Submission from ELCAG to PO2

5 July 2005  


Background to FSA’s awareness  

The FSA’s failings  


Further to the meeting with action groups and the investigation team on 15 June 2005, we would like to make the following new submission, which concerns the period from 1 September 1998 to 1 December 2001, with special reference to the FSA’s role after ELAS’ closure to new business on 8 December 2000.


As late joiners, ELCAG is primarily focused on this disastrous period and our thesis is that maladministration by the FSA caused, compounded or aggravated late joiners’ and late contributors’ losses, in addition to the root causes resulting from earlier failures of prudential regulation.


We submit that no investor could possibly have established from normal public sources the truly vulnerable state of the Society’s finances which was known to the FSA in the period 1 September 1998 until the closure to new business on 8 December 2000. At no time even up to “N2” did the FSA act to alert investors to the full gravity of the situation.


Background to FSA’s awareness


  1. The FSA had privately discussed with both the Treasury and the Bank of England a possible rescue plan in November 2000.


  1. The FSA was aware that the ELAS board had told policyholders that the 7 month bonus suspension to August 2000 would fully cover the GAR cost resulting from the HoL.


  1. The government had required the FSA to evaluate its own role in 1999 and 2000 in the Baird Report.


  1. The FSA’s Martin Roberts and Howard Davies were required to give evidence to the Treasury Select Committee’s 10th Interim report in mid-February 2001.


  1. The FSA was asked to ratify the appointments of Vanni Treves and Charles Thomson in Jan/Feb 2001, with the prospect of a 100% totally new board of directors in place by April/May 2001.

The FSA’s failings  


In summary, by March 2001 the FSA was on full “red alert” about ELAS, and may well have been so for some period beforehand.  Despite this, the FSA stood by, implicitly condoned ELAS’ actions, and did NOT intervene or offer any advice to policyholders but repeatedly asserted that it was “continuing to monitor the situation”.


  1. The FSA allowed a bonus declaration on 12 March 2001 - three months AFTER closure to new business - of 8% for five months of 2000 i.e. 3.3%, whilst being aware that the £25.8bn WP fund had only made a 2.7% return. Equitable's asset deficit was known by the FSA to exceed 10%, which might have been acceptable in a going concern WP fund, but a much more limited range of latitude was appropriate after closure. Thus, by its inaction in March 2001 the FSA actually condoned over-allocation of bonuses by ELAS at a time when the stock market was in freefall.


  1. Similarly, while surrenders raged (half of which incurred no MVA since they were on contractual terms), in March 2001 the FSA allowed Charles Thomson, appointed actuary and chief executive, to declare an ongoing 8% interim bonus - which led to at least £200m in excess of asset share being paid out along with the £3 billion that departed the WP fund in the 6 months to 1 July 2001.


  1. In mid-July 2001 the FSA allowed the new ELAS board to claw back more than £3,500m from policyholders - not by cutting non-guaranteed bonuses pro rata, but by cutting total policy values by 14% to 16%, at gross disadvantage to all late joiners. This was despite the fact that on 18 May 2001 ELAS’ Appointed Actuary Peter Nowell had proposed a cut in value of 10%, to be achieved by reducing terminal bonuses by 35%. This fairer methodology had actually first been presented to ELAS as a proposal in a paper by EMAG on 9 March - four months before the cuts in policy values. We believe it is fair to assume that the FSA was aware of these alternative proposals, but chose not to intervene. ELCAG is not aware of ANY other life insurance company having ever cut overall policy values in its WP fund. The accepted normal methodology has been cuts to non-guaranteed bonuses and imposing material MVAs.


  1. In August 2001 the FSA colluded with the ELAS board to disadvantage all non-GARs by condoning transfer payments from non-GARs to GARs, despite the Counsel’s opinion of Nicholas Warren QC (second report received in draft by the FSA in July 2001) that all non-GARs had a balancing claim on the fund. This opinion was vindicated both by the FOS in its lead case adjudications on late joiners and effectively by the fact that ELAS privately settled the claims of 160 ELJAG members which included the return of ALL lost capital plus a measure of interest.


  1. The FSA not only failed to advise ELAS policyholders in a period of maximum stress and uncertainty in summer 2001 but actively discouraged IFAs from giving proper advice to ELAS investors seeking to transfer out.


  1. The FSA failed to speak up for both locked-in WP annuitants, and for late joiners at the preliminary Court hearing on the Compromise on 26 November 2001.  Indeed, they chose that day, of all possible days, to announce that ELAS had brought to its attention (on 12 September 2001) the existence of a previously undisclosed side letter by Chris Headdon to the reinsurance company, thus appearing to conspire with ELAS with a spoiler story to successfully distract attention from the alarming (to late joiners) content of the preliminary hearing.


  1. While the FSA may not have issued a formal opinion on its position until 6 December 2001, the time that the FSA should have acted was at the preliminary court hearing before Mr Justice Lloyd, (before N2 came into force) on Monday 26 November, 2001. That hearing’s purpose was to establish whether policyholder class definitions were satisfactory.  Both EMAG and ELMHG had made formal a joint representation to the Society (10 Oct 2001) that the draft S425 Compromise proposals were unfair to WP annuitants and to Late Joiners.  There was an all-policyholder group meeting with John Tiner and Martin Roberts at the FSA that very same day where similar anxieties were expressed. It was unacceptable that the FSA did not exercise its responsibility to speak up for those classes in court on 26 November 2001.Paul Braithwaite of EMAG was sitting next to Stephen Walton of the FSA in the High Court and observed that despite representations from ELJAG and others, the FSA made no attempt whatsoever to speak.


  1. The FSA became aware of the Headdon side letter to the reinsurance treaty in September 2001, but for reasons best known to itself, chose not to make this knowledge public until 26 November 2001. Since the Compromise conveniently resulted in no more than statutory solvency and forfeiture of true With Profits status, we might now with hindsight conclude that the financial implications of the side letter had already been factored into the Compromise behind the scenes (in which connection please also refer to sections B (k) and D (d) of ELCAG’s November 2004 submission). So, EITHER the FSA did absolutely nothing for two months OR it made covert use of the information, in effect allowing or even encouraging the Equitable to take another £800 million from the Society’s members, concealing it within the calculations of the S425 compromise.


  1. In ELCAG’s November 2004 submission concerning the Statement of Complaint, we observed that the regulator had failed to investigate gross discrepancies in the Society’s successive estimates of the financial implications of losing the Hyman Case. These include Alan Nash’s Feb 2000 statement of £50 million, the Compromise valuation of £1.6 billion based on 50% historical uptake, actuary Michael Arnold’s representations of the shortfall, Peter Nowell’s July 2001 estimate of £4.9 billion for the end of 2000 (see Penrose Chapter 6 Paragraph 75), and the apparently worthless reinsurance treaty for £800 million. Taking matters at face value, the FSA’s dereliction of duty is all the more gross. In that submission we also observed that the regulators had failed to detect that the reinsurance arrangements made to cover the Hyman position were a show treaty without substance. The regulators did not examine ELAS’s public statement in Feb 2000 that losing the Hyman case would cost members no more than £50 million, when reinsurance to the tune of £800 million was nominally being sought to cover the same situation. At the same time the Society’s actuaries were valuing a “worst case” scenario based on 100% GAR uptake at over £3 billion. On the face of it, this indicates that the FSA has failed properly to investigate these colossal disparities.




It is ELCAG’s opinion that the FSA, following the Society’s closure to new business, may well have colluded with the ELAS board to orchestrate the capping of GARs and to contain the “problem” of the Society’s unstable finances. 


In the process, the interests of all non-GARs, WP annuitants and late joiners were subjugated, to their great personal loss, and it would appear that the FSA’s motive was to serve its over-arching objective of preserving confidence in the industry and to save both Government AND the industry from meeting the very high cost of compensating for regulatory negligence or the Society’s collapse. 


By its inactions the FSA knowingly allowed the transfer of the multi-billion pound losses accumulated over more than a decade on to newer investors who could not possibly have identified the risk to which they were exposed – whereas one of the regulator’s jobs was to protect policyholders’ PRE.


The information about the true state of affairs at ELAS was certainly known to the FSA during 2001 and probably much earlier.


ELCAG calls on the PO2 investigation to consider the FSA’s negligence in 2001 and to acknowledge the total unaccountability to any body of the FSA post “N2”. Further, we would request that this submission be appended to the PO2 report.


Paul Weir, ELCAG                                                                                                   5 July 2005