Exmination of Witnesses (Questions 240-259)|
TUESDAY 13 NOVEMBER 2001
240. You describe this company as arrogant and
yet you are prepared to put up with them not telling you that
they had not signed the reinsurance, that they made the reinsurance
with a company that the FSA would not support because it was not
under your jurisdiction. That is in the Baird Report. Lastly,
they did not tell you that if the terminal bonuses were changed
the reinsurance disappeared. These are not technical matters.
That reinsurance contract enabled you to get the Section 68 Order
by telephone on the basis that they had covered. The majority
of the cover was that reinsurance. If there was ever a dodgy insurance
that surely was. I am amazed that you accept their duplicity with
such calmnessequanimity, as Mr Tyrie says.
(Sir Howard Davies) At least there is cross-party
agreement on grammar and semantics. Of the points you make there
was a point, as you say, at which the contract had not been signed
and we were operating on the assumption that it had been signed,
but subsequently it was and in the terms that we had assumed.
The second point relates to IERC which is regulated elsewhere.
It is true to say that it would be regulated differently if it
were a UK company but it is a large company. The parent is GE
in fact. It is not a small operation, it is not a reinsurer which
is not a company of substance. The third point on the terminal
bonus is that we were aware that the reinsurance treaty would
have to be renegotiated were the company's terminal bonus policy
to be found
241. That is not what Baird says. On more than
one occasion he points out that the FSA did not know about the
terminal bonus clause, which is a key clause.
(Sir Howard Davies) Can you point me to it?
Chairman: Come back to that when you
have found it.
242. I am thinking to the future here. When
you are talking about this relationship that you think you ought
to have with companies, and you also mentioned other companies
whose reserves are not perhaps what you would like them to be,
would you now, looking for sensible solutions, be looking at reinsurance
in relation to those companies? What I am trying to find out is
do we have another one?
(Sir Howard Davies) As I have tried to explain, although
not quite in answer to that question, is that we do not believe
that there are other companies with large guaranteed liabilities
which would require reserving which is not currently in place.
We are however looking carefully at reinsurance policies in the
market in order to get a better understanding of the nature of
those policies and whether they are really delivering what they
purport to deliver. That is something which we, as a result of
what has been revealed in the Baird inquiry, are doing as a matter
of some urgency around the market at the present time.
243. You have told us that you have got new
proposals to make but meanwhile have you already tightened up?
(Sir Howard Davies) Yes, in relation to some individual
companies we have.
244. Before this insurance contract was signed,
it was included in the reserve of Equitable Life and yet had those
reserves been called upon the money would not have been there.
What do you call a position like that?
(Sir Howard Davies) I am not sure that that is the
case, that they were included. The point about the reinsurance
contract was that it was in order to meet the solvency requirements
and the reserving requirements that we put in place; it was not
in order to meet Companies Act solvency requirements. The company
remained solvent without that policy. This was to do with satisfying
the regulator that it met its required minimum margin above its
solvency. I am not sure that there was a positionI hope
there was not a positionin which the company was not meeting
its required minimum margin without the reinsurance contract while
the reinsurance contract had not been signed. I am not aware that
that was ever the case.
245. Sir Howard, Mr Mudie was referring to page
211, paragraph 6.8.2, where it says: "However, in its regulatory
return Equitable Life did not disclose that the reinsurance cover
effectively remained in place."
(Sir Howard Davies) Yes, that is the case, we knew
it but it was not disclosed. The criticism is not a criticism
that we were not aware that that was the case but that the regulatory
returns did not disclose that that was the case. We were aware
that those were the terms of the policy.
246. But you could have required them to disclose
(Sir Howard Davies) I think we could have required
them to do it and the Baird Report says that we should have done.
247. Sir Howard, we have spent quite a bit of
time on this but I think the members of the Committee are a bit
incredulous that it would appear that the FSA are relying on companies
bringing them bad news. We know that many people do not bring
people bad news in a voluntary sense, so they need to be, in your
phrase that you have used regularly this morning, proactive. It
is surely urgent in cases like this. It does appear perhaps just
a little bit naive to accept these points when it has such major
implications. There a balance to be maintained between the customer
having confidence in their regulator to look after their interests
and not giving the impression that every company is rock solid.
There is that area that has to be fashioned and I feel again it
is an area that we have to come back to because there are some
alarming comments that have been raised as a result of your answers
(Sir Howard Davies) If I could try to distinguish
between the issue of the reinsurance contract which, as I have
said, I would like write to the Chair about, and I have some difficulty
with some of the questions because of the commercial issues to
which I referred, as far as the general character of the relationship
is concerned which we have and which we seek to have with firms,
I would say that I do not think that it is naive to rely on people
to bring us bad news in the context of the principles which I
have described because firms are very firmly aware now that whatever
regulatory breach they may have undertaken, if they do not tell
us about it they will undertake a second one, which is that they
have not been open with their regulator. We have in the securities
area taken a number of cases where we have prosecuted or disciplined
firms, both firms and senior managers of firms, on the grounds
that they were not open with their regulator simply because, unless
they are open with their regulator, problems can get out of hand
and it is absolutely crucial that the regulator is able to act
urgently. Most firms in the market are fully aware of that and
are very much aware of the need to bring bad news to us, as you
say. There will always be a few who do not bring bad news to us,
but I do not think it is naive to base your regime on that assumption,
particularly if it is buttressed, as I have said, by a clear principle
defined in very stark terms and which itself is enforceable.
248. So we can assume that you will discipline
some people from Equitable Life then?
(Sir Howard Davies) I could not comment on individual
249. You will be proactive?
(Sir Howard Davies) We will be proactive.
250. Sir Howard, would you describe the Equitable's
material and information to both its policyholders and its potential
policyholders in the period in question, 1999/2000, as being fair,
clear and not misleading in either design or content?
(Sir Howard Davies) I could not answer for absolutely
every communication on those grounds so I could not give you a
blanket undertaking that that was true in all cases, no.
251. What is your impression?
(Sir Howard Davies) I think that there were occasions
when the company would have been well advised to set out more
clearly the risks that it was running in the court case.
252. Can I draw your attention to the Baird
Report, paragraph 6.21.8 which describes the activities of the
FSA as, as it were, the successor to the Personal Investment Authority,
where it says that you never properly considered the nature of
the advice that should be given to non-GAR policy holders about
the liability for GARs, nor did you contact Equitable Life to
make enquiries about what advice had been given about this or
to discuss it further with the prudential arm after getting advice
to the effect that the company could not promise asset share and
investors would have to be warned that they could get back less?
Those are the terms of the Baird Report. You failed as a conduct
of business regulator, did you not?
(Sir Howard Davies) I would not accept the term "failure"
in an absolute way. I think this report draws attention to things
that we might have done that we did not do.
253. You failed as a conduct of business regulator,
did you not, Sir Howard? It is absolutely clear from paragraph
(Sir Howard Davies) I have given you my best answer
254. If you look at the conclusions of Baird
he refers to a culture in the FSA as a conduct of business regulator
in which there is "little appetite and capacity to examine
the wider implications of an issue" and "a reluctance
to pursue any matter without clear evidence of a breach in the
rules". It is page 231. That is failure as a conduct of business
regulator, is it not?
(Sir Howard Davies) I have answered the question about
failure, Mr BairdMr Cousins, sorry. That is the review
team's description of the culture within IBPIA and I am sure that
all the people who were responsible for this would not accept
that description, but that is the review team's assessment. We
certainly take note of that assessment and we are responding to
it, I hope, in an appropriate way, though I have to say that the
sort of people involved would not accept that that was the culture
that they were operating in.
255. What action have you taken against Equitable
Life as a conduct of business regulator?
(Sir Howard Davies) We have taken specific action
in relation to income draw-down policies where we believe that
there is a case of mis-selling and where they have had to provide
specifically for that. That is the specific enforcement action
that we have taken, and also in the case of pensions mis-selling.
256. You did not stop them advertising after
the court case, did you?
(Sir Howard Davies) No, we did not, and the Baird
Report does not conclude that we should have done.
257. If you look at the account that is given
of the FSA as a conduct of business regulator (and there is not
time now to pursue our way through it) it is clear that as a conduct
of business regulator you simply did not have the information
and never sought it to carry out your duties properly.
(Sir Howard Davies) Which bits of information are
you thinking about?
258. It is summarised in 6.21.8.
(Sir Howard Davies) I have accepted that it would
have been better had we gathered that information from the company,
259. You cannot give this Committee an assurance
that you could have done something as a conduct of business regulator
because it is absolutely crystal clear that you never sought the
relevant information. That is summarised at 6.21.8. You never
asked for it.
(Sir Howard Davies) I am certainly not disagreeing
with what is in paragraph 6.21.8, certainly.