Select Committee on Treasury Appendices to the Minutes of Evidence


APPENDIX 12

Memorandum by the Consumers' Association

  Consumers' Association (CA) welcomes the Treasury Select Committee's inquiry into Equitable Life and the Life Assurance Industry.

  The inquiry is both necessary and timely given the current problems of the Equitable and the release of CA's report—Profits at the consumers' expense—which tackles the £400 billion with-profits life fund sector. The life and pensions industry manages £765 billion worth of funds on behalf of consumers in the UK, with just over half, £400 billion, held in "with-profits" funds. The findings of our report are damning analyses of how life insurance companies are being run and regulated against the best interests of currently 10 million with-profits policyholders.

  I enclose evidence to support both concerns.

EQUITABLE LIFE

  I enclose a series of questions that CA had previously sent to the regulator. The FSA has since responded. But due to the FSA's internal inquiry a number of the answers remain outstanding. We believe these questions form an important part of assessing what lessons are to be learnt.

  As you will see from page 17 of CA's report [Not printed], historically the legislation and regulation of life funds has centred on the prudential supervision of the life funds. Life insurance companies are now authorised and regulated by the FSA, and as part of that authorisation process companies have to meet certain criteria specified in the insurance legislation with regards to sound and prudent management of the assets and liabilities of a fund. The rules appear to be stringent and rigorous with the purpose of ensuring that the funds are solvent—in other words, that there are sufficient assets to meet the liabilities. A strong prudential regulation regime is necessary given the size of the assets involved.

  Despite the clearly identified prudential supervision regime, this has not prevented Equitable Life getting into trouble over the issue of guaranteed annuities. Equitable has been forced to close its funds to new business, affecting potential returns for around one million policyholders. CA is firmly of the opinion that a review needs to occur to see how this situation occurred. Why did management not make provision for the liabilities which were readily identifiable? And, what action was the regulator taking to make sure the Equitable's management was taking suitable action to protect policyholders. We do not believe it is enough for the regulator to start its inquiry from January 1999 when the FSA assumed responsibility in this area. The regulatory problems are likely to have occurred well before this date. We would like to see a wider inquiry that took on board the role of the previous insurance regulators from the Board of Trade to the Department of Trade and Industry to the Treasury as well as the FSA.

  To conclude, I enclose a copy of CA's letter to Michael Foot, Managing Director and Head of Financial Supervision which details CA's specific questions.

CA'S POLICY PAPER-"PROFITS AT THE CONSUMERS' EXPENSE"

  I enclose five documents [not printed] for your attention, which aims to tackle the £400 billion with-profits life funds.

  1.  Copies of the CA's report published 6 February 2001. This includes an Executive Summary outlining all the issues together with recommendations for cleaning up this sector.

  2.  CA's press release that accompanied the report.

  3.  Newspaper coverage that followed the release of the report.

  4.  With-Profits Life Funds Questions and Answers as posted on CA's web-site (www.which.net/campaigns)

  5.  A letter sent by CA to Melanie Johnson, MP Economic Secretary, copies to the FSA and the Chancellor, outlining our concerns following the release of our report.

  The report clearly demonstrates that the Treasury must step in to provide strategic direction to the life sector and take the lead role in cleaning up with-profits funds. We call on the Treasury to set up an independent public inquiry to tackle the recommendations made in our report. We believe that failure to do so will leave 10 million current policyholders unprotected and lead to a further decline in consumer confidence in this sector. CA is firmly of the view that the sector can ill-afford further problems following the pension and endowment mis-selling difficulties, and the Equitable and AXA Orphan Assets cases.

  CA's call for an independent public inquiry, as specifically mentioned in our letter to Melanie Johnson MP, is not to undermine the role of the FSA. We recognise that FSA has a key role to play and we welcome its published 2001/2002 priorities where it commits to devoting additional resources to regulating the insurance industry and to conduct a review of with-profits. But when reflecting on the recommendations of our report (page eight and nine of the Executive Summary), there are clearly some issues which are outside of the scope of the FSA. For example, changes to insurance legislation and the extension Charges, Access and Terms (CAT) standards to with-profits.

  Only the Treasury can drive these measures. The Treasury may also provide strategic direction to the piecemeal inititatives taking place by the FSA, the Association of British Insurers (ABI), page 34 of the report, and Institute of Actuaries. Besides these points, there is also the concern that given the FSA's role in the AXA and Equitable Life case, the FSA cannot be allowed to investigate itself. That would be unacceptable.

  I hope you find our evidence useful for the purposes of this inquiry.

9 February 2001

Annex

LETTER TO FINANCIAL SERVICES AUTHORITY FROM CONSUMERS' ASSOCIATION

RE: EQUITABLE LIFE

  Thank you for your fax of 8 December announcing the decision of the Equitable Life to close its funds to new business. This is indeed a sad occasion for such a prestigious life company and its policyholders.

  With this in mind, I thought I should write to you to see if there are lessons to be learnt from the fate of the Equitable. Some estimates put the number of policyholders affected at 1 million, so I fear that this may be a serious blow to consumer confidence in the financial services industry. Policyholders are not party to same critical information as the regulators, which results in unnecessary speculation, so I think it would be helpful if the FSA could enlighten us on a number of points:

    —  have you any plans to hold an inquiry into the Equitable Life saga?

    —  if not, do you plan to review the risk management procedures that apply to life funds to establish if perhaps more could have been done to identify and manage the risk in this case, to minimise the chances of a similar case happening elsewhere in the industry?

    —  more urgently, will you be telling consumers what action will be taken should there be a run on Equitable's funds, and how the interests of different classes of policyholder will be protected. I appreciate this is not the same as a run on a bank, but nevertheless there are very real fears that Equitable will attempt to increase the size of the market value adjuster transfer penalty in a further attempt to dissuade policyholders from taking their funds elsewhere;

    —  the decision to close the fund to new business came as a surprise and disappointment as it was hoped that a buyer could be found. According to the press information you kindly provided, the last of the interested parties withdrew its proposed "offer" at the 11th hour. Did information come to light regarding the true extent of the GAR liabilities? Or were Equitable directors unwilling to accept the offer?

    —  if the latter is the case, I would be interested in your views on protecting the consumer interest in this case. The point I am alluding to is: did the FSA take the view that it would have been preferable for Equitable's board to accept a "reasonable" bid from a buyer in the long-term interests of policyholders, rather than close the fund to new business? If the board chose not to accept advice from the FSA, could the FSA, or indeed Ministers, not have influenced the directors to accept a deal in the consumer interest?

    —  was there any attempt to construct an alternative rescue package across the industry or indeed involving Government support;

    —  specifically, I would be interested in your views on the effectiveness of the office of the appointed actuary in this case;

    —  do you think that the Equitable directors and actuaries fully appreciated the risk of the legal action going against them. What was the view of the FSA's legal advisers on Equitable's assessment of the legal risk;

    —  there is the view that, even if Equitable had fully taken on board the risk of losing the legal action, there was little that could have been done to implement contingency plans given the size of the exposure to guaranteed annuities. However, I am curious as to why, with each downward tick in long-term interest rates, Equitable did not adopt an incremental approach to managing its exposure. Has Equitable provided an explanation as to why it did not try to hedge against the risk of adverse interest rate movements much further back;

    —  a final point is, on the back of the Equitable case, do you have any plans to issue an update on the guaranteed annuities as it applies across the industry? I think that consumers would welcome some clear guidance and reassurance on two separate issues involving guaranteed annuities:

      —  there is the general concern about the extent of exposure to guaranteed annuities across the industry. What is the latest industry wide estimate for GAR liabilities?

      —  we have also received disquieting information about certain companies who may have persuaded policyholders to inadvertently switch out of pension policies with guarantees attached. This of course has the effect of reducing life company exposure to guaranteed annuities, but also means that policyholders may have unwittingly foregone very valuable pension guarantees. Has the FSA come across any evidence of this?

  I hope these points are helpful. I recognise that you will be considering many of them yourself and it may take time to respond. However, I think there are lessons to be learned by all of us arising from this sad event and we will be happy to co-operate in any follow up you plan.

13 December 2000


 
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