UK regulators failed abysmally

In her report, presented to both houses of parliament, Abraham
called on the government to apologise to Equitable Life
policyholders and to establish and fund a compensation scheme for
those policyholders.

Abraham’s condemnation was directed at three regulatory bodies –
the Financial Services Authority (FSA), the Government Actuary’s
Department and the former Department of Trade and Industry – in
relation to their regulation of Equitable Life in the period before
1 December 2001. In total she detailed 10 areas of what she termed
“serial maladministration”.

In a statement Abraham stressed: “The failings I have identified in
this case were not failures of the system of regulation that was in
place at the relevant time. The aim of that system was the
protection of the interests and reasonable expectations of
policyholders and potential policyholders.
“Parliament gave those operating that system robust and
wide-ranging powers, which the regulators were under a duty to
consider using where appropriate. The regulators at the time said
that they would deliver regulation in a proactive and vigorous way.
That singularly failed to happen in the case of Equitable.”

For the FSA her criticism comes at a time when the regulator is
under pressure in two other areas: its oversight of life insurers’
with-profits funds and its handling of the Northern Rock
debacle.

For the UK government, acceptance of Abraham’s call for
compensation of Equitable Life policyholders holds daunting
financing prospects. While she did not attempt to estimate the
extent of compensation, by all accounts it would be
substantial.

According to Paul Braithwaite, a director of activist group the
Equitable Members Action Group (EMAG), total losses incurred by
policyholders are estimated at £4.65 billion ($9.3 billion). The
huge sum highlights the large number of aggrieved policyholders: 1
million of them, not only in the UK but in other European Union
states, especially Ireland and Germany.

In essence Equitable Life’s woes – and ultimately policyholder
losses – were attributable to overly generous annuity rate
guarantees which became increasingly difficult to meet during the
1990s. Notably, in 2004 a UK Treasury commission of inquiry headed
by Lord Penrose found that Equitable Life was the “author of its
own misfortunes”, having used “dubious” actuarial techniques and
made excessive payouts to policyholders.

The insurer’s first move to stem the crippling financial drain came
in 1994 when it announced cuts to bonuses paid to its 90,000
guaranteed annuity rate policyholders. With its back against the
wall Equitable Life attempted with no success to find a buyer and
in December 2000 announced that it would no longer write new
business. In July the following year the insurer added more pain by
reducing the value of with-profits pension policies for 1 million
policyholders by 16 percent.

Abraham’s call for compensation of aggrieved policyholders on the
grounds of lax regulation is not the first. In 2007 a European
Parliament (EP) committee of enquiry concluded that the UK
government was under an obligation to assume responsibility for
losses sustained by policyholders, a view that was overwhelmingly
endorsed by the EP.

Author of the EP report Diana Wallis said of Abraham’s findings:
“Her conclusions, similar to the ones drawn in my report adopted by
the European Parliament last year, make the case for a
comprehensive, transparent and simple compensation scheme
irresistible.”

How the British government will react to Abraham’s and the EP’s
call for compensation of aggrieved policyholders remains to be
seen. However, Braithwaite warned that EMAG believes the government
will resist calls for compensation and is “digging in for a long
fight”.

Heralding potentially the next twist in the long-running Equitable
Life saga, Braithwaite concluded: “We stand prepared to take the
government to Judicial Review – if that is what it takes.”