Sir George writes to Ombudsman on Equitable Life
5 May 2004
Ms Ann Abraham
Parliamentary Ombudsman
Office of the Parliamentary Commissioner for Administration
Millbank Tower
London SW1 4QP 5 May 2004

Thank you for your letter of 22nd April inviting representations from MPs on “whether and, if so, in respect of which period and matters, I should carry out any further investigation into the regulation of Equitable Life.”

Your letter was timely, and very welcome in view of the publication of Lord Penrose’s Report, on 8th March.

The regulatory failure identified by Lord Penrose is particularly well suited to an investigation by the Ombudsman for maladministration. The high regard in which your office is held depends on thorough investigation of such cases.

In summary, I consider that

• you should conduct a further investigation;

• the purpose of your investigation should be to investigate whether any public bodies concerned with the regulation of Equitable Life were guilty of maladministration;

• where any maladministration is found and where, as a consequence, losses have been sustained by policy-holders and annuitants, you should make recommendations for remedy;

• the period covered by your investigation should be the same as that covered by Lord Penrose’s report;

• you should invite Lord Penrose to assist you in the investigation;

• you should reconsider your earlier decision not to investigate the Government Actuary’s Department (GAD);

• if, after that reconsideration, you still believe such an investigation into the GAD to be beyond your jurisdiction, you should immediately recommend to the government that they request parliament for an extension of your powers of investigation to include the GAD.

Lord Penrose’s Report identified regulatory failure both of the system of regulation and of its operation over a sustained period, and particularly throughout the 1990s. These are documented in detail in, among others, Chapters 15 to 18. No doubt you will already be examining Lord Penrose’s findings of regulatory failure in the short period covered by your first report, from 1st January 1999 to 8th December 2000. The scale of the regulatory failure identified by Lord Penrose prior to that period, and the accompanying detail he provides, also require investigation. Of the whole period Lord Penrose states: “There was a general failure on the part of the regulators and the GAD” . He writes of 1998, that “GAD’s approach over this period seems to me to have been persistently naïve.” In his conclusions, he describes the Department for Trade and Industry and the Treasury (who were between them responsible for prudential regulation from the early 1980s until 1st January 1999) as “ill-equipped” and the GAD as “complacent”. Lord Penrose notes “short-term objectives related to support of solvency that should have alerted regulators to the Society’s weakening position.” He says that “information was not used to form a realistic appraisal of the society’s financial position” and that “unsatisfactory answers were accepted without follow up”.

The events described by Lord Penrose which led to these and other conclusions of regulatory failure are very extensive. Among those which would benefit from investigation for maladministration are that public bodies:

• allowed the Society to accumulate huge contingent liabilities by selling unguaranteed policies without ring-fencing the funding of Guaranteed Annuity Rate (GAR) policies and without declaring that those prior guaranteed policies existed;

• failed to discover that the Society was not reserving for the guarantees expressly contained in the GAR policies;

• endorsed the Society’s attempt to redress the balance by paying differential bonuses, later ruled illegal;

• permitted the publication of inadequate accounts and the submission of inadequate regulatory returns which obscured the financial weakness of the Society;

• failed to recognise the inadequacy of the reinsurance policy negotiated to cover reversionary bonuses for GARs in late 1998 and early 1999;

• allowed the Society to “over-bonus” for many years;

• allowed the Society to trade with totally inadequate reserves and to claim throughout that they were selling a low-risk product, coupled with prudent management and the benefits of mutuality.

The GAD was the subject of particular criticism by Lord Penrose. In your first report you took the view that the GAD was outside your jurisdiction and gave your reasons. I strongly urge you to reconsider that view. In evidence to the Public Administration Committee you said you were influenced by the description of the GAD in government documentation “as a separate department rather than subordinate to the Treasury” . However, after taking evidence from the Treasury and the GAD the Treasury Select Committee concluded that the GAD was a “non-Ministerial government department . . . to provide actuarial advice to Ministers” . and that it “does not have policy-making responsibilities of its own.” I know of no advisory government department, the accountability for which does not flow through a Minister. In this case, responsibility for the GAD clearly lies with the Treasury. The GAD is therefore not independent but subordinate to the Treasury, a department maladministration of which may be subject to investigation by you. You will, in any case, want to consider whether the Department of Trade and Industry and the Treasury asked the right questions of the GAD and acted correctly on the responses.

Should you feel unable to reconsider your earlier conclusion that the GAD was beyond your jurisdiction I strongly urge you to invite the government to obtain parliamentary authority to add the GAD to the list of bodies which you can investigate. This can quickly and easily be done by amending Schedule 2 to the 1967 Act, using a negative Statutory Instrument.

The addition of the GAD to your list of responsibilities will not preclude a retrospective investigation for maladministration. The Parliamentary Commissioner Act 1967 enables you to extend an enquiry beyond the period of 12 months before a complaint was made if the Ombudsman “considers that there are special circumstances which make it proper to do so.” (6.3) I consider that the long and detailed investigation of Lord Penrose, and his findings, constitute “special circumstances”. Further clarification of Parliament’s intentions with respect to retrospection is provided by Clause 14 (3) which states that “a complaint under this Act may be made in respect of mattes which arose before the commencement of this Act”. This presumably would be expected to apply also to complaints made in respect of matters covered by an extension of the Act’s scope. In the House on 24th March the Financial Secretary to the Treasury, Ruth Kelly, dismissed Andrew Tyrie’s suggestion that the GAD should be added to your list of responsibilities on the grounds that such retrospection was not permitted. She has recently reversed her view on retrospection in a letter to him.

Of course, your view on the period that should be covered by your investigation relates to all the relevant public bodies, not just the GAD. As you pointed out last year, it was a decision of your predecessor to limit the period of investigation to less than two years. I consider that the special circumstances brought about by Lord Penrose’s Report warrant an extension of your investigation to include the whole of the period covered by him.

In your earlier report you distinguished between public bodies falling within your jurisdiction when they were acting as the prudential regulator and conduct of business regulation, which falls outside your jurisdiction. Having examined the Penrose Report, I am not persuaded that this should be a substantial bar to your work. A very large proportion of the regulatory failure identified by Lord Penrose was of the prudential kind. Furthermore, prudential regulation and conduct of business regulation was, in certain periods, carried out by the same bodies. For example, from 1st June 1998, the Personal Investment Authority, which had responsibility for conduct of business regulation since 1994, contracted out its role to the FSA. The FSA also became responsible for prudential regulation six months later.

I strongly urge you to invite Lord Penrose to participate as fully as possible in your further investigation for two reasons. First, his lengthy investigation has left him uniquely well placed to assist you. Secondly, his involvement will enable you to conduct your inquiry more quickly, without any loss of thoroughness. Minimising the delay will reduce further uncertainty about the industry created by the Equitable Life affair. Even more important, minimising further delay is essential for those most deeply affected: we are dealing with nearly a million policy-holders and annuitants, a high proportion of whom are elderly and vulnerable. All of us owe it to them to complete this essential work as quickly as possible.

Yours sincerely

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