Note re Equitable Submission to FOS

   on 15th November 2004 

Nicolas J. Bellord


 Click here to read Equitable's submission letter of  15th November 2004 to FOS.


The Penrose Report was published in March 2004.  It was extremely critical both of ELAS and the Regulators.  The FSA, as one of the regulatory bodies, was necessarily deeply implicated and therefore its subsequent actions and views cannot be regarded as impartial; it is not unfair to suggest that they might be trying to cover their own backs.  They have given waiver after waiver to ELAS to give them more time to respond to the numerous complaints policyholders have made against ELAS.  Policyholders suspect that the strategy orchestrated by the Treasury, FSA and ELAS working together in an unholy cabal is to kick all these complaints into the long grass in the hope that the complainants, in the most part pensioners, will be either too senile or too dead to pursue their complaints.  Despite the FSA having given ELAS, in this particular instance, a waiver to respond to the Penrose report until 31st July and then extending it to 30th September with a further 4 weeks to provide a written response which it did just before the deadline in the form of a “factsheet”. This was a bit of a misnomer as it extremely short on any new facts revealed in defence of the allegations in the Penrose Report. On 15th November ELAS wrote to the FOS about its jurisdiction and this letter was published by FOS so entering the public domain  on 30th November.  It is stated on page 1 that it is not a ‘substantive response’.  If this were happening in a Court of Law ELAS’s defence would be in danger of being disallowed as being out of time and judgment entered in default of a defence.

            There are, according to Ruth Kelly when Treasury Minister, two avenues open for policyholders to complain:

a.       The Courts.  Well we have just seen how ELTA has not been able to authorize service of their writ because of lack of insurance.  ELAS wrote to the insurance brokers warning them off.  It is simply not possible for anybody of modest means or even a substantial number of people acting together to contemplate suing ELAS when there is the slightest chance of losing and being ruined by a mammoth order for costs.  Only the very rich can afford to take on ELAS however good their case.

b.       The Financial Ombudsman Service and this letter demonstrates how ELAS is going to handle them.


ELAS argues: (using their para numbers)


1.1.    The case is just too complicated for FOS to handle.  This is like saying that if a fraud is clever enough and complicated enough the person defrauded should not be compensated.  If this is really being put forward as a serious point then it is a compelling reason why the Government should set up a proper judicial enquiry with full powers to do the things which ELAS says are not appropriate to FOS.  It is claimed that the rules of FOS being DISP 3.3.1R(17) apply.  This reads:



is satisfied that there are other compelling reasons why it is inappropriate for the complaint to be dealt with under the Financial Ombudsman Service.

            What is this compelling reason other than that ELAS does not like it? 


1.2.    Naturally the FSA has said there was no overbonussing.  To admit that there was would be deeply embarrassing for the regulators.  Yet ELAS are conducting a billion dollar case against Ernst & Young claiming that because they failed in their duties to audit the company properly the Directors were misled into overbonussing.  A clear case of trying to have your cake and eat it?

1.3.    We are then referred to a ‘Memorandum of Understanding’ and the “need to cooperate and communicate constructively”.  This is curious as the Memo is between the FSA and the FOS.  Is it appropriate for ELAS to comment on such cooperation and communication or is ELAS in cahoots with the FSA and the Treasury over this?

1.4.    ELAS contends that FOS cannot deal with matters of ‘legitimate commercial judgment’ such as bonussing.  But what if it is NOT legitimate and a fraudulent misrepresentation of the company’s true financial position as evidenced in the Penrose Report?

1.5.    ELAS contend that “overbonussing” should not be dealt with by FOS because the PO in her document of 19th July 2004 gives “compelling reasons” why such would be inappropriate.  I can find nothing in that document to substantiate that statement.


Section 2 of this letter is an argument as to why FOS should not deal with overbonussing:


2.2(d) ELAS say "Lord Penrose's Report is not evidence".  This is an oversimplification. It may not be evidence that can be accepted without qualification but it is evidence as to the evidence which Lord Penrose has collected and summarised.  It is not something that can be lightly dismissed and that corpus of evidence could be made available to the FOS as it has been to the Parliamentary Ombudsman. 


Equitable go on to say that 'it would be fundamentally unfair to the parties involved, particularly where they were not represented before the inquiry'.   Equitable were of course represented before the enquiry in that they presented the evidence and had their opportunity to make their views known both during the enquiry and in the process of Maxwellisation. I had the same opportunity when I presented my evidence.


It is perfectly obvious that the FOS could say to ELAS that this is the evidence as summarised by Lord Penrose in respect of which he comes to certain conclusions –what have you ELAS to say in reply.  This would be quite fair to ELAS. 


3.1.        This refers to ELAS’s ‘factsheet’ on overbonussing.  What is notable about that is that it contained no new facts or evidence to support statements therein.  I have dealt with that elsewhere and I append a copy of my response to this document.

July 2001 Policy Value Reductions – as I explain in my note #1.3 billion of the reduction did NOT, on ELAS’s own evidence, relate to Stock Market falls but perhaps #1.3 billion is not a ‘material component’ in ELAS’s view? 


I would also like to refer to  the question of “overpayments”.  There is a passage in the Penrose Report at para 28, Chap 4, page 124 where Lord Penrose quotes a circular issued in April 2002 by Charles Thomson, the current chief executive of ELAS, in which he admits that there were overpayments viz: 'That flexibility allows policyholders to take their benefits when the assets of the fund are depressed which is obviously to the disadvantage of continuing policyholders'.


Lord Penrose goes on in para 29 to comment: "This constituted a serious indictment of the management policies of the 1989 Board...".  The whole of this para 29 could be put to ELAS for their comments.


3.2.        July 2001 Policy Value Reductions – as I explain in my note #1.3 billion of the reduction did NOT, on ELAS’s own evidence, relate to Stock Market falls but perhaps #1.3 billion is not a ‘material component’ in ELAS’s view?


3.3.        Legal Analysis: ELAS claim ‘that they have received clear legal advice that it has a very substantial defence to any claims or complaints which be asserted on the basis of Lord Penrose’s finding’.    It would be helpful if ELAS would disclose ALL the instructions to Counsel and the Opinions they have received over the last four years rather than just those it deems politic to disclose.  After all the members have paid for these opinions.

The enclosed factsheet does not attempt to address whether or not any “overbonussing” or “over-payments” in fact took place’.  Well you could have fooled me – I thought this was just the intention of the factsheet.  So are ELAS saying they do not know?  Or are they pleading ‘Not guilty’ and asking the FOS to prove it that there was overbonussing? 

‘It goes without saying that with-profits returns are smoothed`  An extraordinary statement to make in view of Lord Penrose’s detailed examination of ELAS’s practice on smoothing and his conclusion: ‘But none of those who have provided evidence or comment has identified a smoothing policy that can be related consistently to the practice of the Society over the 1980s and 1990s .`   (para 45, page 214, Chap 6 of the Penrose Report).   On Lord Penrose’s analysis ELAS is in no position to argue that the bonuses were smoothed in any way.  They just announced bonuses not because they had the money but to pretend they were doing better than anyone else so as to suck in more money into their Pyramid selling or Ponzi scheme.  But perhaps they meant to say:  ‘It goes without saying that with-profits returns SHOULD BE  smoothed`  ?

The letter goes on to quote the GAD who are being investigated by the Parliamentary Ombudsman.  They also quote Sir Richard Scott without  mentioning that he was overruled in the Court of Appeal and again in the House of Lords in the Hyman litigation which led to the downfall of the Society when too many previously hidden facts as to the Society’s finances were revealed to the world at large.  The Society do not like exposing their activities to public gaze.


4.              Memorandum of Understanding.


One wonders whether ELAS imagined that this letter would not be published by FOS! 

4.1.        Of course the FSA do not agree with Penrose that they and the regulators had failed.  ‘They would, wouldn’t they?’  We will await the PO’s second report on this.

4.2.        ELAS asks for the FSA and the FOS to ‘co-operate constructively’ as if the FOS were to find overbonussing it might have “potential implications for the Society’s financial position”.    This seems to be a plea not to investigate as if the FOS found out there had been overbonussing then the Society might be in financial difficulties.  This is an extraordinary idea that a party to the dispute should ask not only the arbiter (FOS) but the arbiter’s master (FSA) not to investigate as the party might suffer. Blow the other party’s interests!

4.3.        The idea that FOS might make a ruling that improved the future conduct of pension business is not to ELAS’s liking it seems.

4.4.        This says that if the FSA has been in the wrong in the past then the FOS must not say so as this would breach the Memorandum of Understanding.  ‘I don’t believe it’ the grumpies will say.

5.              The Parliamentary Ombudsman’s Report

ELAS fail to mention that the PO is dealing with a different aspect namely the behaviour of the Regulators and not the behaviour of ELAS.  Thus there can be no argument that because the PO is dealing with a complaint against the Regulators this precludes the FOS from dealing with a complaint against ELAS just because some of the material evidence is relevant to both complaints.  A truly desperate argument.    They go on to argue that it is wasteful for both bodies to cover the same ground.  Surely it is not beyond the bounds of human endeavour for everyone to agree that the two bodies co-operate so that waste is reduced?  It is perfectly possible to arrange for cases to be combined in the law Courts so why not here?


6.              Other Issues

6.1.        ELAS suggest delay.  There was a recent cartoon, I think in the Financial Times’ showing a gravestone which read ‘Not dead – just waiting for Equitable compensation’.


Nicolas Bellord 

Horsted Keynes 1.12.2004


This was my  comment on the ‘factsheet’:




Comment on ELAS’s document:


‘Penrose Report – Policy Value Reductions and alleged “Over-bonusing”‘ October 2004




This note says nothing new which is in itself important as no new evidence is brought forward to support ELAS’s contentions.


Using their paragraph numbers my comments are as follows:


2.2.    If Lord Penrose admits that his calculations are necessarily crude those of ELAS are non-existent as they have brought forward no detailed calculations to refute those of Penrose.


3.          The Policy Value Reductions in July 2001.


This is an attempt to suggest that the policy value reductions in July 2001 depended entirely upon the fall in the markets during 2000 and the early part of 2001.  The argument is that (3.2) the fund was roughly in balance as at the end of 1999 with a mere £700 million shortage in assets as against policy values.  The market then fell and it was decided to cut policy values sufficiently to produce a surplus of assets over policy values of £600 million (3.6).  Am I wrong in thinking this shows that £1.3 billion was NOT due to market movements?


The key question is not what happened after 31.12.1999 but what happened previous to that date and whether there was over-bonusing.   It goes to the core of the conduct of the with-profits fund and the policyholders’ reasonable expectations.


ELAS claim that there was a smoothing policy despite Lord Penrose being unable to find one.  The existence of a smoothing policy is crucial to the running of such a fund.  It was constantly represented to the policyholders that there was a smoothing fund.  The problem was that ELAS also had a policy of ‘full distribution’ and such a policy is incompatible with holding back money to create a smoothing fund.  This contradiction could however be hidden by a policy of rapid expansion of the fund to bring in sufficient new money to keep paying out the on the expectations that had been raised previously – this was the essence of ELAS’s Ponzi scheme.  So long as new money flowed in the contradiction could be hidden – when the music stopped the pyramid collapsed.


A properly conducted smoothing policy keeps back money in good times so that payments can be made in bad times without enormous variations.  It is inevitable that as the market rises and falls, assets are going to exceed policy liabilities and vice versa: policy liabilities will exceed assets.   Thus the policy value to asset value ratio is going to be sometimes below 100% and sometimes above.  ELAS at 4.3 rather disingenuously says “one would not expect the aggregate ratio to be always at or below 100%”.  The problem with ELAS was it was NEVER at or below 100%.   In 1990 it stood at 128%.  The 1990s saw a long bull market which should have enabled ELAS to build up proper reserves in the form of a smoothing fund so that the ratio would fall well below 100%.  They never succeeded in doing that.  Most observers of the market were expecting the end of the bull run by 1998 and were surprised when it continued into 2000 by which time the ratio had fallen to 103% so when the market did fall they had no reserves.  The cuts had to be made in policy values not because the market fell but because they had no reserves.  They had no smoothing fund but ELAS had repeatedly told policyholders and potential policyholders that a smoothing fund existed and that this would mean that their expectations were safe from any fall in the market.  No such fund existed and the values had to be reduced drastically.

            It is plain from reading Chapters 2 & 3 of Penrose that the main aim of ELAS was growth at any cost.  To achieve this from the 1970s onwards it was necessary to announce results better than any other company thus raising the expectations of policyholders and potential policyholders so that they were encouraged to invest increasingly large sums of money in the company.  The results were announced by means of the high level of bonuses declared.   However as there were statutory constraints on the level of guaranteed bonuses that could be declared (ELAS had to reserve for them in some way – and in what ways is another story) an increasing part of the bonus was announced in the form of non-guaranteed bonuses.  Policyholders Reasonable Expectations were constantly raised.  These Expectations were ignored despite the statutory requirements that they should not be and are nowhere mentioned in ELAS’s note – rather the contrary.

            Another factor is that Penrose identified historic ‘over-payments’.  ELAS at 4.1 says ´for the majority of policyholders policy value is neither guaranteed nor “encashable”.  However in fact for a minority - the astute and the lucky - the policy values were encashable and over-payments were made creating a further drain on the funds when policyholders were paid more than their share of the assets.

            At 4.4 the use of hindsight is criticised in respect of the “Society’s regulatory solvency position and use of financial adjustments”.  This is just not sustainable.  You can point out that hindsight is being used when you judge the actions of some person in the light of some event which that person could not have foreseen at the time.    If someone stops on a level crossing and is then hit by an unscheduled train you could say that it would be the wrong use of hindsight not to say his negligence is mitigated by the fact that it was unscheduled.  It is not an unfair use of hindsight to point out that the person had been informed previously of the unscheduled train’s approach.  It is not an unfair use of hindsight for Penrose to point out that there were clear risks of insolvency  and other risks of which ELAS was aware as early as the 1980s in the course they were following.  The Actuary Ranson drew the attention of the Board to those risks – see for example Penrose Chap 3 para 127 page 104 “The Board was warned clearly and pointedly of the risks of maintaining high levels of distribution without adequate cover” (Penrose summarising report by Ranson to the Board 27th November 1985).

            At 3.9 and 5.1 ELAS claims the support of the FSA.  As the FSA are under investigation by the Parliamentary Ombudsman for maladministation and are further accused of connivance in ELAS´s fraud their opinion, unsupported by any evidence, can be ignored.

            At 5.2 the words ‘precise’ and ‘precisely’ are used.  Policyholders may not be entitled to ‘precise’ fulfilment of their expectations but ELAS are saying that they were entitled to zero expectations in respect of their unguaranteed bonuses.  Weasel words indeed.


            Is this factsheet not somewhat economic with the truth?  Is it an honest balanced view of the situation which one should be able to expect from a Board consisting of eminent and trustworthy people.  And who would guess that this same board is suing the former Directors and Ernst & Young for “overbonussing”?


Nicolas J. Bellord

26.10.2004  Santos Evos.