Written submission by ELTA and ELTA Claims Ltd


to the


Committee of Inquiry into the collapse of the Equitable Life Assurance Society



Section 1              Executive Summary



Section 2              An illustration of the Losses to past and future income



Section 3              Key Failures by the UK Government in the prudent regulation

of Equitable Life



Section 4              Equitable Life Assurance Society And Its Handling of With-Profits Annuities.



Section 5              Reforms of the Legal system in the UK



Section 6              The Financial Ombudsman Service


Section 1

Executive Summary


The following text is an expanded version of the presentation given to the Committee of Inquiry into the collapse of the Equitable Life Assurance Society on May 29th, 2006


Madame Chairman and members of the committee, thank you for giving me the opportunity to make this presentation to you this afternoon plus the written contributions that I have already submitted.


My name is Peter Scawen and I am the chairman of ELTA (Equitable Life Trapped Annuitants), approx 2,000 members out of we believe 50,000 annuitants and ECL (ELTA Claims Ltd), a subset of ELTA members who are actively pursuing a claim for compensation through the English courts as we speak. I should stress that I am not myself a plaintiff in this action nor am I or any other members of the various committees paid for our time, save for expenses which are recovered from a small fund established by a one time contribution by the plaintiffs.


In the invitation to make this presentation, you specifically stated that; “In particular, the Committee would be interested to hear from you about the status of policyholders’ claims and remedies available to them under UK law.”


In practice, many of the general comments about the Society and the role of the various UK government departments have already been extensively covered by previous presentations and submissions, EMAG, ELCAG and the IA, whose opinions and beliefs are shared by the group of policyholders that I represent here today. As a consequence I will be focussing on the problems facing With-Profits Annuitants seeking redress for their losses through the various legal channels open to them in the U.K.


We use the word “trapped” for several reasons.


  1. As annuitants in payment, we cannot or are not allowed to transfer our policies to another provider. Thus the Society can reduce and has reduced our annuity payments by substantial sums, in my case by some 40% and with the prospect of continuing reductions in my income for the rest of my life. Other policyholders were able to remove their funds, taking a loss for sure, but have thus been able to recover their losses through prudent investment in the various schemes available in the UK from other providers


  1. Even if we could now transfer our policies to another provider in order to gain some sense of stability for our future income, in all probability the transfer value would be so low that the new annuity payment would be substantially below even the current level being paid the Society, especially given the low annuity rates currently available


We are trapped two times over!


With Profits Annuitants


The people that I represent are uniquely different from other policyholders. We are all retired, with an average age in the mid 70’s, some relative youngsters like myself, active both physically and mentally, and others reaching the end of their lives with all the associated problems of memory and physical, and intellectual frailty that comes with the ageing process.


I will give you two illustrations. A annuitant phoned up to advise me of his new address. So I asked what it was and there was silence and he said, sadly, “I have forgotten, I will go and check!” Another annuitant phoned me and said he was sorry for not doing more but he already had one leg amputated, was going into hospital for a tumour and in all probability would need his other leg amputated as well! These are the people who need our active support and assistance.


We see the world differently from others. Within broad constraints, we know our income for the rest of our lives. It is fixed or at best inflation linked. We have no future job prospects, no promotions in sight, no career moves, just the same income year in and year out. Accordingly, pensioners become very conservative about costs and budget very carefully to ensure that their expenses and incomes remain in balance. We live within our means, so if our income changes radically, as in the case of our Equitable annuities, this poses some very real problems.


And it makes no difference whether we have a large or small annuity: that money forms part of our plans for our lifestyle and once it is removed then we have lost out with no opportunity to recover the situation.


We also come from a generation that reached political awareness at the end of the pre-war depression, survived the war, or grew up in the years of austerity following 1945. We learnt to survive, so whilst our incomes have been reduced and many have had to sell their properties in order to create funds to meet their liabilities, most of us just “tighten our belts”, travel less and reduce our non-essential spending. Others rely on their families or the various income support schemes available to UK citizens from Social Services. This was NOT our objective when we spent our lives saving money so that we could live comfortably without money worries during our retirement when at last we have the time to explore new horizons, be they intellectual, travel, cultural or simply spend more time with our families.


Why are we different from other classes of policyholders?


I have already made clear that we, the With-Profits Annuitants, are different from all other classes of policyholders because:



1.      Our income is already significantly reduced and it looks as if such reductions will continue for the rest of our lives. In my case my annuity, which started at approximately £10,500 (approx. 15,200 Euros) is now £7,600 and by 2020, my actuarial age of death, I estimate that it will be £4,800 and that is before any adjustment for inflation is made.


2.      What most With-Profits Annuitants (WPAs) thought they were buying was an annuity that would increase at least broadly in line with inflation. Whilst we all understood there would be temporary variances from time to time as a function of the financial markets, it was never explained that nearly 50% of our annuity would be un-guaranteed and could, and indeed has, been removed by the Society in order I believe to meet its obligations to other policyholders who of course can take their investments elsewhere.


I quote from an e-mail that I received recently. “Just to reinforce the point I met a friend recently who had his money invested with ELAS and he eventually withdrew it (£850K) less 16% and stuck the money into a risk free high interest account. After 3 years he has now recovered his capital and is a relieved and happy bunny.”


These policies were presented as being as secure as the so-called Blue Chip investments by a financial institution that had the highest reputation for probity in the UK and whose clients included many workers in state industries and service providers, Civil Servants and indeed MP’s.


Most with-profit annuities were compulsory purchase pension annuities. This means they were purchased with pension savings, at least 75% of which had to be used to buy an annuity from a life assurance company. The UK government’s rationale behind this legal requirement is


“Annuities provide a financially efficient and secure means of turning pension capital into pension income. Because they pool risk, they ensure that people get better returns without fear of running out of money. And low inflation enables annuities to hold their real value more effectively” (Modernising Annuities – a DWP consultation paper of February 2002).


The core issue that we are discussing today is that these policies were not the secure low risk investments they were represented to be, as is evident from the reality, and that this fact was known to the Society and should have been known to the official regulator in the UK.


The Annuity Contract


The annuity contract by the Society was remarkably brief and relied heavily on product literature. It failed to clearly explain the terms and possible risks to future income.


The Society adopted a policy of not retaining any reserves and making a full distribution to policyholders. This had two serious consequences that should have alerted the regulator.


  1. The bonuses offered by the Society were above those of their competitors thus attracting business to the Society that it might not otherwise have received.


  1. If for whatever reason there was a fall in market values, a drop in the quantity of new business or any loss of confidence in the Society, then there were no reserves to make up the shortfall.


It is precisely because the Society did not have “additional reserves” that it was able to present a falsely rosy picture of its financial worth, thus attracting premium income that would have been placed elsewhere had the true position been clear.  The implied logic of the Society’s position, given that profits were fully distributed year by year, was that either the stock market would rise every single year thus generating the necessary profits, or that new premium income would be used to meet its financial commitments. I think this sounds like a Pyramid Scam (A Ponzi scheme by any reasonable definition) and by implication, since the regulator was fully aware of what was taking place, the latter’s failure to act aided and abetted such a scheme.


The Society has argued that its strategy was to keep its liabilities and assets in line over a 10 year rolling cycle, something that is “normal” for the industry. That I cannot comment on but the fact remains that the assets were not enough when the time came the Society, unique amongst other UK financial institutions, reached the point of collapse. So whatever the policy or strategy was adopted, it didn’t work.


One element of the With-Profits Annuity is called the Final Bonus Annuity. Its precise definition and how it is calculated are not relevant here. At the time of my contract the document merely said the annuity might go up or down depending on the overall performance of the fund. Given that we were participating in a With-Profits scheme that is entirely reasonable and is to be expected. What neither the contract nor the product literature indicated was that this Final Bonus Annuity could be removed in its entirety at the sole discretion of the Society and that this element might represent after a few years as much as 50% of the annuity income.


It is inconceivable, almost a matter of common sense, that anybody who understood this and was seeking a secure income for life, that is in the range of 20 to 40 years, would ever have bought such a product. In other words it was quite unsuitable for the purposes for which it was offered and the regulator had a clear duty to ensure that the Society’s literature alerted the public to this risk. (As a side note, the current versions of the Society’s literature do make this point quite clear but now of course it is too late!)


This is to me the central point of the claims for compensation.


Either the Society explained the annuity contract in detail or it did not. That is a matter before the courts in the UK and nothing more can be said about that at this time.


But it also follows that the FSA either knew about this condition or it did not.


  1. If it did not know, then it failed in its duty and was clearly incompetent.


  1. If it did know and took no action then it was negligent.


Either way, the regulator failed in its duty to the public and on this basis alone, compensation is due to those people who invested in the Society and whose life’s savings have been so abused by the Society to meet its other financial obligations.


The “standard” practice with annuities is that money invested with a pension provider is “ring fenced”. That is the money cannot be used for any other purposes than to provide an annuity for life. It was not made clear that in the case of the Society, this was not the situation and indeed the investment was lumped into a general fund to be used for any purpose the Society saw fit. The risk to annuitants is therefore substantially increased. No explanation or warning was offered by the Society and the regulator took no action to ensure that it was.




The Society has made many statements about the wisdom of litigation, though as a litigant it has been very active.


Of course, it initially sued itself over the GAR issue, an action that certainly precipitated the almost total financial collapse of the Society. It has also been very active in the courts against former directors and some suppliers, and so far as I know with no success, whilst wasting hundreds of millions of pounds of policyholder’s money.


However, the Society has also had to deal with litigation or potential litigation from policyholders. To the best of my knowledge all of these cases have been settled out of court, prior to trial under very strict confidentiality clauses.


The same applies to the many cases being pursued against the Society through the Financial Ombudsman Service (FOS), which are slowly being dealt with, some in favour of policyholders and some not.


Of course the Society took proactive steps to prevent further litigation by agreeing to transfer to another society the policies of such investors as UK MP’s and others, though admittedly with some form of Market Value Adjustment (MVA), and with the so-called Rectification scheme for those who lost out in the transition.


Choices facing With Profits Annuitants:


The suggestion by Lord Penrose was to seek our remedy through the courts. This is a perfectly reasonable statement until one considers the problems that confront a potential litigant. I must emphasise again the relative age and thus fragility of the policyholders I represent here today. Their ability to deal with the complexities of the law, the associated stress and ill health make this a bigger challenge than it might be for younger persons.


As I see it there were several choices open to my members:


  1. The Society. Many policyholders have taken the view that they will rely on the Society to “do its best” for them, and will wait on events and trust that somehow it will be OK by the efforts of others, such as ECL, EMAG, ELCAG, etc. They are at the end of their lives and that seems and maybe is the best option for them. I have seen no evidence that the Society can be relied upon to take any action that is in the best interests of my members, a group of policyholders who have by any measure been abused by the society because of their weak position.


2.      The Parliamentary Ombudsman. The P.O. has already made one report, which more or less exonerated everyone, but as its terms were so constrained by the Government that was perhaps not too surprising. Under the threat of a judicial review, the Government agreed to a second enquiry which is in process now with the result due late in 2006 or early 2007. Of course we have no way of knowing what the report will conclude, but recent experience does not encourage confidence. The P.O. presented a report to Parliament on the treatment of pensioners with Failed Company Pension schemes. It is my belief that this happened as the UK government had changed the regulations over several years exposing pensioners to this risk despite being warned of the potential problems. The PO found in the pensioners’ favour, but the Government just said we don’t agree and will not make any compensation payments, even going so far as to wildly exaggerate the costs to the Treasury in the process.


So it is no help to us if there has been maladministration if at the end of the day, the Government takes no notice of the report and takes no action to compensate victims of its incompetence.


  1. Make claim for compensation. There are several possibilities, but they all come with some difficulties.


A) The Financial Ombudsman Service. As mentioned above, many policyholders have tried to make a claim through the Financial Ombudsman Service. This service to say the least is less than satisfactory (see the comments made by Paul Weir of ELCAG on this topic).


The public perception is that the FOS is a neutral, consumer-friendly arbitration service. In practice, it is nothing of the sort not least as its primary obligation is to the Financial Services Authority, but also because in this case Equitable can hire solicitors and counsel to present their case and argue against the public who evidently cannot have the legal expertise. It is possible to employ a solicitor to act for you but this costs from £6,000 to £20,000, hardly a low-cost solution for what is supposedly a free service for the public, and somewhat defeats the objective of the exercise.


In my experience, the staff are under trained do not have legal, financial or pensions experience and make arbitrary and inconsistent decisions.


In the normal course of events, when a Government department writes to you, especially one with the title the FOS has, you expect to receive a considered reply using the available data and the appropriate and correct interpretation of the law. In fact, adherence to the law is not required of FOS. It can decide matters in any way it thinks “fair and reasonable”, and need only “take into account” the law (FSA Handbook DISP 3.8.1). This gives it considerable scope to be subjective, and makes its decisions virtually unappealable and often unpredictable.


For example, I made a claim against the Society through the FOS and was told by return that my claim was rejected due to the GAR compromise. Since I had very specifically ensured that my claim in no way mentioned or referred to any aspect of the GAR compromise, I wrote a strongly worded letter back pointing out their error. In return I received a reply saying they would now consider my claim.


The point I am making is that I am reasonably knowledgeable about the issues, certainly more so than the overwhelming majority of policyholders. I suspect that most claimants would have accepted this so-called “ruling” and let the matter rest. This is not an acceptable standard for a Government Department, which should have a clear duty to ensure accuracy and fairness.


The last point to be made about the FOS is the length of time it takes to obtain a ruling. The FOS has ruled that you cannot both make a claim in the courts and a claim through FOS at the same time. But in many cases the FOS ruling takes so much time that by the time a decision has been reached, the policyholder has become statute barred, thus severely limiting the choices open to policyholders.


Regrettably, we know from pronouncements made by the FOS that whole classes of claims have been rejected on quite arbitrary grounds. For example, even accepting the GAR compromise strikes out part of the claim for compensation, it does NOT strike out the whole claim. It should be the duty of the FOS to allow policyholders to pursue a claim, maybe for a reduced amount, not block the entire claim. This is NOT an Ombudsman’s service in any terms that I think are reasonable.


B) The English Courts. The overwhelming problem facing plaintiffs in the English courts is simply one of costs. If I decided to sue the Society for compensation, then I am advised that my risk for costs, in the event that my case went to trial and was lost, would be of the order of £150,000 on each side--£300,000 in all (440,000 Euros). Apart from the fact that I do not have that sort of risk money, as my claim is only of the order of £70,000, (101,000 Euros), it does not seem to be a cost effective approach. Thus I am forced to rely of the PO or the FOS as an individual.


With data that I have had access to it is clear that the costs of pursuing a claim against the Society to the point at which the Society settles out of court vary from £56,000 to £180,000, with an average of approximately £101,000. Clearly this lies outside the financial resources of the overwhelming majority of British citizens, quite apart from the risks of paying an equivalent sum to the Society’s lawyers if they lose or give up under the stresses and strains of the legal process.


The other obstacle from a legal perspective in the Limitations Act, which imposes on potential plaintiffs a time limit within which they must initiate proceedings. As of today, the overwhelming majority of policyholders are now time barred and by the end of 2006 the Society will be free of any further risk of litigation.


There are two possibilities to pursue the Society through the English court:


  1. The Small Claims Court, which as the name suggests is where an individual is seeking to recover a small amount of money, but where the plaintiff is allowed to present their own case in effect supported by the presiding judge who makes the ruling. Some policyholders have taken this choice and I believe all have been successful, but as the maximum jurisdiction is £5000 the amounts of money involved are trivial.


  1. The High Court where the major problem remains one of having to meet the defendants’ costs in the event that the court decides in favour of the Society. The second problem is to find lawyers and barristers who not only understand the law as it applies in this case, but also the complexities of the relevant Pension regulations and the complexities of the Society’s annuity policies.


Apart from a small number of relatively wealthy claimants, this approach is more or less closed to the average policyholder in the UK. However, by a chance merger of my personal expertise and understanding with that of Clarke Willmott, a legal practice based in Bristol, we were able to establish a mechanism by which a group of policyholders (ELTA members) were able to band together (ECL) and effectively mutually insure each other if one or more of the cases failed with a maximum cost exposure of approx £12,500 if all the cases were lost. Even this much-reduced sum was too much for many policyholders who do not have or are not willing to take that financial risk this late in their lives.


Further we should also note that Clarke Willmott have undertaken this litigation on a “No Win, No Fee” basis where potentially if the case is lost they will have to write off many millions of pounds of fee income. It goes without saying that not many firms would be prepared to undertake such a risk.


I should briefly mention Legal Aid, which is available to plaintiffs who effectively have no income or assets in order to meet the costs of the case. In fact we have only one plaintiff in this case who meets this criterion, which apart from their personal difficulties, does not say much for the annuities the Society should have been paying to them.




In my personal experience, when entering litigation one should plan to win, but budget to lose. The potential cost liability in the event of losing the case is so high in the English courts, that to all intents and purposes this option is closed to the overwhelming majority of the population save where a group coalesces around some organiser with the requisite numeracy, literacy and PC skills, in this case myself and the ELTA members, and can also retain a proactive firm of solicitors willing and able to take on the case.


As I have said earlier, the overwhelming majority of the trapped annuitants will now have no legal remedy unless they have already initiated an action of some sort.  They are nearly all now time-barred and for those who are not, the problems of the cost risk of an individual legal action, and the difficulties of getting a satisfactory solution through the FOS are sufficiently formidable to deter effective action.

Section 2


An illustration of the

Losses to past and future income


The chart below is based on my personal data and my expectations of future income based on the extensive computer modelling that I have conducted on the Society’s annuity system. Whilst, a qualified actuary has not verified this, the model produces results that closely match forecasts made by actuaries who have conducted a similar exercise. Thus, whilst I would not claim it to be 100% accurate, it does represent a reasonable projection of my future income and thus a measure of the losses that I and all other With-Profits Annuitants (in proportion to their investments) of the Society are going to suffer unless some form of compensation is awarded.


1.      I approached the Society to purchase a “conventional” guaranteed level annuity. (Pink)

2.      I was offered a With Profits Annuity on the basis that is started at more or the same level and would increase in value through time based on the Society’s performance. (Blue)

Self evidently any company’s results will vary from year to year, but given the FTSE 100 had achieved a CAGR for the previous 30 years of approx 12%, (including the recent fall and subsequent rise in the FTSE 100) and according to Jeremy Siegel of the Wharton Business School shares have generated a real return of 6% per year since 1802. (Economist May 13th, 2006), it seemed to me that the Society could easily exceed 7%, which is the figure I used for my Anticipated Bonus Rate (ABR).

3.       In any event, my expectations were based on the assumption that the Society could hardly fail to achieve such a rate given the historic performance of the markets and its investments in gilts and property. Indeed, the Society’s failure to achieve such a moderate performance also begs serious questions about its competence.

4.      In fact what I am going to achieve is a tiny fraction of that amount.  (Brown)


My fellow With-Profits Annuitants have given me, in confidence, extensive amounts of data in the course of my function as Chairman of both ELTA and ECL. Of course, everyone has their own story to tell, but my experience is, broadly speaking, a reasonable reflection of the overwhelming majority of ELTA members.


As can be seen from the chart my loss of income both to date and in the future is enormous. For many annuitants where their ONLY source of income is from the Society, their future standard of living has to decline and in many cases they will be seeking financial support from their families, or Social Security, or be forced to sell up their homes just in order to subsist.


These people prudently set aside money from their earnings to provide themselves with a comfortable lifestyle during their retirement, a lifestyle that has been stolen from them by the Society.

Section 3

Key Failures by the UK Government

in the

prudent regulation of Equitable Life.


The regulator has adopted various arguments to defend its actions or inactions and the document below sets out, to the best of my ability, my understanding of its position. I have tried to address these and made comments that in my opinion clearly set out the failure of the regulator to perform his duties in a way that the public have a right to expect.

1.      In the period 1991 to 1997 the Chief Executives or Managing Directors also held the post of Appointed Actuary, which was contrary to normal procedures and contrary to the 1982 Act. The regulator was aware of and recognised the problem and yet for six years took no action!

2.      Under the Third Life Directive, the regulator had the authority to require Equitable to set aside reserves for non-guaranteed terminal bonuses, but it did not do so even though this inaction prejudiced the rights of one set of policyholders against another set. I am told that the regulator has insisted on such reserves in the case of other companies in the same industry and providing the same services.  By making full distribution of profits without reserves Equitable ensured that it regularly topped almost all of the relevant performance tables, which was a key selling point in attracting new business.

3.      The Government Actuaries Department (GAD), whilst at the same time assisting the official regulator, was recommending Equitable as the supplier for one of the civil service’s pension schemes and thus had a clear conflict of interest.

4.      It is clear now that Equitable’s exposure to the GAR liability and the policy of differential terminal bonuses was less than satisfactory, though this was not identified by the regulator until the late 1990’s, and even then no action to protect the interests of current policyholders (or future policyholders) was apparently taken.

5.      Thus by 1998 it should have been clear that Equitable had not reserved for GARs, had significantly higher exposure than other pension providers and had not separated the GAR business from non-GAR business. This was unlike other companies where the GAR business was on a smaller scale, or was separate, or where they had an estate, or were reserving on a proper basis. It seems that in spite of many internal discussions nothing was actually done nor were the public made aware of the fragile state of ELAS’s finances.

6.      The With-Profits Without Mystery paper of 1989 clearly stated that the Society was not reserving for future liabilities by creating an estate, but was going to rely on future returns and new income to meet its future liabilities, a technique severely criticised at the time by the Institute of Actuaries, yet the GAD and Regulator took no effective action.

7.      It is precisely because the Society did not have “additional reserves” that it was able to present a falsely rosy picture of its financial worth, thus attracting pension premium income that would have been placed elsewhere had the true position been clear.  The logic of the Society’s position, given that profits were fully distributed year by year, was that either the stock market would rise every single year thus generating the necessary profits, or that new premium income would be used to meet its financial commitments. I think this sounds like a Pyramid Scam (a Ponzi scheme by any reasonable definition) and by implication, since the regulator was fully aware of what was taking place, the latter’s failure to act aided and abetted such a scheme.

8.      It has been argued many times that the July 2001 cuts were largely due to negative rates of investment returns earned by Equitable in 2000 and 2001, against a background of falls in equity markets. It is rarely admitted that its policy of no estate was the real cause, which meant that in adverse investment conditions policy values might have to be cut. It is precisely because there was no estate that cuts had to be imposed and had to be the size they were. No other company of a similar size made such comparable cuts. The lack of estate was built into the core of Equitable’s financial model. Policyholders had the right to expect that the GAD were fully aware of this disastrous policy and its potential consequences, and would take action to ensure such a model was never implemented. It is this signal failure by the GAD in 1989 that is surely the core of the claim of maladministration.

9.      UK and European legislation allows, under certain conditions, a value to be placed on projected future surpluses for demonstrating cover for the regulatory required solvency margin. The regulator apparently placed great weight on the certificate from the Appointed Actuary who of course had a conflict of interest holding two incompatible functions as noted above and did nothing. Given the known conflict of interest as accepted by the regulator above, then it follows that the regulator should NOT have relied on a certificate from the Appointed Actuary.

10.  The Society produced marketing literature of very doubtful integrity. In fact the documentation presented by the Society stated that the Annuity Policies were of an investment grade similar to Gilts and/or Cash. In reality the annuities were a very high-risk product and were quite unsuited for the purposes for which they were sold. Surely it is the responsibility of the regulator to ensure that the products being offered by a company are not only fit for purpose, but that the associated literature reflects the true situation so that potential clients can make informed decisions.

11.  It seems clear from Penrose that whilst many practices of the Society were a matter for the judgement of the Appointed Actuary and were permissible, some were not. The Appointed Actuary working in a dual capacity was able to avoid justifying his actions.  This would not have been possible had the proper separation of powers occurred, as was clearly required under both UK and European law and which the regulator had the capacity to enforce.

12.  The financial reinsurance policy was used by the Appointed Actuary as a means of complying with the regulator’s reserving requirements. He concealed from the regulator a key side letter limiting its effect. Even without this, it was of doubtful value, yet it was accepted by the regulator as an asset of the Society

13.  The same applied to mortality expectations, which went through significant changes throughout the 1990’s and indeed continue to change to this day. These changes had a profound effect on the future liabilities of the Society. Again it is not clear whether the GAD scrutinised the returns and assumptions, and if it did, what recommendations it placed before the Society. What is clear is that changes to the mortality expectations were not reflected in Equitable’s actuarial calculations, so in effect nothing happened and thus the regulator failed in its duty.

14.  Penrose says that the subordinated loan taken by Equitable should have alerted the regulators to its weakening position. This issue should have raised major warning flags about the financial situation of the company. An insurance company should have more than enough capital since that is what its investors have given it, in order for it to trade with that capital to make more money for the investors than they could for themselves. But the Society operated without an estate, with the knowledge and consent of the regulator, so how could there be a surplus in order to pay off this loan, unless at the same time it substantially reduced the benefits payable to its members? The regulator is supposed to protect the public from this type of chicanery.

15.  As far back as 1991, there were concerns expressed by the GAD and the DTI about information contained in papers presented by the board, which should have meant that the regulator had flagged the Society as being at risk and needing careful monitoring, especially when coupled with all the other issues surrounding the Society.

16.  We know that throughout the 1990s policy values (i.e. the promises given to policyholders) exceeded the assets available to back them. This in itself I understand to be normal. I am told the Society intended the assets and policy values in its with profits fund to oscillate around a mean in a smoothing cycle, so that one is more than the other half of the time, and vice versa. If, however, the policy values are more than the assets for a decade or more than just a few years, as was the case here, the Society was bound to bleed cash as policies matured and surrenders at full value occurred.

This should have caused some warning lights to flash with the regulator, especially in the light of the fact that there was no estate, that we had a CE who was also the Appointed Actuary and that various other issues were affecting the Society’s finances. The lack of an estate not only made smoothing at times of very unfavourable market conditions more difficult, in fact such smoothing was almost impossible unless the market had a bull run that lasted forever, clearly not a low risk assumption. You might care to note that the Society’s collapse came at the end of the longest bull-run in market history and the so-called collapse in the markets had minimal effect on other companies.

17.  Policyholders had nobody to rely on except the regulator to ensure that the product being offered was fit for purpose.  In the case of the Society, it was offering a highly risky product quite unsuited to the needs of its policyholders. What on earth is the function of the regulator other than to ensure it uses its expertise and powers of investigation to protect policyholders from organisations that do not meet reasonable standards of integrity and honesty?

18.  The paper “With Profits Without Mystery” presented by the Society to the Institute of Actuaries set out the plans and was severely criticised by the members as having the potential to lead to financial collapse, precisely what in fact happened. The Society used a defective business model to obtain competitive advantage.  The regulator should have prevented the use of such a model or insisted on substantive changes to it. It is clearly a responsibility of the regulator to understand the underlying business model to ensure that such a risk is minimised, but it failed to take any action against the Society or, as noted above, to alert the public.

19.  The Society’s policy towards smoothing has been widely debated and is of course highly technical, though it is clear that the Society’s policy did not work in practice. The simple fact is that a Smoothing Policy and a Full Distribution Policy (no Estate) are incompatible and irreconcilable. You cannot smooth if you have no reserves with which to implement a smoothing policy. Smoothing policies are indeed highly technical, but that is precisely why we, the public, have a right and the regulator a clear duty to ensure that such a policy is prudent and effective in practice.

20.  It has been argued that Equitable’s business model, whilst different from many other companies was, legitimate. BUT, we are NOT talking about many life insurance companies but about one that, uniquely, failed after being a source of concern to the regulator for many years. The business model was flawed and the regulator should have known that. Even though the Society may have met its statutory solvency requirements, the combination of events, actions or inactions should have raised alarm bells in the office of the regulator. Throughout the whole period, the regulator adopted a passive role, accepting without demur statements made by a CE who had a dual role, when such a situation required extra not less vigilance.

21.  Policyholders Reasonable Expectations (PRE) was introduced in 1973, in an attempt to ensure not that policyholders got “value for money”, but that their reasonable expectations would be met. There is a significant gap between “value for money” and permitting a product to be sold that could not meet any reasonable standard of PRE. The regulator did not act when it should have done, even though there were glaring signals for those who wished to see and to act!


It is clear that the failure to establish an estate was a fundamental failure that led to the collapse of the Society. This fundamental flaw was clearly signaled in the professional association and severely criticized at the time, but no action was taken. No other comparable institution collapsed as a result of the adverse financial markets of the late 90’s, even where GAR liabilities were just as significant as they were at ELAS. The liability arising from the GAR liability should not have led to the collapse of a well-run company with an adequate estate. Reductions in policy values would probably have occurred as they have elsewhere but not on the scale seen at ELAS.


From the late 80’s onwards, it is my understanding that the regulator regularly flagged concerns about the Society. If there had been just one instance or event, it is entirely possible that it could easily have been missed in the “noise” of every commercial activity. But we believe that there were multiple instances, which cumulatively should have resulted in closer monitoring and a more proactive approach to force the company into line with acceptable practice.


With profits annuitants bought their annuities to last for their own and their spouses’ lives. They were laying plans to last up to 40 years (the youngest purchasers were in their early 50s). Yet the Society was engaged in a stock market gamble, which could not possibly come off year in year out over that period. The regulators must have known this, yet do not seem to have considered with-profits annuitants as a class at all.


Throughout much of the 90’s, the fact that the same person performed the dual role of the CE and the Appointed Actuary created a situation where issues that should have been confronted while the seeds of destruction were being sown, were avoided or glossed over. That the regulator allowed such a situation to continue when it was against all policy advice and practice must be a further basis for claims of maladministration.


One must conclude that the regulator’s view from the above is apparently that its role is essentially a passive paper exercise, waiting on events. The regulator was not proactive in any way in seeking to protect the public from the growing crisis in the Society.


The regulator had adequate powers of both investigation and imposing change, but for reasons that have been alluded to but never admitted, the regulator chose to do nothing. These actions or inactions by the regulator have led to a massive reduction in income and it is only just and proper that the Government accepts its failures and takes action to compensate policyholders for its failures.


Section 4


Equitable Life Assurance Society




Its Handling of With-Profits Annuities.


What follows is an extract of a report I prepared based on the analysis of data that I received from approx 70 With Profits Annuitants and approx 100 policies. It was written during the Spring of 2003. It is the first part of a 4 part quite technical document but sets out broadly speaking what represents even with today’s information a sound description of the issues that I perceived at the time and which still hold true today’


It is offered as back up material to support the submission being made today.



Equitable Life Assurance Society

“Conspiracy or Cock-Up”


1.1) Introduction


The Equitable Life Assurance Society (ELAS) has received very wide and adverse publicity for its actions over the last few years. What has been done is reasonably clear, but how and why the Society chose to adopt certain strategies has never been satisfactorily explained.


I volunteered to collect data from annuitants to study the impact of the reduction after the Society announced that it was reducing the payments to With-Profits Annuitants (WPAs) by 20%. My objectives were to determine if there were any patterns and to predict what the reduction might be where it had not occurred already. Subsequently I extended these objectives to understand the possible future impact on annuitants’ pension payments and explain what had hitherto been contained in the Society’s marketing literature, but either largely misunderstood or not comprehended.


The current jargon term for much of what has occurred is called ‘Confusion Marketing’, not so much because there is an overwhelming selection of choices and options as there is not. It is because the terms and terminology used by the Society are imprecise, arguably poorly phrased and rarely explained at a level that enables the clients to actually really comprehend the consequences of the decisions being made that have had and will continue to have such a profound impact on their future financial security. As more and more of the implications of the Society's pre-sale marketing activity and their post-sale activities over the last 15 years are understood, including some very mis-leading material presented at the time of the so called "Compromise Deal", it is easy to understand why annuitants are angry and frustrated and demanding action by the Society, the statutory regulator and the government.


The Society appears to have structured the With-Profits Annuities in a manner that enabled it to present them as producing very good benefits, but without explaining the downside risks. These risks were identified in 1989 at a meeting of the Society of the Institute of Actuaries when the original paper “With Profits Without Mystery” was presented by the Society, before the initial offering of this new type of annuity. The members of the institute were quite severe in their criticism of the paper but, so far as can be assessed this was broadly ignored by the Society and the official regulator.


The With-Profits Annuities are also structured to enable the Society to remove entirely a very large portion of the annuity that is “un-guaranteed” in order to meet its other obligations as they arose following the consequences of the GAR litigation and the subsequent House of Lords adjudication, the collapse of stock market prices and the general fall in interest rates over the last 15 years.


It would appear that this crisis was not entirely un-anticipated by the Society and one which should have been known to the FSA, or its predecessor, but no action appears to have been taken. This has left one section of the Society’s clients, the With-Profits Annuitants, exposed to, what has been felicitously phrased, Institutional Exploitation with substantially reduced incomes and without the possibility of recovery.


1.2) What happened?


Over the last 15 years, there have been many events that taken in isolation might be regarded as of no consequence, chance acts, things that just happen in any organisation that has to operate in changing times managed by people who are at least as prone to error and mis-judgement as everyone else. And there can be no doubt that one possible explanation of all the things that have happened or not happened can be explained quite easily by what is known in the vernacular as “The Cock Up Theory of Life”.


On the other hand, when all the actions are put together there does appear to be the semblance of a pattern.


1) In the late 1980’s the Society decided to withdraw the GAR product since according to the Burgess Hodgson report, the Society was beginning to encounter financial problems. (See the note at the end this Section)


2) At about the same time, the Society introduced an innovative concept under its own title, which was the With-Profits Annuity. The logic was that the annuitant could benefit from increasing stock market values and dividends that otherwise were retained by the annuity provider. This must have been and in some respects still is a very attractive proposition. What was not apparently explained to the purchasers of the Society’s annuity at the time was that whilst their income was higher than it might otherwise have been, much of that income over time was to be classified under the terms of the annuity as “un-guaranteed”.


In the process of data collection, it became clear from the communication with Guaranteed Interest Rate (GIR) annuity holders that they neither knew that they had contracted to this type of annuity, nor fully understood the how the Total Return for a Level Annuity (TRL) was derived until this project was started! Many of these annuitants apparently did not understand that they were offered a Guaranteed Interest Rate (GIR) of 3.5% uplift on their Anticipated Bonus Rate (ABR) to create the much higher Total Return for a Level Annuity (TRL),


The term TRL more or less describes what it means. That is if the Society achieved a consistent Overall Rate of Return (ORR) that was identical to the TRL, then the annuity would remain constant and level.


The ORR itself has never been adequately defined and is set by the Society based on its own internal computations, without reference to the policyholders and members, ignoring that they are the people most affected by any changes in its level from year to year.


Apparently, it was not made clear that the un-guaranteed element of the annuity would become an increasingly large percentage of the total income of the annuitant nor that it could be removed in its entirety. In effect the Society, intentionally or otherwise, had created a vast source of assets that, whilst apparently assigned to the annuitants as future benefits, in reality could be removed at any time. Such an act would substantially and immediately reduce its future liabilities.


It would be interesting to understand how this was recorded in the accounts of the Society, since it is not immediately obvious when an un-guaranteed liability is a commitment to pay in the future unless the Society decides otherwise, becomes a real liability in a true accounting sense. It is understood that no provision appears in the Society's accounts for this un-guaranteed bonus element despite its appearance in the annual statements sent to policy holders and despite it accordingly forming part of Policy Holders Reasonable Expectations under insurance legislation.


Further, because this un-guaranteed element was "intended for" policy holders by way of bonus, it is arguable that the legislation concerning statutory accounts for life insurance companies has for many years required such non-guaranteed bonuses to be provided for. However, they were not and, so far as is known, are still are not in the Society’s accounts.


3) In the mid 1990s, it would have been obvious that the Overall Rate of Return (ORR), required by the GIR type annuities, was not sustainable and that they would inevitably pay a reduced amount each year. From a marketing perspective this was presumably not acceptable and this type of annuity was withdrawn and replaced by a non-GIR annuity. The significant difference being that the TRL was set as equal to the ABR. So even though the Overall Rates of Return being achieved by the Society were lower than they had been historically it meant that the annuity would still increase whilst avoiding the declining results of the GIR annuities AND retaining the primary benefit to the Society of creating another source of assets that could be withdrawn.


This remixing did not affect the ORR being declared by the Society.


4) By the late 1990’s the Society was in serious trouble and there followed a series of apparently unrelated events as follows:


The Society had historically sent out details of the various ‘rates’ it was using for the year, the Overall Rate of Return (ORR), Declared Bonus Rate (DBR) and the Interim Rate (IR) The year 2000 was the last year for which these details have been issued and without these it is not possible for the annuitant to know what rates are being used by the Society. Despite repeated requests for this information, none has yet been received. It can be derived if there is enough data from enough annuitants and expertise in computer modelling, otherwise the annuitant not only does not know, but also cannot find out.


There is no obvious reason why this information should not be available to annuitants. Given the mutual status of the Society and the position of each member as both a co-insurer and an insured with all the other members, it seems doubtful that the Society can be justified in withholding this information. It is closed to new business, so the information cannot be commercially sensitive.


Since this time there have been substantial changes, in practice severe reductions, in all of these rates.


a) The Overall Rate of Return (ORR) has been reduced from an average of just over 10% for the preceding decade to respectively 7%, 3% and 2%. This change reduces the amount of annuity being paid.


b) The Declared Bonus Annuity (DBR) has been reduced from typically 5% for non-GIR policies, and 1.5% (5.0 less 3.5) for non-GIR policies, was reduced to zero. This has NO effect on the income of the annuitant but transferred large amounts of annuity into the ‘un-guaranteed’ element of the annuity that could be withdrawn by the Society at its own discretion.


c) Several events flowed from The House of Lords adjudication of the GAR bonus issue.


i) The Society reduced the Overall Rate of Return (ORR) by 1% in 2001 and 2002 and by 1.5% in 2003 and 2004. That is making further reductions in the income paid to annuitants.


ii) The Society produced and, after an extensive public relations campaign and approval by the Court, implemented the so-called Compromise Deal. As far as annuitants were concerned, the Society offered an uplift of 4% (0.5% for GIRs) on two elements of the annuity and 2.5% on the Total Gross Annuity. The 4% uplift had NO, and could not have had, any effect on the Total Gross Annuity paid. The 2.5% uplift, which would have had an effect on the amount of the Total Gross Annuity paid occurred in the same year that the ORR was reduced by 4%. Whatever the reason for the dramatic drop in the ORR, the Compromise Deal gave the With-Profits Annuitants (WPAs) absolutely nothing in terms of increased income. This was not what the literature implied.


iii) In November 2002, the Society produced the document entitled “Your With-Profits Annuity – planned reduction to income payments” a copy of which can be found at the end of Section 4. The entire document is a classic example of Confusion Marketing and whilst it must be admitted that after extensive analysis and communication with the Society the document does actually say what the Society intended, it was and remains far from clear. It is discussed in more detail in Section 2 but it would appear that the Society intends to exercise its option to remove the entire Final Bonus Annuity from the WPAs in two steps, one that is in process and will end early next year, when the next step will be implemented. The cumulative effect will be the transfer from the WPAs income from March 2003 until their deaths of approximately £1.8 billion pounds.


This facility that the Society has apparently created over the last 15 years in the way it set up its With-Profits Annuity schemes, is being used to address the problems, only partially caused by the House of Lords ruling on the GAR issue.


It would appear that not only has the Society had some very clear financial objectives since the late 1980’s and early 1990's and that this process appears to be both exploited and continuing with the new board and under the supposedly close supervision of the regulatory authorities. It would appear that the Society designed the With-Profits Annuities with the intention that an increasing part of the annuity should become un-guaranteed and could be removed. The amounts that have been or may be removed is discussed in more detail in Section 2


It follows that there can be no doubt that another possible explanation of all the things that have happened or not happened can be explained quite easily by what is known in the vernacular as the “Conspiracy Theory of Life”.


Which is the more correct interpretation is not possible to decide without full access to the Society’s records and computer systems.


1.3) The Compromise Deal


It is arguable that the Compromise Deal would not stand up to legal challenge on the following grounds:


a) The full state of the Society's finances, in so far as they were disclosed, was in fact NOT as they were disclosed. The With-Profits Annuitants have gained nothing from the deal save perhaps to ensure the Society did not go into receivership.


b) The deal offered to GIR and non-GIR annuitants was perhaps an illusion and consisted of the following:


i) A 4.0% uplift on the Guaranteed Basic Annuity (GBA) and the Declared Bonus Annuity (DBA) (0.5% for GIRs). This was paid, but nobody until this research realized that all this did was to transfer money out of the Final Bonus Annuity (FBA) element into these elements. It had NO, repeat NO effect on the Total Gross Annuity (TGA) at all!


ii) A 2.5% uplift on the TGA. So the maximum uplift anyone could get was 2.5% and NOT 4.0%. But in the same year the Society reduced the Overall Rate of Return (ORR) by 4%, which obviously reduces the TGA, not quite by a corresponding amount but close to it.


The Society's Compromise deal offer actually gave the WPAs absolutely nothing in exchange except for giving up their rights to sue over mis-selling and a minor increase in their guaranteed annuity.


So this poses the question, would the annuitants have accepted the offer had we known what we know now? The answer is surely not since, apart from the above, there are facts that the Society knew, but had not disclosed - see the EMAG web site for hidden losses etc. (www.emag.org.uk)


1.4) Conclusions


It is arguable that the whole concept of the With-Profits Annuity is open to a charge of mis-selling since the investment of their savings of future and current annuitants was in a financial vehicle not that dissimilar from any other investment that is linked to Stock Market performance, with investments in high return, but high risk equities, and bonds. This is NOT the right strategy for a financial vehicle that is meant to provide stable income for pensioners. It is perfectly feasible to provide a With-Profits Fund, that permits the annuitants to benefit from both capital growth and dividends in good years and smoothed over bad year, without resorting to a high-risk strategy.


Anecdotally, an investment banker expressed the opinion that the function of the Society was to meet its liabilities with respect to pensioners and those building up retirement funds AND NO MORE. It was not the function of the Society to make risk investments that are more appropriate for other savings vehicles, such as PEP's, ISAs and the like. In his opinion, the Society took a very high risk investment strategy for reasons that are not relevant here and that not least was one cause of their problems.


One of the implied themes of this analysis and report is that the Society has been taking situations as they arise and developing policies to counter or minimize the effects and/or damage as the board perceived the problem. In a commercial organisation driven by profits, this is not only to be expected, but also demanded by its owners. But the Society is not a commercial organisation. It is in fact a mutual Society which is supposed be driven to meet the reasonable needs and expectations of all of its members. That it has failed in its primary function is hardly a matter of debate.



And that would have been that, the end of the analysis. And then quite by chance, following down another line of enquiry on the Internet I came across an article on the Investors Association web-site which in turn referred to a presentation made by the Society to the Institute of Actuaries on 20th March 1989 and titled ‘With Profits Without Mystery’ (Journal of the Institute of Actuaries, v.116 1989)


It is not the intention to critically review this presentation not least since the document and review is 30 pages long, but three elements that seem very pertinent to this document have been extracted. As it happens members of the Institute of Actuaries expressed deep reservations about the 1989 paper as potentially exposing the Society to failure and collapse, a forecast that turned out to be remarkably prescient.


“2.2.1 ……….. The fund is continually open to new members. In particular, we do not believe in the concept of an `estate' in the sense of a body of assets passed from generation to generation and which belongs to no one. This is a point developed later in the paper.


3.2.6 If one accepts that the policyholder's key concern is the total proceeds achieved, then the matter of how those proceeds are made up between declared and final bonus elements should be of secondary importance.


4.3.4 There is, however, a more fundamental issue to be addressed. Even if a better measure of strength could be made, it must be asked why strength is of itself a desirable feature. Clearly there must be an adequate level of strength or an office is at risk of having the DTI intervening in its affairs. However, beyond such a level of adequacy it is difficult to see the merit of strength as an end in itself. One must ask for whom the strength is being built up. There is an argument that a high level of strength could indicate a failure to achieve a full value return to policyholders although, of course, such strength does add to the office's freedom of manoeuvre. Whether that is desirable or not is a matter of judgement. In the extreme, maximum strength could be achieved by having no declared bonus and passing all the return on by way of a final bonus.”


Of course, it is very difficult to be sure what was meant by something said 15 years ago, but one interpretation is that the financial strategy of the Society was to create a With-Profits fund where “strength” could be achieved by establishing a Final Bonus that could be removed at the Society’s discretion and that Policyholders would not be concerned (i.e. since they would not understand?) how the proceeds (i.e. the annuity?) is made up. The Society’s “Estate” (i.e. its reserves?) could be used for other purposes presumably in the promotion of the Society as a successful Life and Pensions company.


With the benefit of hindsight, maybe the paper should have been titled, “Without Profits but With Mystery!”


The Government employs actuaries in its service in the FSA today, DTI at the time, who presumably are professionally qualified, are members of the Institute of Actuaries and receive the Institute’s periodicals. It follows that it is inconceivable that the regulatory authorities were unaware of the Society’s strategy as presented by its Chief Executive and of the concerns expressed by the members of the Institute about the paper and the implied strategy and yet no action was taken then or since.


Whatever, the motivations of the individuals, separately or collectively, might have been at the time and arguably continue to the present day, whether it was some grand conspiracy or just a mixture of bad luck and incompetence, can be guessed at, but probably never truthfully exposed. And in some respects, it doesn’t matter, since the impact on the With-Profits Annuitants of the Equitable Life Assurance Society is the same.


The FSA and its predecessors have clearly failed in their statutory duty to the public and those members of the Society – the With-Profits Annuitants, who are now expected to carry the costs of their administrative failure, have the right to and deserve recompense.








Note: Burgess Hodgson are a firm of Chartered Accountants, who produced a report of the Equitable Life With Profits Fund in March 2003 at the request of the Equitable Members Action Group. (EMAG). The report can be found on the Internet at: www.emag.org.uk/documents/03.pdf


Section 5


Reforms of the Legal system in the UK


I have already alluded to the difficulties facing litigants in the UK and so for completeness I refer you to two articles that originate from within the UK legal system and make the same point but based on extensive practical experience.


The first article is by Lord Woolf (formerly both the Lord Chief Justice and the Master of the Rolls [the President of the Court of Appeal]. The full report can be found at:




I have extracted the initial statements, which clearly show that the problem is recognised by the Legal profession though so far as I am aware nothing material has happened so far in the sense that litigation has become affordable.


“The Principles

In my interim report I identified a number of principles which the civil justice system should meet in order to ensure access to justice. The system should:

(a) be just in the results it delivers;

(b) be fair in the way it treats litigants;

(c) offer appropriate procedures at a reasonable cost;

(d) deal with cases with reasonable speed;

(e) be understandable to those who use it;

(f) be responsive to the needs of those who use it;

(g) provide as much certainty as the nature of particular cases allows; and

(h) be effective: adequately resourced and organised.


The problems

The defects I identified in our present system were that it is too expensive in that the costs often exceed the value of the claim; too slow in bringing cases to a conclusion and too unequal: there is a lack of equality between the powerful, wealthy litigant and the under resourced litigant. It is too uncertain: the difficulty of forecasting what litigation will cost and how long it will last induces the fear of the unknown; and it is incomprehensible to many litigants. Above all it is too fragmented in the way it is organised since there is no one with clear overall responsibility for the administration of civil justice; and too adversarial as cases are run by the parties, not by the courts and the rules of court, all too often, are ignored by the parties and not enforced by the court. “


I quote from a practising solicitor who writes “Most people would say that the reforms, whilst welcome in many ways have failed in their object of making justice more accessible.”


The second article is by Mr Justice Lightman and can be found at




Mr Justice Lightman goes into some detail which I will not repeat here but the message is the same, that is the cost of litigation must somehow be reduced in order to bring it within the financial means of the population at large.


Both these documents are published by The Department of Constitutional affairs and remain Crown copyright.

Section 6


The Financial Ombudsman Service


With the permission of Clarke Willmott I have included a letter sent by them to the Financial Services Authority (FSA) in answer to a consultation paper about the FOS. It sets out clearly the issues facing plaintiffs and how FOS does not meet the expectations of the public which is/was “A neutral arbitration service” and not a branch of the FSA and the Treasury.


“3 April 2006




I am writing with this firm’s comments on the consultation paper CP05/15.  In this consultation paper we are mainly commenting on the proposal that the FOS compensation limit be raised from £100,000.




We are solicitors with a significant corporate and private client practice.  In relation to financial services our corporate clients include market makers, financial advisers and networks.  The services, which we offer to our corporate and private clients in the financial services field, include tax planning advice, asset management, dispute resolution and regulatory advice.  Our personnel include a number of partners and solicitors with financial services qualifications including FPC1, 2 and 3 and G60, and three qualified stockbrokers.


In relation to dispute resolution our clientele embraces both private clients and financial firms.  In terms of sheer numbers private clients probably outnumber corporate clients in relation to financial services dispute resolution, but there is a significant amount of work for both sides of the financial services advice industry.


The position and purpose of the Financial Ombudsman Service in financial services dispute resolution


The consultation paper in a number of places (specifically paragraph 10.20 and paragraph 11 of annex 2) says that complainants can have recourse to the courts as an alternative to a complaint to the Financial Ombudsman Service.  In reality access to the courts is severely limited.  There are a number of practical objections to litigating financial services complaints before the courts, in particular: -




A lawsuit in the High Court concerning a financial services mis-sale, which is defended up to the point of trial, can cost anything from £30,000 to £150,000.  Few business clients, and even fewer private clients, can afford this kind of outlay.  Whilst the availability of conditional fee agreements makes litigation for the claimant slightly more attractive than it used to be, nevertheless the uncertain nature of the commitment, the uncertainty of the outcome and the risk of paying the other side’s costs are a significant disincentive.




The courts are constrained by the Limitation Act 1980 which prescribes, in effect, a limitation period of six years from the date of transaction.  There is some scope for extending this in the case of negligent advice under Section 14A of the Limitation Act 1980, but even so the limitation period is less generous in many cases than that operated by the FOS.  In particular, for the private client, the alternative of suing in the courts after FOS has found against him is almost always unavailable.  This is because FOS is not quick, and the complainant’s date of knowledge will almost certainly be no later than the date he made his complaint to the firm which is a pre-requisite of a FOS complaint.  By the time FOS issues a determination, which may be several years after the initial complaint to the firm, the three year time period available under Section 14A of the Limitation Act 1980 may have expired.


In practice therefore, the FOS is the main, and often the only, source of civil justice in the financial services field.


The Shortcomings of FOS


The consultation paper rightly identifies that the £100,000 limit is now often inadequate to provide compensation where justice demands that it should be paid.  In practice, FOS is often able to overcome this £100,000 limit by determining the complaint, not by an award of compensation, but by a direction.  So, for example, FOS can direct a pension mis-selling case to be rectified by a payment to top up a personal pension by an amount sufficient to buy the lost benefits.  This may amount to more than £100,000.




Any system of civil justice, including the FOS, ought to meet the twin social purposes of such a system.  One purpose is to provide compensation to those who are entitled to it.  The other purpose is to act as an engine for the enforcement of law.  For a more academic exposition on this subject I refer you to the work of the late Professor Glanville Williams.  In the context of financial services the regulatory function of the FOS fits in with the FSA’s statutory objectives of maintaining confidence in the financial system, and the reduction of financial crime and with its principles of good regulation, in particular ensuring that “a firm’s senior management is responsible for its activities and for ensuring that its business complies with regulatory requirements.  This principle is designed to guard against unnecessary intrusion by the regulator into firms’ business……..”


In effect, the trade off between the citizen and the government (or regulator in the case of financial services) is that the citizen draws a regulatory or legal failing to the attention of the authorities, get his compensation as a reward, and the defaulter gets a penalty for non-compliance.  The citizen in this context is doing the government/regulator’s policing work for it.


The experience of our clients, both IFAs and private clients, of FOS is disappointing in this regard.  Both corporate and private clients complain of decisions, which appear ill informed and capricious.  Of course, individual private clients do not get to see a broad spectrum of cases so as to get the whole picture.  We do, and the impression we get is that a complaint to FOS is often, in practice, little better than a lottery. We believe that opinion in the financial services industry, when candidly expressed, is to the same effect. Particular shortcomings seem to us to be:


Inquisitorial Procedure


FOS investigates a complaint rather than hears evidence about it.  This requires a degree of diligence, inquisitiveness and scepticism, which is all too often absent.  FOS does not seem to exercise its powers to call for papers sufficiently often; when differing factual accounts arise it does not seek to call those giving the differing accounts to give evidence.  A good example in our experience has been the large number of mis-selling complaints made by Equitable With Profits Annuity holders which were dismissed on the grounds that they were” GAR related”, i.e. subject to the compromise scheme made between Equitable and its policy holders and sanctioned by the High Court on 8 February 2002.  There has been widespread injustice caused by the dismissal of these complaints.  This is because FOS failed to appreciate that the annuitants, writing their self-prepared complaints, believed that Equitable’s problems were caused by its GAR liabilities (because that was what was in the newspapers).  They did not trouble, in our experience, to look deeper and find out what the real nature of the complaint was which in most cases was the suitability of the policy, with its attendant risks.


Fairness of the procedure


The investigation procedures of FOS often appear to be unfair, particularly in the failure to offer a hearing to resolve factual conflicts, which is an essential ingredient of justice as traditionally perceived in the UK, and, indeed, enshrined in the human rights legislation. I do not intend to expand on this aspect of the FOS procedure, save to remind the FSA that there is real concern about the fairness of the procedures operated by FOS, which will be exacerbated if the jurisdiction is increased.


Basis for the Decision


The FSA’s Handbook enjoins the FSA (at Disp.3.8.1) to make a decision on what appears “fair and reasonable” and only to “take into account” the relevant law and regulations.  All too often the relevant law and regulations are ignored.  We offer an example of a case, which has recently come to our attention: -  


Mr O H complained to FOS on 5 November 2002 in these terms.  “I was a member of [his employers] final salary pension scheme.  At that time I was persuaded by [name of representative], a financial services representative of Equitable Life, to transfer my final salary pension scheme to a with profits annuity scheme with Equitable Life”. 


On 21 July 2004 an ombudsman at FOS did not uphold his complaint in terms, which entirely ignored, to the point of not even mentioning them, the LAUTRO conduct of business rules for life offices advising on pension transfers, which, by common consent, had been grossly breached.


Bearing in mind the twin purposes of the civil justice system as explained above, if the FOS declines to investigate cases properly, or chooses not to apply the law or the regulations, but instead does what appears to it to be “fair and reasonable”, it is not, in effect, ensuring good regulation in line with the FSA’s statutory objectives and principles.


In practice, the industry’s compliance personnel try very hard to ensure that their firms do not fall foul of the Financial Services Authority or the Financial Ombudsman Service.  If they cannot predict the outcome of a complaint with reasonable certainty, there are the following consequences for the industry and the consumer alike.


(1)               The industry becomes infuriated with the unfairness and unpredictability of FOS decisions.  We believe you are aware of considerable industry concern.


(2)               The industry becomes saddled with costs in relation to compensation, which, in some cases, ought not to have been ordered.


(3)               Consumers become bitter and disappointed (and there is plenty of evidence of this too) and do not receive the compensation to which they are entitled.


Transitional Arrangements


In Section 7 of the consultation paper you ask about transitional arrangements, but in practice you ask about time limits for FOS complaints.


The time limits for commencing the civil justice process in relation to financial services are excessively complicated.  The courts apply the rules set out in the Limitation Act 1980 which are themselves extremely complicated, in our view, more complicated than they need to be.  FOS applies a variant of those rules; the variations result in a time limit regime on which it is in practice difficult to advise a client without reference to a textbook and/or the FSA Handbook.  Financial services customers, advice firms, providers and their legal advisers all need to be able to know, or need to be able to ascertain very easily, precisely where they stand.  Granted that it is outside the scope of the FSA’s function to bring about an amendment of the Limitation Act 1980, it ought to use its powers to ensure that time limits before the FOS are easily understandable.  Accordingly, different time limits according to the dates on which a complaint is made are unnecessarily complicated.


The Way Forward


In paragraph 11 of Annexe 2 of CPO5/15 you point out that many other UK ombudsman schemes are not subject to a monetary limit, “but the awards are either non-binding or subject to appeal to the courts”.  The FOS is an exception to this broad principle in that its decisions are binding formally on the financial services firm and in practice (usually) on the complainant, yet are not subject to an appeal to the courts.  We think that the absence of external scrutiny by the courts or some other suitable body is part of the reason for the FOS’s lack of consistency and low standards to which we have referred in this letter.  With a limit of £100,000 (in practice exceeded in some cases as we explain above) already this is a significant jurisdiction, which should be subject to external scrutiny.  We do not believe it is acceptable that sums of the order of £100,000 or more are awarded by a dispute resolution mechanism, which, in practice, observes standards below those one is accustomed to see in the small claims court, where the limit is only £5,000.


Accordingly, if, as would normally be appropriate, the limit on FOS’s jurisdiction should be lifted to reflect current conditions, corresponding improvements to FOS’s standards of operation ought to be made.  In particular


1.                  The possibility of an award, which disregards both law and relevant financial services regulations, but which appears to the Ombudsman to be “fair and reasonable” should no longer be available.  The FSA’s Handbook should be altered so as to ensure that FOS only applies the relevant law, including the financial services regulations in force at the relevant time.


2.                  There should be an external appeal mechanism with powers to review and alter decisions of the FOS, including the power to criticise FOS for a failure to observe appropriate standards.


3.                  There should be finality, and awards should be binding on both complainant and on the firm, subject to an appeal mechanism, to bring FOS in line with the Pensions Ombudsman.


We give our answers as follows to the questions dealing with the FOS jurisdiction.


Question 4        - Yes

Question 5        - Not unless the FOS’s standards of operation are improved by

(1)   requiring it to apply the law and

(2)   imposing an external appeal or other mechanism for scrutiny of its decisions.

Questions 7 – 9  - No

Question 10      - The time limits for a complaint to FOS should be as simple to understand as possible and, if there is to be an increase in jurisdiction, it should apply to all complaints whenever they were made.


Yours faithfully




Robert Morfee