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Clarke
Willmott PROPOSAL - 1 April 2004 |
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Mr P Scawen ELTA Group Route de Laprade Aubeterre
sur Dronne 16390
France 1
April 2004 our ref: 11/505/901413-107/ljh Dear Peter Equitable Life Trapped Annuitants I refer to our meeting at your home on the 6 and 7 January when we were joined by Nicholas Oglethorpe and Nicholas Bellord. I am writing this letter as a preliminary letter of advice to members of the Equitable Life Trapped Annuitants as an indication of what we see as the way forward for holders of With-Profits annuity policies written by Equitable Life. Summary For the reasons which appear in the following paragraphs of this letter, in my opinion:- 1. With-Profits annuitants with Equitable policies have sound claims against Equitable Life for mis-selling which have not been taken away by the Compromise Scheme of 2002 2. The damages payable in most cases will be significant, and are being magnified by the fall in annuity rates and the declining income from With-Profits annuities. Detailed calculations of losses would require an actuary. 3. There may also be a sound claim against the United Kingdom Government and/or Government appointed Regulators of the life assurance industry. I am unable to advise such legal proceedings be commenced at the present time. 4. This firm is in principle willing to undertake a group action by With-Profits annuitants on a conditional fee agreement (no-win-no-fee). 5. There is no prospect of running a group action through the Financial Ombudsman Service, which we would not in any event recommend for claims of this kind. 6. The likely cost to each With Profits annuitant joining such a group, depending upon the numbers joining and the cost of insurance against the cost of losing, is between £700 and £1000 per claimant. Your membership I understand that the membership of your organisation is confined to those who have purchased Equitable Life With-Profits annuities with funds that they held within pension schemes. Most of these schemes I understand to have been either personal pensions or retirement annuity contracts. It may be that some of the funds were held inside occupational schemes. I am assuming however that all those to whom this letter of advice is addressed entered into their With-Profits annuity contracts with Equitable Life on the advice of one or more persons employed by Equitable Life to give pensions advice to potential annuitants. What follows in this letter may not apply to those who have entered into With-Profits annuities on the advice of independent financial advisers. Those of your members who had advice from more than one source may need to look to the source of the advice on which they relied as being the responsible party. I say this because it is not uncommon for Equitable Life policyholders to have had independent financial advisers, but to have relied upon Equitable Life representatives for their pensions advice in preference to the IFAs. Individual circumstances. It is important that I say right at the outset that this letter of advice is addressed to an organisation, that is ELTA, and not to any particular member. Every investor in a financial product has his own story and his own circumstances. This is necessarily a generalised letter. Individual members of your organisation looking for the fullest advice on their individual circumstances should take legal advice on an individual basis. This firm will be able to provide that advice, but we are certainly not the only people able to do so. The nature of the problem. Equitable Life had a blue chip reputation as a life assurer specialising in pension arrangements for professional people. The With-Profits fund was promoted by the Equitable Life’s sales force as a low risk investment with a history of high returns and every prospect of continuing those high returns for the future. The With-Profits annuity was thus sold as a safe source of pension income which had a good chance of growing and beating inflation. In fact the With-Profits fund was affected by potential liabilities to guaranteed annuity rate policyholders (GAR’s), and may well have been subject to other liabilities. Burgess Hodgson had produced some reports for EMAG which identify these and the Penrose report confirms they were right. Certainly from 1997 onwards and possibly earlier, the fund was so insufficiently provisioned against those liabilities that it did not meet the requirements of UK legislation or the Third Life Directive of the European Union. This is evident from the Equitable’s own pleadings against its former directors, and from the Penrose report. Unlike other products, there is no market in transfers for With-Profits annuities. Accordingly With-Profits Annuitants were unable to transfer out to another provider even when it became clear that the Society might have been in difficulties. All other With-Profits policyholders had an opportunity of so doing subject, at various times, to various market value adjusters. Thus the With-Profits annuitants are “trapped” with their Equitable Life policies in a way which other With-Profits policyholders are not. The compromise scheme of February 2002, sanctioned by the High Court under Section 425 of the Companies Act 1985, prevented all then existing With-Profits policyholders, including With-Profits annuitants from raising negligence claims or any other claim relating to guaranteed annuity rate liabilities in actions against Equitable Life. Again, the With-Profits annuitants were unique in not being able to escape the Society and, therefore, the effect of the compromise scheme. Subsequently Equitable Life cut bonuses (and hence income) to With-Profits Annuitants in a way which many of them found surprising, having regard to the representations that had been made to them at the time that the policies were sold and afterwards up to that point. I am sure the Equitable’s sales force were not properly instructed as to the nature of the product, that they did not know themselves that the annuitants’ income could be reduced in this way, and this caused With Profits annuitants to be misled. Liability for With-Profits Annuitants’
losses. It is obvious that if all holders of With-Profits annuities written by Equitable Life have suffered significant losses which were not expected at the time they entered into the transactions. What are the possible sources of redress? There are two. The Equitable Life itself and the British Government and/or Government appointed regulators. Dealing with these in turn:- Equitable Life Sales
Issues Equitable Life was required to ensure its sales force, when making recommendations to investors, complied with rules made by LAUTRO. This required the representative to ensure that the investor understood the investment he was making, and only to advise investments that were suitable to the investor. It is obvious to us that no Equitable Life representative ever did this. I am sure that you could get some Equitable representatives to give evidence to that effect and certainly With-Profits Annuitants will be able to say that they never understood what they were investing in. It is important to note that the claim will be against the Society not the representatives themselves. I regard the prospects of bringing home a claim on this basis as extremely strong. Life
Office Issues As mentioned above, Equitable were subject to liabilities and any anybody investing in the With Profits fund took his or her share of those liabilities. To the extent that those liabilities related to GARs, we may have a problem with the Compromise Scheme of 2002. However it is also obvious from Equitable’s own case against its directors that its accounting provisions were out of order. Without appropriate reserves, With-Profits annuitants were buying a much higher risk product than it was represented to be. Penrose has informed us that the With-Profits annuity was developed especially to reduce the contractual obligations of Equitable. Annuitants’ income was deliberately put at risk by being put at the discretion of the directors in order that Equitable should have less risk. They called it being more “technically efficient”! I wonder that such an “annuity” could honestly be described as an annuity at all. I regard a case against Equitable on life office issues as being very strong. Contractual Issues There is an attractive argument that Equitable was in fact contractually obliged at least not to reduce annuities. Such an obligation could stem from the original representations by the representatives; it could possibly stem from the compromise scheme documentation itself. I am less sure about this ground, but I am having the matter looked at by a QC for the benefit of with profits annuitants at this early stage. The Compromise Scheme The Compromise Scheme does operate to waive any existing policyholders right to bring a GAR-related claim. However, although the definition of a GAR-related claim is wide it is limited to such issues. Thus, contractual claims and claims that the advice was unsuitable regardless of any GAR element are not waived and can still be brought. The key to the whole issue of Equitable’s liability is that it was simply not understood by the purchasers of With-Profits annuities that there was any real prospect that their annuities could go down. With-Profits Annuitants have in my view a strong case against Equitable. The UK Government/regulator There are two possibilities for claims against the UK Government or the regulators. The responsibility for regulating Equitable shifted over its unfortunate history. I am not attempting in this letter to identify exactly which regulator was responsible at what time. There are two possible opportunities for claim. The first is the occasion of the original investment at a time when Equitable was non-compliant with UK law and/or the Third Life Directive as to the provisioning in its accounts. The Compromise Scheme of February 2002 does not affect claims against this class of defendant at all. The second occasion is the Compromise Scheme itself. There are two causes of action, or “hooks” on which to hang a claim against the UK Government/regulator. These are:-
It is worth mentioning in this connection that the Human Rights Act 1998 gave certain rights to With-Profits annuitants which may have been breached by the Compromise Scheme to the extent that that scheme effectively confiscated their right to make a GAR related claim against Equitable, and gave nothing of substance in return. This firm has agreed to fund an opinion from a QC on this aspect of the Compromise Scheme. Our present view is that the UK Government/regulator, whilst a possible, even attractive defendant, is not the most obvious target for With Profits annuitants. We do not believe that the Penrose Report has made the prospect significantly more attractive. The amount of compensation payable. I am not going to attempt to quantify compensation which might be payable by the UK Government/regulator. I confine myself to what is more familiar territory to me namely the measure of damages in a claim against Equitable Life. This firm has recently settled a batch of cases against Equitable Life in which the measure of compensation for mis-selling financial products was very much in issue. So we have a track record on this particular point. I take the view that in respect of mis-selling (i.e. sales rather than life office issues) Equitable’s liabilities are to bridge the gap between what a With-Profits annuitant would now have if he or she had been properly advised at the time and what he or she in fact has now. The gap is measured by the price of an annuity to cover the difference, and is payable in cash. Let
me illustrate this with
a couple of examples. 1)
Mr A bought in 1997 a With-Profits
annuity for £120,000. The income at that time was £11,374 per annum (i.e. 9.4%
of the sum invested). Suppose
that properly advised, Mr At would have bought a level annuity at say 9.1%
yielding £10,920 per annum. Following
the cuts imposed on With-Profits annuities, the £11,374 has fallen to £7,961
(i.e. has been cut by 30%). Mr
A’s present loss is the annual difference between what he should have and what
he in fact has, is £10,920 – £7,961 = £2,959 per annum. Annuity
rates have moved against Mr A the annuitant in the meantime and the annuity rate
applicable to him now is (say) 6.5%. Therefore
his current loss is £2,959 x 100/6.5
= £45,523. From
this Mr A will have to give credit for the extra income he has enjoyed from 1997
down to now (i.e. £11,374 - £10,920). Adjustment
will have to be made for tax, for he has paid more tax than he would have paid
on a slightly smaller income. There
will be an adjustment therefore of about £1,600. 2)
Mr B has a more modest income. He bought, in 1991, a with profits
annuity yielding £1136 pa. The consideration was £14,947. Properly advised, he
would have bought an annuity escalating at 5% pa with a pension for his widow of
2/3. The rate for this in 1991 was 7.3% It is now 4.7% So
Mr B would have had at the outset, in 1991, an income of £1091 instead of the
higher sum of £1136 pa. This would have risen at 5% pa to £2057 pa. The income
he in fact received, over the intervening 13 years, at first rose, but has now
fallen to £842 pa. Suppose that, taking one year with another, and adjusting
for interest and tax, the net difference over the last 13 years is that he
received £10,000 less than he would have done. The difference in his annual
income is now £2057 - £842 = £1215. Mr
B’s losses are Down
to today
£10,000 Cost
of purchasing an escalating annuity to
bridge the gap
£1215 x 100/4.7
£25,851 Total
£35,851 Plus
further compensation calculated actuarially to compensate for the likely fall in
the current income of £842 pa This calculation however is very basic and provides only a minimum
loss further complicated by the fact that an Equitable With-Profits Annuity is
falling year by year. To calculate any particular
With-Profits Annuitant’s losses with accuracy it is necessary to carry out
this calculation for every year of the annuitant’s projected life, making
assumptions as to the decreasing income from the annuity. This is the method of
valuation we have used in our current With-Profits Annuity cases. It is work for
an actuary, rather than a solicitor. It follows therefore that as
annuity rates fall so the losses suffered by With-Profits Annuitants will rise.
All but the most modest investors in Equitable Life With-Profits annuities with
therefore have suffered considerable losses. I emphasise however that
damages received will not normally be paid in annuity form. Damages recovered
through the courts are paid cash. I do
not believe they will be subject to income or capital gains tax, although tax is
sometimes deducted on interest on damages. Where would such
compensation come from? Compensation for claims against Equitable would come out of Equitable’s funds and will of course affect other With-Profits policyholders. It is however a fact that because of the particular susceptibility of With-Profits Annuitants to the final bonus element, they have been disproportionately affected by claims now being paid out by Equitable Life. Should policyholders be making a claim at all, and where is the benefit? The question has been asked by a number of clients whether Equitable Life can in fact stand the claims. The provisions for claims in the December 2003 interim accounts are as follows:-
Note also that in 1997 the Society issued £350 million in subordinated bonds, payment on which can be deferred if the required minimum margin of solvency cannot be met. The holders of those bonds are subordinated to payment of claims by all creditors including, of course, judgement creditors which is what successful with profits annuitants will be. These bonds feature as a liability of £348m in the most recent accounts. In the circumstances of financial difficulty, this liability would be worth much less, or nil, and the Society’s capital base increased proportionately. Whether claims represent a real threat to the viability of the Society is not something I can predict. I can however say that the price of Equitable Life’s subordinated debt has risen significantly. I have been watching the price of these instruments since about May when they were £48 per £100. As I write this letter they stand at £82 per £100. Admittedly of course these bonds are in the category of distressed debt but the market plainly thinks that Equitable’s finances are improving. Some policyholders have been influenced by the mutual status of the Society. The current board, as was its predecessor, is keen on the notion of mutuality, hoping to deter claims by pointing out that the defendants of such claims will simply be other policyholders like themselves. This is of course true, but this is a very large commercial organisation and is very far from the cricket club or small partnership where such sentiments would be more appropriate. It is a fact however that the interest of With-Profits annuitants are directly opposed to those of investing policyholders. If there are opposed classes, it is between those who invest and those who draw an income. The Equitable at the moment is paying out claims under the Rectification Scheme and the Managed Pension Review. Compensation is being received by investing policyholders or ex-policyholders at the expense of With-Profits annuitants. If there is unfairness between classes of policyholder, With-Profits annuitants have been losing out to the benefit of investing policyholders and ex-policyholders As With-Profits annuitants are disadvantaged by other claims the only effective way to protect With Profits Annuitants income is to make your own claims for compensation. Will compensation be allocated by the courts and how will it be calculated? I would expect that once liability by Equitable is established, the judge will indicate the way in which individual claims for compensation will be assessed. In the absence of agreement, there will be a default power of the court to fix the appropriate sum. There is always a possibility that Equitable will make a lump sum offer to all claimants joining a joint action. I propose therefore (see below) that the committee of ELTA should ultimately have a fallback power to accept such a lump sum offer and divide it equitably between the claimants if it appears in claimants’ interest to do this. I would recommend the committee of ELTA, in such an event, to appoint an independent arbitrator to do this job, probably drawn from the legal profession but entirely independent of the committee. Avenues for redress. There are two jurisdictions available, the Financial Ombudsman Service and the civil courts.
Limitation. The law on this is very complex and I do not propose in this letter to set out the different limitation periods applicable to the different kinds of claim. An important point that many Equitable Life policyholders do not understand is that the limitation clock is ticking against them until they issue their writ (or as it is now called claim form). Writing letters to the Equitable or to an MP, or putting in official complaints of whatever kind, simply do not stop the clock ticking. Claims against Equitable Life do not keep forever. There will come a time when a good claim is no longer viable simply because the policyholder has waited too long. However, once six years from the original transaction has elapsed, a With-Profits Annuitant will always be at risk that Equitable will argue that he knew there was something wrong with the product and should have started his legal action before. On the assumption that a With-Profits annuitant did not know that his/her income could fall before the reduction in fund values on 16 July 2001 at the earliest, then there is a window until the beginning of July this year in which to issue the proceedings. If proceedings were to be issued later than this there is a real danger that Equitable will argue it was issued too late and that issue will have to be resolved by trial before the claim itself can be tried. There is a degree of subjectivity in limitation arguments once the basic six year period from the date of the purchase has expired. Nevertheless we are confident that proceedings commenced before the 15 July this year cannot be successfully defended on limitation grounds. Indeed, Equitable may not even challenge them on this ground. What size fits all? In advising a group of policyholders with a view to combining together and running a claim as a group, it is necessary to consider what claims are common to all or most of them. An example of a claim that is common I believe to most of them is a claim that the Equitable’s representatives never explained to policyholders that bonuses could be cut as severely as they have been (as outlined above).
An example, however, of a claim that is not likely to be common to many is the advice given to some policyholders to consolidate all their policies with other insurance companies into an Equitable fund. Such claims would be very client specific. It is important that your members understand that in putting together a group of policyholders to run a class action, they are necessarily abandoning those claims that are specific to them and not shared by the group. What I propose. I
propose that you should gather a group of With-Profits annuitants who wish to
make claims. There will have to be enough of them to raise sufficient money to
run the case through to trial even though it is likely to settle beforehand. There
are a number of matters which need to be resolved before we are in a position to
commence the action. These include Counsel’s detailed advice on various
aspects of the claim and prospects of success, the structure of the body which
will bring the claim, obtaining insurance cover, and considering each
individual’s suitability for joining the group action. I propose that each
individual who wishes to join the action contributes £100 towards the costs of
resolving these matters. It
is important to clarify that: 1.
You would need a constitution for your action group under which the group
would have to be managed by a committee. 2.
Joiners of the group must understand and agree that their own cases will
be subordinated to the group, and the committee will take management decisions
in the interests of the group as a whole. The group management would have to
have the discretion to refuse to take cases not passing a threshold of
viability. Annuitants whose cases
are not accepted by the committee will of course have their contributions
refunded. 3.
Joiners of the group must be willing to support us in representing them.
They would therefore have to provide documents, statements and be willing if
necessary to go into court to give evidence. After
this initial stage we will be in a position to issue proceedings. We should have
insurance cover in place to cover Equitable’s fees if we lose and we will also
have signed a Conditional Fee Agreement to cover our fees. However, there are
expenses in bringing the claim which cannot be covered in the CFA and each
participant in the action will have to contribute a further sum to cover those
expenses, the largest of which will be insurance. We anticipate these will be in
the region of £600 to £900 each. The final amount will depend upon how many
participants there are. We
would recommend obtaining insurance. With-Profits Annuitants will be concerned
that in starting legal proceedings they may have a personal liability if the
case goes wrong and Equitable become entitled to its costs. Whilst many of our
clients are happy to rely on our judgment without taking such insurance, I
anticipate that an action group of With-Profits annuitants will want the comfort
of adequate insurance against the cost of losing. I
am in discussion with our usual providers of insurance provision with a view to
getting quotations. Funding
an action. Once
a sufficiently large float has been raised from members’ contributions, this
firm would be happy to work on a conditional
fee agreement (subject to a counsel’s opinion – see below), This would mean
that members would not have to worry about our fees – they would either be
payable by Equitable in the event of success or would not be payable at all. The
members’ contributions would go towards disbursements including the insurance
to cover against the risk of losing. The members’ contributions would be
lodged in our client account and we would for this purpose be the groups
“bankers”, drawing down disbursements on instructions from the committee as
required. The
start-up costs this firm is incurring will be included in the costs payable in
the event of success. We
will have the have the right to refuse cases if we do not think liability will
be established in individual cases, and also have the right to limit numbers, so
that we do not take on more than we can handle. There are thousands of Equitable
With-Profits annuitants. This
firm would however, in addition to the time spent in start up, make available £10,000
for disbursements. This is mainly to provide an initial counsel’s opinion for
the comfort of members of the group right at the outset. The
way forward As
a pre-requisite for this arrangement we would need:- 1.
A library of letters and other announcements to With-Profits annuitants.
We already have of course quite a lot of this material. 2.
A group able to provide sufficient funding. A precise budget must await
the outcome of our discussions with Vision Underwriting. 3.
A leading Counsel’s opinion on the merits. This will certainly be
required by legal expenses insurers before we can sign a conditional fee
agreement. Once a sufficiently large group looks likely to be assembled, we will
set about getting this using the £10,000 float that the firm has made
available. With
all this in mind I would like to suggest that you invite expressions of interest
by With-Profits annuitants. Those who are interested and prepared to contribute
towards the main action should send their file of papers, their £100
contribution and a questionnaire that we have prepared.
Once we know that we will have sufficient members of a group to afford
the action we will begin the initial work. I
look forward to hearing from you that this matter can be taken forward further. Robert Morfee Partner 0117 916 9566 direct fax:0117 9175 594 rmorfee@clarkewillmott.com Clarke Willmott solicitors 1 Georges Square Bath Street Bristol BS1 6BA UK DX 78247 Bristol 1 switchboard 0117 941 6600 www.clarkewillmott.com |
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