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Letter to FOS from Rodney Allen |
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Mr. John Todd, Assistant Manager, Financial Ombudsman Service, South Quay Plaza, 183 Marsh Wall, London E14 9SR 20th October 2003 Your Ref. 3633673/JXT/25 Dear Mr. Todd, Re ELAS Thank you for your letter dated 10th October and copy of a booklet produced by the Society dated December 1993. I was never shown this publication. Since I believed Mr. Moss’s explanations were straightforward, I did not see it necessary to delve further. As you are aware my claim has two main elements. First, that the workings of the bonus system were not properly explained. Second, that I was misled about the state of the Society’s finances. Regarding the first, I cite Peter Scawen’s report to which you have access. I would refer specifically to page 9 of Section 3. I assumed my annuity would be adjusted annually by the direct relationship between the Anticipated Bonus Rate [ABR] and the actual Bonuses declared by the Society, as I believe is generally the situation elsewhere. I understood that my ABR required a bonus rate of over 7.1225% for the annuity to increase. If it were lower it would decrease. The calculations for the next year would be based upon the level established the previous year. I contend that was how tens of thousands WP annuitants interpreted the way their annuity would work, and certainly in my case no attempt was made to disabuse me. While a few confused investors may be unfortunate, when tens of thousands are involved the implications are chicanery. I am not suggesting that Mr. Moss deliberately misled me. I do not have sufficient evidence for that although others may have. However, I do regard him as a pawn being operated on a sale’s chessboard by senior managers who must have been aware that they were not going out of there way to explain the full extent of WP annuitant policyholder’s risk. Of course, they must have hoped that expectations of continuously rising stock markets made this unnecessary. In passing, I mention that it was Mr. Moss who recommended a WP annuity as providing protection against inflation. I did not know of the existence of WP annuities when I first approached him. Why did I go to the equitable Life? I had been working in a government quango and the GAD had recommended that our organisation’s pension scheme should be with the Equitable Life. I assume the reference in your letter concerning the Schedule of Special Provisions refers to the exiguous paragraph about the guaranteed annuity falling by 3.5%. I would mention that I received this document some time after I had agreed to accept the annuity. I assumed the 3.5% reduction was linked to the 3.5% GIR and the manner in which my ABR was calculated. [See the Scawen Report]. No one in their right mind would buy an annuity which automatically declined by 3.5% unless they were assured of compensatory factors. Of course, I accept that the Society’s recent actions do not contradict this paragraph. But, it is disingenuous if you are implying that this is the sole basis of the contract I believed I had signed with Equitable Life. Before going further, I must emphasize on my own behalf, and on that of others in my situation, that the Equitable Life had a first class public reputation and excited a high degree of trust when I bought my annuity. It may be that certain experts in the industry were aware this trust was far from justified, but this was not common knowledge, and certainly not the general perception. It would be unfair to suggest that WP annuitants should have submitted Equitable Life’s documentation to the microscope and approached all its statements with the rigorous analytical skills of a forensic scientist. The FOS should take the view of how the proverbial man in Clapham omnibus would have reacted. The main document on which my wife and I considered purchasing a WP annuity with Equitable Life was policy projection schedule which I am enclosing. Its faded nature makes it difficult to photocopy so I hope you will return it to me after you have made notes. You will see the first paragraph makes no reference to conditional final bonuses which may be withdrawn retrospectively, thus substantially reducing the level at which the annuity is calculated. I assumed that there was only one kind of bonus payment as this paragraph implies. The Second paragraph refers to market fluctuations of which I was well aware. Let us consider the figures. The crucial column is that referring to Guaranteed Basic Payments. I quickly calculated that the basic guarantee would indeed decline by 3.5% per annum. I noted this was a regular decline. There was no indication of a sudden decline in one year as happened in 2003. I assumed, after discussions with Mr. Moss, that the first column represented an absolute worst case scenario, and that generally my annuity would not decline provided bonus payments on average exceeded 7.1225%. You will note that the other columns are headed ‘Projected gross payments if the future rate of return is:’ I assumed that the future rate of return would be matched by bonus payments. There is nothing to indicate otherwise. Here again bonus payments are not differentiated. There is nothing to suggest that a conditional class of bonuses could accumulate over the years and then be suddenly withdrawn to allow the first column to kick in. I assert that my wife and I were not properly advised on the complex manner in which WP annuities were calculated, despite the fact there existed explanatory documentation which you kindly enclosed with your letter. I would observe, however, that the full implications of this document for the WP annuitant would require a dedicated explanation by the Society’s sales force in all but a limited number of cases. It is far from clear to someone without considerable financial experience. My second major complaint is being misled on the Society’s financial situation. In addition to the Burgess Hodgson Report on the Society’s assets, I would also refer to Mr. Charles Thomson’s evidence in the Appeal hearing of ELAS v. Ernst & Young. If I recollect correctly, there was an asset gap of some 13% at the end of 1995, shortly before I bought my annuity. One consequence was that unwittingly I paid a premium for my annuity. This was not disclosed and in itself may amount to mis-selling. Another consequence is that the continuing asset gap between overall claims and the means to meet them was that policyholders whose policies matured were consistently taking out of the Society more than their asset share. Annuitants, of course, were not withdrawing from the Society and as class suffered the most from this situation. This factor has contributed significantly to the reductions now facing WP annuitants. I believe that the Society’s policy, which has only recently been brought to the attention of the general public, of not having undistributed reserves, in fact actually running at a deficit, made WP annuities a high risk investment totally unsuitable for any but the richest annuitant with substantial income from other sources. There seems little difference in principle from the mis-selling of endowment mortgages and split level investment trusts. WP Annuitants were generally paying an unjustified premium for their Annuity and were not advised of the full consequences if there was a substantial long term market setback. ELAS’s major competitors had reserves for this contingency. The Society did not. Instead, it was in deficit. It should never have sold WP annuities, or been allowed to do so. It is extremely regrettable that the Society’s actions against Ernst & Young and the former directors may be holding up publication of the Penrose Inquiry Report, or at least lead to an extremely bowdlerised interim statement. Among issues which I expect the Inquiry to address is the fact that the FSA misinterpreted the meaning of the House of Lords’ ring-fencing decision and that the Compromise Scheme was launched on a false prospectus. I am enclosing a copy of a letter to the PI. I have received confirmation that it will be given full consideration and that some similar representations have been made. I am also enclosing copy of a letter to the Chairman of the Treasury Select Committee which I am informed is being circulated to all members. I do not know whether it is in the remit of the FOS to look into this situation, and that I and other non-GAR policyholders were persuaded to come to a settlement under false pretences. Of course, I am not claiming that the directors or anyone else were aware of this at the time. Although I very tentatively raised this issue in the High Court hearing in February 2002, Mr. Justice Lloyd failed to confront it directly in his decision. Of course, to do so would have required more consideration than he felt time was available. Expediency triumphed over justice. May I thank you for your attention to my claim. I would also mention my awareness that you face a very difficult situation since ELAS does not perhaps have the reserves to meet WP annuitant claims on the lines I have put forward. It is a relatively easy decision to penalise financial institutions for misleading information when the money exists to pay compensation. I have wrestled with this issue. I have concluded that whatever the inconvenience or loss, justice must be done. There has to be an overall brokered settlement involving the regulatory authorities and the Government. Delays over publishing the PI are impeding this. I shall be pleased to come to the FOS in person to discuss some of the issues I have raised. Yours sincerely, Rodney Allen |
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