccumulated.

7.13 The maladministration which I have found alsoresulted in the problems which caused the Societyeventually to close to new business being obscureduntil July 1998 and to the loss of opportunities forthe Society and for the prudential regulatorsand/or GAD to begin to address those issues muchearlier than they all eventually did.

7.14 The consequences of my fourth finding ofmaladministration, related to scrutiny of theSocietys regulatory returns for each year from 1994to 1996 were, first, that an early opportunity was


which, arguably, should have been available to allreaders of the Societys published returns.

7.20 No action was taken when it was clear that thosereaders were misconstruing the information thatwas provided. Maladministration also resulted inthose who expressed concerns about the Societyssolvency being reassured on grounds which werenot sustainable.

7.21 The consequences of my sixth finding ofmaladministration, related to financial reinsurancewere, first, that the Society was permitted todeclare a bonus in March 1999. Had the Society notdone so, a warning would have been given to thoseconsidering investing in the Society for the firsttime or to those considering making furthercontributions to existing policies that the Societywas in significant financial difficulty.

7.22 Another consequence of those acts and omissionswas that the solvency position of the Society, aspublished by 1 May 1999 within its 1998 returns, wasmisrepresented. Those reading the Societyspublished 1998 returns would have been misled asto the strength of the Societys financial position.That reinforced the misleading message of thestrength of the financial position of the Societywhich had been given by the declaration of a bonusa month earlier.

7.23 A further consequence of the acts and omissionsof the prudential regulators and GAD was that theongoing weakness of the Societys financialposition was hidden from public view in theSocietys published returns for 1999 and 2000.Those considering their options whether toinvest, to make further contributions to existingpolicies, to convert a policy into an annuity, orsimply to stay were given a wholly misleadingpicture of the true position faced by theSociety and of its solvency position due to the

unreasonable credit taken for the reinsurancearrangement.

7.24 The maladministration which I have found to haveoccurred resulted in the true financial position ofthe Society being concealed and misrepresentedthrough the publication of returns whichcontained a misleading picture of the Societyssolvency position.

7.25 That maladministration also resulted in existing andpotential policyholders making highly importantdecisions some of which were irreversible about their financial affairs without the benefit ofinformation which the system of prudentialregulation was designed to provide to them, inorder to enable them to make informed choices.

7.26 The consequences of my seventh finding ofmaladministration, related to the potential impactof the Hyman litigation on the Society were, first,that the prudential regulators and GAD could notbe certain that the Societys policyholders andthose potential policyholders considering investingor continuing to invest in the Society were beinggiven complete and accurate information aboutwhat were the extent and nature of the possibleeffects should the House of Lords deliver ajudgment that was adverse to the Society.

7.27 Existing and potential policyholders were thusdenied information about their potential exposureto significant risk, which was an integral partof informed decision-making as to theirfinancial options.

7.28 Another consequence of those acts and omissionswas that the Society and the prudential regulatorsand GAD lost an opportunity to consider, eitherseparately or together, whether the scenario planningand other work they had undertaken as preparationfor managing the possible outcomes of the Hyman


or suspension of the Societys authorisation towrite new business been taken or who boughtannuities, or who made further contributions toexisting policies where there was no contractualrequirement to do so, made those decisions in anenvironment in which accurate and completeinformation about the financial position of theSociety was not available to them.

7.34 No warning had been given by the prudentialregulators, as would have been provided by theexercise of intervention powers such as thewithdrawal of authorisation, of the seriousness ofthe financial position that the Society was in.

7.35 A further consequence of this failure was thatcompensation for mis-selling, if any wereprovided, became an additional liability falling tobe met by those existing policyholders.

7.36 The maladministration which I have found to haveoccurred resulted in those late joiners andcertain other existing policyholders makingdecisions about their financial affairs without theaccurate and complete information necessary tomake those decisions on an informed basis.

7.37 The consequence of my final finding ofmaladministration, related to the informationprovided by the FSA after closure was thatreassurance was given to those who contacted theFSA to enquire about the financial position of theSociety when that reassurance was not soundlybased. Those who had regard to the informationprovided by the FSA made decisions about theirfinancial affairs having regard to the incompleteand inaccurate information that was provided.

7.38 The maladministration which I have found to haveoccurred resulted in misleading information aboutthe position of the Society being provided toexisting policyholders, in a situation in which

litigation was sufficient to address the full range offactors which had exposed the Society to the rangeof problems which it faced during that period.

7.29 The maladministration which I have found to haveoccurred meant that the prudential regulatorscould not have been certain that the reality that anadverse judgment would crystallise for the Societywas not being distorted.

7.30 Any such distorted reality might inform thepublished returns and the other publications thatthe Society produced during that period. Theprudential regulators could not have been surethat existing and potential policyholders hadthe full information necessary to takeinformed decisions.

7.31 The consequence of my eighth finding ofmaladministration, related to the failure to recordthe decision to permit the Society to remain opento new business was that no proper andcontemporaneous record exists as to the basis forthat decision. The maladministration which I havefound resulted in an absence of documentaryevidence to support the basis for an importantdecision taken by the FSA.

7.32 The consequences of my ninth finding ofmaladministration, related to the basis on whichthe decision was taken to permit the Society toremain open to new business were, first, thatpolicyholders lost any opportunity to receive thebenefit of the sound and robust exercise of thediscretionary powers that Parliament hadconferred on the prudential regulators in order toprotect the interests of such policyholders.

7.33 Another consequence of this failure was thatthose who invested for the first time during thisperiod which could not have occurred hadcertain intervention action such as the withdrawal


those policyholders were entitled to have regardto that information because of its source.

7.39 All of the above specific consequences of thedeterminations of maladministration that I havemade also had three general consequences:

that the Societys published returnswere unreliable;

that there were lost opportunities to addresscritical issues earlier; and

that regulatory decisions were taken on abasis which had insufficient regard to therange of powers that the prudentialregulators possessed.

7.40 I considered whether the consequences whichI have determined flowed from themaladministration I have found to have occurredconstitute injustice to those who have complainedto me. Having done so, I make five findings ofinjustice, being:

first, financial loss, where that has occurred,and/or lost opportunities to take informeddecisions as a result of reliance on theinformation contained in the Societys returnsfor 1990 to 1996;

secondly, the loss of opportunities in theperiod between July 1991 and April 1999 to takeinformed decisions in full knowledge of theexposure of the Society to guaranteedannuity rates and of the risks that suchexposure generated;

thirdly, financial loss, where that has occurred,to anyone who joined the Society or who paida further premium that was not contractually

required in the period after 1 May 1999 and/orlost opportunities to take those decisions onan informed basis;

fourthly, financial loss, where that hasoccurred, and/or the loss of opportunities totake informed decisions to those individualswho can show, having regard to their particularcircumstances, that they relied on deficientinformation provided by the FSA in the post-closure period, that such reliance wasreasonable in the circumstances, and that it ledto any such losses; and

finally, a justifiable sense of outrage on the partof all those who complained to me at thefailings of those operating the regulatorysystem during the period prior to the Societysclosure to new business.


8.1 Chapter 13 of Part 1 of my report sets out mydisposal of each of the eighteen specific heads ofcomplaint, and the general complaint, referred to inSection 4 above and detailed in Annex A.

8.2 I uphold the general complaint that the prudentialregulators and GAD failed properly to exercise theirregulatory functions in respect of the Societyduring the period prior to 8 December 2000. I donot uphold it for the period from 8 December2000 to 1 December 2001.

8.3 Annex B shows how I have disposed of theeighteen specific heads of complaint.

Section 8: Disposal of the complaints


9.1 My approach to the provision of remedies forinjustice or hardship resulting frommaladministration is set out in my document,Principles for Remedy, published in October 2007.My underlying principle is to seek to ensure thatthe relevant public body restores someone to theposition he or she would have been in, had themaladministration not occurred. If that is notpossible, the relevant body should compensatethem appropriately.

9.2 I received submissions from the public bodieswhich sought to persuade me that it would not beappropriate in the circumstances of this case toadopt my usual approach to questions of remedy. Iwas not persuaded by those submissions.

9.3 It is my normal practice, where someone has beeninconvenienced or made to feel a justifiable senseof outrage at the way that they have been treated,to recommend that an apology is made and thatconsideration is given to whether that apologyshould be accompanied by a tangible recognitionof such inconvenience or outrage.

9.4 Where financial loss is established, I wouldnormally expect that, where appropriate, such aloss should be remedied in full, with payment ofinterest where that is relevant.

9.5 In that context, there are four questions that I needto address in this case before making anyrecommendations designed to remedy the injusticethat I have found has been sustained on thisoccasion, namely:

whether complainants have suffered a financialloss in absolute terms that is, have theysuffered an identifiable or quantifiable loss at all?;

if so, whether complainants have suffered afinancial loss in relative terms that is, have

they suffered a loss that they would nototherwise have suffered had they invested orsaved elsewhere than the Society?;

if so, whether there is a sufficient link betweenthe acts and omissions of the bodies whoseactions have been investigated and found to bedeficient with that relative loss; and

if there is, what would be appropriate in all thecircumstances of this case to recommend byway of a remedy?

9.6 If I were to find no financial loss, or were toconclude that any such loss sustained was notsufficiently linked to maladministration, or were toconsider that it would not be appropriate torecommend a remedy for any such loss, I wouldthen need to consider whether it would beappropriate to recommend a remedy for theopportunities that I have found were lost as a resultof maladministration.

9.7 I also need to consider whether any injustice hasalready been remedied by other means. Where thatis so, I would not expect a further remedy to beprovided, as it is an important principle that anyrecommendation I make should not lead to acomplainant making a profit or gaining anunreasonable advantage.

9.8 As for absolute loss, I am very far from concludingthat everyone who has complained to me aboutthe prudential regulation of the Society hassuffered a financial loss. Still less do I conclude thateveryone who has saved with, or invested in, theSociety during the period covered in my report hassuffered such a loss.

9.9 It seems to me that it is a natural and unavoidableconsequence of one of the basic premises of theallegations underpinning the complaints that have

Section 9: Remedy and recommendations


9.14 I sought information from the Society as towhat the outcome had been to the cases ofthose people who, not being caught by theeffects of the Compromise Scheme, hadcomplained to the Financial Ombudsman Serviceabout such alleged mis-selling on the part of theSociety. I understand that those cases wereassessed using a comparative loss assessment usingthe performance of an average competitor of theSociety as a comparator. That information showsthat relative loss was established in approximately60% of thos

equitable life part 5 guide and summary

Documents

main report

summary of findings

relevant complaints

recommendationsequitable

contentsequitable life

vequitable life

summary ofmy findings

relevant period