Select Committee on Treasury Appendices to the Minutes of Evidence


Supplementary Memorandum by Mr David Browning, Equitable Members' Action Group (EMAG)

  (This communication is intended as a follow-up to the Select Committee hearing into ELAS held on 15 February 2001, taking regard to the evidence presented at that hearing. EMAG made a written submission before the hearing, which would have been circulated to committee members, as well as individual submissions by EMAG members, notably those by Alex Henney, Andrew Pike, and Christopher Whitmey.)

  EMAG welcomes the fact that much of the hearing focused on what policyholders were being told about the implications of the Guaranteed Annuity Rate ("GAR") issue. It was manifest from evidence presented that there was a gap between the public image of ELAS as a solid, well-funded mutual assurer, and the underlying reality of the situation. ELAS had a potential problem with GARs which was recognised by the Treasury, at least from the time in 1998 when the Government Actuaries Department conducted its survey of insurers' GAR exposure. The Committee heard from ELAS representatives that the Society was relying upon advice given to it by its lawyers and by its regulators that it was entitled to pursue its differential approach (based on the concept of "asset share") to the setting of terminal bonus. The Financial Services Authority ("FSA") representatives said in effect that the way the Society managed itself was largely a matter of commercial judgment, and that it had had no reason to query the sense of what ELAS were doing, ie relying upon legal "opinion" rather than legal "fact" in its handling of the GAR issue. It seems fair to say that both parties were contributing to a situation where an assumption was being made about a matter of contract law compliance. This assumption underpinned both the reserving requirements imposed upon the Society, and the public utterances of ELAS about the GAR issue. This situation was allowed to go unchallenged until the litigation process was commenced in 1999.

  It is important to understand what that process involved. A group of litigants brought an action against ELAS which challenged the Society's right to allocate different terminal bonuses according to whether benefits were taken in GAR or non-GAR form. The litigants were not asking for, or implying that they would agree to settle for, a halfway-house solution based on the concept of "ring-fencing", ie a different approach based on classes of policyholder. What they were asking for was what they eventually achieved, ie the HoL ruling that any differentiation of terminal bonuses as between GAR and non-GAR annuitants was wrong.

  It emerged during the course of evidence that ELAS and FSA had agreed an "exit strategy" based on possible outcomes of the HoL hearing, which included a contingency plan to cover the possibility of a complete victory for the GAR litigants. The HoL decision was handed down on 22 July. Press coverage at the time referred to the announcement of a sale process by ELAS within minutes of the judgment being announced. On 27 July the Society told a meeting of its sales representatives held in London that ELAS had been given legal advice covering six possible scenarios for the outcome, one of which equated to what had actually transpired. The FSA, at the TSC hearing on 15 February 2001, did not give a date for the agreement of the "exit strategy", but implied that it was some time between the Court of Appeal verdict (21 January 2000) and 22 July 2000. All of this indicates that the depiction of the actual outcome as a "remote possibility", referred to repeatedly by ELAS representatives, is inadequate as an excuse for the opacity of the information given to policyholders, both existing and potential, certainly since the initiation of the Court process in January 1999.

  In February 2000, after the Court of Appeal had overturned the High Court judgment of September 1999, the then Managing Director of ELAS made the following statement: "Contrary to many of the reports which have appeared in the press, there would be no significant costs imposed upon the Society if the Court of Appeal's decision were upheld in the House of Lords. The speculation regarding financial difficulties and costs to be borne by with-profits policyholders is therefore unfounded. Your Society remains, and will continue to remain, financially secure". (letter to policyholders from Alan Nash, ELAS Managing Director and Actuary, 1 February 2000). Mr. Nash was making this confident assertion on the premise that the litigants had only won a partial victory in the Court of Appeal; one of the three judges had indicated that "ring-fencing" was a possible means by which ELAS could apply differential bonuses. But this was only one judge's view; and ELAS themselves stated that the main reason for taking the case to the Lords was to achieve "clarity", precisely because the three Appeal Court judges had all given different judgments, one upholding the High Court's judgment, two rejecting it, but on different reasonings.

  During 1999, potential policyholders who asked ELAS sales reps about the impending court case had been told that it was a narrow technical matter which was being blown up out of proportion by the press; the sums at stake were insignificant in relation to the total value of the with-profits fund; and, in any case, any potential GAR liability was covered by "re-insurance" arrangements. These statements were patently misleading. Policyholders were not told of the £1.6 billion which ELAS were compelled to establish as additional reserves for its GAR contracts at the end of 1998; and the re-insurance arrangements were, as ELAS's deposition to the TSC made clear, irrelevant. They were not related to the differential bonus issue; they were not a "hedge" against the possibility of GAR litigants winning their case. (There is indeed a case to be made that ALL policyholders who bought with-profits policies after July 1988 were misled, because they were not told of their potential exposure to the risk of having to bolster up the GAR-holders' contractual rights, if indeed those rights were to be upheld in a court of law).

  To sum up:—

  1.  Taken together at face value, the depositions and statements made to the Committee by both ELAS and FSA representatives could be interpreted as saying that no-one was to blame for that fact that things turned out as they did. Furthermore, policyholders could have found out all that they needed to know to make reasoned decisions applicable to their individual circumstances by asking for, and reading with understanding, the 400+ page statutory Treasury Return as submitted in February 2000, plus stories appearing in the press. Our comments: Firstly, the document mentioned is virtually incomprehensible to a lay person without professional mediation; secondly, ELAS were, as we have seen, in practice denying the validity of press comments on the situational problems ELAS were confronting.

  2.  It should be self-evident that the only rationale for the existence of organisations like ELAS and the associated regulatory authorities is to serve the interests of policyholders. There was a comprehensive failure to achieve this, and claims for compensation must be looked at seriously where they can be shown to be appropriate.

  3.  Equitable did not pay commissions for introducing business to third parties. That may have been laudable, in that it kept costs down; but such a philosophy puts a critical degree of responsibility upon the in-house sales force to tell potential clients the truth, and not a "spun" version of the facts designed to serve the organisation's perceived commercial interests rather than those of the client. The FSA's monitoring role in such situations needs to be conducted with extra vigilance.

5 March 2001

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