Last Updated: Thursday, December 10, 2009 12:36 AM

Chapter 1

Letter to Sir John Chadwick - 6 September 2009 

Letter from Sir John Chadwick - 1 October 2009

Chapter 2 Salami Slicing

Letter to Sir John Chadwick - 26 October 2009  
Letter from Sir John Chadwick 18 November 2009 

Chapter 3

Letter to Sir John Chadwick Calculation of Individual Losses - 12 October 2009  NEW 

Letter from Sir John Chadwick - 30 October 2009 NEW

Letter to Sir John Chadwick Comparators - 11 November 2009 NEW



From Michael Joseph to Sir John Chadwick

16 September 2009


Dear Sir John,


1) As your staff can readily confirm, I have been involved in an exchange of views with Rudi Vis MP regarding Equitable Life for the last eight years, during which time I have been endeavouring to discover exactly what happened to policyholders' money over the period from 1980 onwards. It remains a matter of considerable regret that the Society itself has provided no proper explanation of the matter in all this time. I have written various papers on that and closely related subjects which Dr Vis has endorsed by passing them on to the Ministers concerned.


2) I have also submitted formal evidence to the Penrose Inquiry, to the Morris Review of the Actuarial Profession, to the EQUI Inquiry of the European Parliament and to the recently published Investigation by the Parliamentary Ombudsman.


3) As a result of my earlier work I am probably the best informed layman on the contents of Equitable's Regulatory Returns from 1972 to 2000, and I was considering making a submission to your Inquiry on the subject of comparability and relative loss, but I found myself confronted by serious doubts, and so sought advice elsewhere.


4) I have discussed those doubts with a number of policyholder advocates including Dr Michael Nassim, Nicholas Oglethorpe and Dr Andrew Goudie who broadly share the concerns set out in paragraph 5.


5) I am not sure that you are aware of the degree of uncertainty and scepticism regarding your role that is to be found both among policyholders and more widely in the media and in Parliament. Personally, I felt that I understood the essence of the matter, only to discover that my ‘colleagues’ all had different views. Even after studying your Interim Report and reviewing your terms of reference, we found ourselves at odds. Accordingly I have set out some questions regarding your modus operandi in the following subparagraphs [A to L] and I hope that you will feel able to respond to them and make it easier to formulate submissions appropriately.

A) My interpretation is that you are not acting as an arbitrator and that your fundamental role in this matter is to act as eminent legal counsel to the Treasury with the emphasis on the creation of a robust and practical system of ex-gratia payments for those policyholders who may be deemed to qualify for them. Is this broadly correct?


B) Your written remit does not appear to contain any reference to fairness of outcome or being even handed as between policyholders and regulators. To what extent might such neutrality be implied by your appointment, and to what extent would it conflict with your obligations to the Treasury?


C) Do you accept that there has not yet been any proper accounting for the shortfall in assets which caused Equitable Life to be closed in 2000, nor is it known which cohorts of policyholders were advantaged in the creation of that shortage and which cohorts lost out? [The Parliamentary Ombudsman confessed with regret that she had been unable to address such issues and could therefore give no reliable quantification of losses.]


D) Do you accept that, apart from any overall shortages of assets at the point of closure, the computation of loss must also take into account unfair transfers of assets between one cohort of policyholders and another, where such unfairness may be substantial?


E) Policyholder groups have been invited to make submissions regarding their estimates of losses and the computation of any redress, which amounts to showing their hand in detail. Are you able in return to offer any assurances regarding the disclosure of the detailed statistics that underlie your own proposals? Such disclosure would seem to accord with the principles of natural justice. [I ask this question because we know from hard experience how difficult it is to advocate changes to such proposals when the underlying figures are withheld, and we may need to subject such figures to an independent actuarial review.]


F) It is extremely troubling that, in the papers so far disclosed to us from circa 14 inquiries, there is no explicit recognition of the fact that ‘Conduct of Business’ regulation failings have never been properly addressed, and that the prima facie case of civil fraud on the part of the Society has never been resolved. It looks quite wrong in principle to introduce such matters ‘through the back door’ by attributing blame to policyholders in general for being deceived by the Society in one way or another. Indeed, I have elsewhere made the case that only insurance experts could be expected to see through Equitable’s veils of deception, which were exceptionally well crafted. As the whole question of the degree of fault on the part of policyholders remains contentious because of Government inaction, surely it cannot be assumed as your Report suggests?


G) From the exchange of correspondence on the subject of the implications of your ‘Flexible Approach’ which Peter Scawen has kindly shown me, I see that you envisage it covering all policyholders who are deemed to have made a loss, despite the apparent conflict with your remit which instructs you to ignore many of the Ombudsman’s findings. I note too that the Ombudsman has written to emphasise the cumulative nature of her findings, a point which we regard as fundamental.

H) My questions in regard to (G) above are these: (i)Can you give any assurance that you will ignore the substantial increase in numbers of qualifying policyholders in formulating your proposed scheme of payments; i.e. that you will not seek to make the individual payments less generous than they would have been with a relatively restricted number of qualifiers? (ii) What assurances can you offer that the Flexible Approach will remain valid if some or all of the Ombudsman’s Findings are reinstated?"


I) Your Report endorses Lord Penrose’s assessment that the (management of) the Society was "the author of its own misfortunes", although in the same paragraph he makes further statements about the regulators which have since been invalidated by the Ombudsman. Would you not agree that the injustices which policyholders suffered could only occur if the Society was mismanaged, and that therefore such mismanagement cannot be used to mitigate ‘Maladministration’ by the regulators? In other words, that the Government has consistently misunderstood the import of Lord Penrose’s phrasing, as was explicitly pointed by the Public Administration Select Committee, in reply to the Government?


J) I noted two other instances where the Report appears to favour the position of Regulators who have been adjudged guilty of what the PO insists is a continuing failure of duty over a ten year period, as against that of policyholders who collectively have never been found guilty of anything other than believing what they were told by the Equitable salesmen and its top management. For example:


1) Your Report advances the thesis that 'all policyholders knew that ELAS was a full distributor', without demonstrating either the evidence for that statement or the significance that lay policyholders were supposed to have attached to it. Nor does the Report address the fact that that there was more than £4 Billion of Group Scheme business at Equitable at the behest of experienced scheme actuaries, a fact which gave substantial comfort to other WP investors.


2) In examining the level of 'discretionary payment' which might be appropriate the Report proposes that narrowest constructions be applied to every aspect of the Regulator's liability, while apportioning responsibility away to Fate, other parties, policyholders themselves as reckless investors, and various other bases for discounting. In contrast the Report does acknowledge elsewhere that in a similar professional failure in the private sector the principle of Joint and Several Liability would be rigorously applied.


3) In regard to (2) above, would the latter method not provide a better model for the organisation of any payment scheme,

with, for example recipients assigning their rights against third parties to the Government who could make one aggregate claim instead of many uneconomic legal actions?

K) Our reading of the causes of policyholders’ losses is that they derived from a substantive and obvious mismatch between the business that Equitable was writing and the actuarial model that they applied to that business from 1985 onwards. We infer that the GAD was perfectly well aware of this mismatch and its implications for policyholders’ reasonable expectations (PRE), but they took no action whatever to address the problem. I would plan to base my own submission on the thesis that, had Equitable used an appropriate model, no losses would have occurred. Is this a scenario that you might feel able to consider in determining notional losses?


L) The history of the Equitable affair and its multitude of pseudo ‘investigations’ is rife with concealed conflicts of interest. We

would urge that on this occasion at least, there should be the maximum of transparency on all sides. Would you accept in this

context that it is appropriate that your actuarial advisors provide a detailed declaration of their corporate and personal roles in the management of Group Pension schemes at Equitable Life? [I am confident that those of us arguing the policyholder case will be happy to make similar disclosure.]

6) May I also emphasise that, in writing this letter, we are not expecting to be entrusted with any privileged or confidential information, and that we would indeed hope that you could make your responses to it generally available.


Yours sincerely

Michael Josephs


From Sir John Chadwick to Michael Joseph

1 October 2009


Dear Mr Josephs


Equitable Life


Thank you for your letter dated 16 September 2009. I set out below responses to points that you have raised, following the same numbering as your paragraphs.


1) Neither my office nor I have seen any correspondence between yourself and Dr

Vis MP. If you have provided material to Dr Vis which you consider to be specifically relevant to my work, I would be grateful if you could send copies to my Office.


I note your comments at paragraphs 2) to 5). In response to the questions which you posed:


A) You are correct that I am not acting as an arbitrator. But, subject to that, your understanding of my role appears incorrect. I am not acting as legal counsel to the Treasury. My task is to provide independent advice on the matters set out in my

Terms of Reference.


B) I understand it to be an overriding requirement of my Terms of Reference that the advice which I am asked to give should be even handed: both as between different classes of policyholder and between the policyholders and the Government.


C) and D) I do not understand your reference to the absence of "any proper accounting for the shortfall in assets which caused Equitable Life to be closed in 2000". An investigation into an alleged shortfall in assets forms no part of my Terms of Reference.


E) I do not understand what you mean by the phrase "showing their hand in detail." It is for policyholders to decide what submissions they wish to make to me. If they choose not to do so, there is an obvious risk that I will not be able to take the points which they wish to make into account.


F) Neither my Terms of Reference, nor the Parliamentary Ombudsman’s remit, required consideration of the "Conduct of Business" regulation of Equitable Life. I am unaware that either my Interim Report or my Proposals made any reference to fault on the part of policyholders. If you disagree with this view I would be grateful if you could direct me to those paragraphs of my Interim Report which you consider relevant in this context.


G) and H) The number of persons who might be found to have suffered relative loss will not affect the advice which I shall give as to the manner in which relative loss be ascertained. The number of persons who ultimately participate in the Government’s ex gratia payment scheme - and the amount of any payments to be made pursuant to that Scheme - is a matter for the Government; not for me. I will not speculate on what my advice would be if I were asked to consider loss resulting from those of the Ombudsman’s findings of injustice which the Government has, to date, rejected.


I) It is incorrect to suggest that my Interim Report does more than record (in neutral terms) what appears in the relevant paragraphs of the Penrose Report. I am not in a position to comment on whether or not the Government has correctly understood Lord Penrose’s phrasing. My comments on whether there should be an apportionment to Equitable Life are set out at Section 3 of my Interim Report: in particular at paragraph 3.11 thereof.


J) It is, indeed, still my understanding that Equitable Life widely advertised its policy of full distribution. This view is based principally on statements contained in the Ombudsman’s Report and the Penrose Report. See, by way of example:

• Ombudsman: paragraphs 1/2/36-38 (pages 12-13), 1/2/56 (page 14), 1/2/157 (page 30 – quoting the Disciplinary Panel of the Institute of Actuaries, to the effect that Equitable Life operated a "stated philosophy of full and fair distribution"); 1/4/104 (page 60 – where the Ombudsman appears to accept the description of Equitable Life as having a "well publicised policy of full distribution) and 1/12/68 (page 343); and


• Penrose: paragraphs 4/139 (page 157), 5/62 (page 175), 14/2 (pages 481- 482), 14/11 (page 484), 14/56 (page 496), 14/78 (page 502), 14/85 (page 505), 14/95 (page 508), 14/110 (page 512), 17/64 (page 623) and 20/5 (729) of the Penrose Report.


If you think that this understanding is incorrect, I would be grateful for information which you think might lead me to alter it.


J) 2) and 3) I am not able to identify the basis for your comment that "the Report proposes that the narrowest construction be applied to every aspect of the regulative liability". Would you direct me to the passages on which you rely to support that comment.


K) Allegations of maladministration prior to 1995 are not within my Terms of Reference.


L) I have been assured that my actuarial advisers at Towers Perrin have no conflicts of interest. No member of the Towers Perrin team has any connection to Equitable Life; none of them has ever been an Equitable Life policyholder; and they are satisfied that none of their close family members have been Equitable Life policyholders. Towers Perrin also inform me that none of the team providing advice to me has advised clients to invest in Equitable Life. Furthermore, as far as they have been able to ascertain, none of the current principals of the firm have advised clients to invest in Equitable Life since before the early 1990's.


6) I note your comments. As part of my interim report I issued key correspondence between myself and interested parties. In the interests of transparency, I intend to do the same with regard to representations on my interim report. I will presume, unless you write to me otherwise, that you are content for your letter and this reply to be published at that time.


Yours sincerely


John Chadwick


From Michael Joseph to Sir John Chadwick

26 October 2009

Apportionment and Other Matters - (Salami Slicing) .pdf

Section 3 of Sir John Chadwick's Report devoted to the Apportionment .pdf

From: The Right Honourable Sir John Chadwick

To Mr. Michael Josephs

18 November 2009


Dear Mr. Josephs

Equitable Life ex gratia payment scheme

Thank you for your letters of 26 October and 11 November 2009. In this letter I respond to a number of the representations which you have made to me. There are other representations in your letters which do not seem to me to call for a specific response at this stage; but I shall, of course, give consideration, also, to those representations as I proceed with my work.


Letter of 26 October 2009

Paragraph 4: I have received advice on actuarial matters – which, naturally, include quantitative data – from Towers Perrin; but it is not the case that "detailed statistics … underlie [my] proposals". To the extent that my Advice (or any interim advice) provides HM Treasury with figures on which to base any decision to make payments, it will be for the Treasury to decide whether those figures and the basis on which they have been determined are made public.

Paragraph 5: Paragraph 2.46 of my Interim Report has been misunderstood by many who have written to me. I have prepared a short note explaining the thinking behind that paragraph. I attach a copy.

Paragraph 11: My Terms of Reference require me to consider whether there should be an apportionment. That is what I shall do. If I come to the conclusion that there should be an apportionment at all as a matter of fairness and practicality - a question on which I have invited representations and have made no determination

- I shall need to go on to consider what apportionment would be appropriate in this case. Again, that is a question on which I currently have an open mind.

Paragraph 14: I note your point that, at the time of the maladministration that has been found and accepted, the Law Commission’s proposals regarding joint and several liability had not been made: and I am aware that the proposals have not been accepted or given effect in law. I do not regard myself as bound by those proposals: but I regard them as providing some guidance as to how the question of apportionment might be approached in the context of regulatory failure. It is important to keep in mind that I am not conducting an exercise in apportionment as between parties each of whom is under some legal duty. I am not seeking to apply legal rules. I find it difficult to see that there is any element of retrospective rule-making.

Paragraph 16: Again, I note your point that the Law Commission’s proposals may be seen as tentative. But, as it seems to me, the passage you quote relates to the proposal for the creation of statutory liability for administrative bodies in its totality; and does not relate specifically to the suggested mitigation of the potential consequences of such statutory liability (by modifying the principle of joint and several liability in such cases).

Paragraph 20: I think it incorrect to state (as you do) at paragraph 20(h) that:

"[The] Ombudsman found that, under the legislation then current, the public bodes shared joint and several liability with the Society for the injustice visited on the victims."

The Ombudsman did not find – and would not have been able to consider – any question of legal liability on the part of the public bodies investigated.

Paragraph 25: Paragraph 3.15 of the Interim Report does not state (or even suggest) that I have "already made a decision" concerning Mr. Headdon’s withholding of the "side letter". I had not done so. Paragraph 3.14 makes plain that the views expressed in this context are provisional. I have still reached no conclusive view on the question of any notional apportionment to Mr. Headdon.

Paragraph 26: I do not understand your statement that "by introducing apportionment, causation will be introduced via a back door". The question of causation is central to the advice that the Government has asked me to provide.

Paragraphs 27 to 30: It is likely that I would need to make my own findings of fact before reaching a view as to any notional apportionment. I would require further persuasion before making the findings that you have there put forward.

Paragraphs 31 to 35: I shall give appropriate consideration to the matters you raise.

Letter of 11 November 2009

In general, I note the points you make in support of the use of a notional comparator. I have not yet reached a definitive view on the question as to what kind of comparator should be used. However, I still tend to the view that a notional comparator is likely to prove more contentious and less readily understood than a basket of actual comparators.

You urge that I should avoid using comparators that were not affected by maladministration of the same kind as Equitable Life. But I do not understand how you suggest that I should identify those comparators which were (or might have been) affected by maladministration. My Terms of Reference do not permit me to investigate whether and, if so, where and when, maladministration occurred in relation to other participants in the life assurance industry.

Yours sincerely,


Letter to Sir John Chadwick Calculation of Individual Losses - 12 October 2009 .pdf

Letter from Sir John Chadwick - 30 October 2009 .pdf

Letter to Sir John Chadwick Comparators - 11 November 2009 .pdf