An Equitable Assessment of Rights and Wrongs

by Dr Michael Nassim

2.GOVERNMENTS, REGULATORS AND THE SOCIETY

2.  Governments, Regulators and the Society

When the GAR crisis was precipitated by the House of Lords judgement, there was widespread consternation among the many parties with an interested responsibility in the matter.  Naturally enough, none of them can have wished to be held any more accountable for the situation than the emergent facts might ultimately dictate.  The overall pattern of events strongly suggests that their first instincts were to review and cover their respective positions, such that their obligations to manage the situation positively may have taken second place.  In the case of the Government, Treasury and the regulators this was particularly unfortunate, and the defining moment came when Mr Christopher Chope, the Opposition Treasury Spokesman, asked inter alia the following question in the House of Commons on October 31^st, 2001 (Hansard Column 979)²:  “Is it right that the FSA should be giving no guidance to individual policyholders about whether to accept a compromise?  Is the FSA certain that, in the event of a compromise being accepted by policyholders, Equitable Life will be able to withstand large class actions alleging general mis-selling of with-profits policies, brought by those who have left the Society?  Unless there is some certainty about that, even if the compromise is accepted, Equitable Life might go into insolvency.”  Hansard does not indicate that this question was answered, which may in part explain why Mr Chope returned to the matter on November 9^th, as follows (Hansard 491)²:  “To ask the Chancellor of the Exchequer what assessment he has made of the impact on the future for Equitable Life Assurance of the society compromise due to be voted on; and if he will make a statement.”  To this Treasury Spokesman Ruth Kelly replied: “This is a matter for the board of the Equitable Life and the members of the society.”  And since the writer had previously put Mr Chope’s first question to the Chairman of the FSA in person³, and had already received a noncommittal reply from him⁴, it was thereupon finally clear that the Society was (and indeed always must have been) entirely on its own, such that its new Board could do no other than paint the rosiest picture it could of a very stormy prospect in order to contain the situation and limit the damage. Here an important proviso is that it was cognisant of its inheritance when it proposed the Compromise Scheme.

Though the new Board deserves everyone’s sympathy in this, we should note that this pink picture included a conservative GAR liability estimate at 1.5 billion pounds, and the clear statement that any compensatory litigation would be on a case-by-case basis.  This implied that there was no general case for class actions, and that litigation would be piecemeal and comparatively trivial.  But as had been urgently pointed out to the Society⁵, Government⁶, the FSA and its chairman at the time^3,6, this went against the grain of the evidence then available, which indicated that widespread or even universal mis-selling had occurred, essentially because the GAR liability was never addressed by the Society’s literature and explained to or by their representatives, and there was a clear need to keep the money flowing in.  These observations and deductions have since been corroborated, and officially confirmed in that the Society has accepted responsibility for mis-selling, although as yet only for policies after 1998.  And in the process it has more recently emerged that the GAR issue was one of several points of contention which stemmed from seminal decisions or actions which overturned the traditionally successful business and insurance paradigm of the With-Profits Fund, affected all policies sold subsequently, and adversely influenced the manner in which the Fund was administered and represented.  Hence any resulting maladministration, misrepresentation and mis-selling has a central and generic character.  The crucial date when this process began has yet to be established with certainty, and what brought it about is of central forensic importance.  Conversely, in our various considerations of the conduct of government and regulators past and present we should expect any rigorous analysis to cover three distinct periods, namely:

1. The role of the DTI/FSA and governments of the day in the events leading up to the crisis precipitated by the GAR issue.
2. The handling, or lack of it, by the present government, Treasury, FSA and the judiciary in the run up to the Equitable Compromise Scheme arrangement.
3. Ditto in the events since the Compromise.

We should also anticipate that the findings of the Baird report⁷ into the conduct of the regulator will be followed up and appropriately addressed. This is because there were regulatory requirements for solvency under the Insurance Companies Act of 1982, and for the conduct of business and the obligation to give “best advice” to clients under the Financial Services Act of 1986.  As will become apparent, there were matters wanting in both these areas, and so the failure of the regulatory departments concerned to communicate with one another was an important factor in the FSA’s inaction. The climate of co-operation between regulators and the Society is an additional consideration, because the Chairman of the FSA has complained about it openly.  On the one hand it may excuse some regulatory deficiencies, and on the other it could indicate a more general irregularity rather than something occasional or incidental. In due course we shall need to know which, or indeed both, might be the explanation.  Finally, we should remember that silence and inaction give the government three traditional and oft-deployed advantages:

• A low profile and reduced need for uncomfortable decision-making

• Avoidance of responsibility

•  Delay in settling for its share of financial consequences until as many people as possible have already accepted less than their due.

Having thus outlined our fears and expectations in this arena we may turn to the Society, where the majority of our interest properly lies.