Exmination of Witnesses (Questions 260-279)|
TUESDAY 13 NOVEMBER 2001
260. Would you not summarise paragraph 6.21.8
as a failure of conduct of business regulation?
(Sir Howard Davies) No, I would not, Mr Bairdsorry:
261. You may have gone through this with Mr
Baird before. Is it not the case that the picture you have given
this Committee this morning of your relationship with Equitable
Life is rather misleading? In fact your relationship is quite
collusive. The policy holders, new ones, old ones, potential ones,
were the bait that was going to solve your prudential regulatory
problem, were they not?
(Sir Howard Davies) No, Mr Cousins, I would absolutely
reject that. I would reject the notion that we had a collusive
relationship and I would certainly reject the notion that the
policy holders were bait. Our actions at all times were directed
at doing the best we could for all of the policy holders at Equitable
Life. We had some extremely difficult judgements to make in the
course of this period about what the appropriate course of action
was in the interests of all the policy holders. The key judgements
were whether we should have closed the company to new business
at an earlier stage, and whether we should have prevented it as
a consequence from advertising etc. We took the view that that
was not appropriate in the interests of all policyholders. We
took the view that we could not force the company to pre-judge
the outcome of the House of Lords case in the light of the legal
advice that it had and that, had we done so, we would have been
rightly accused of seriously damaging the interests of Equitable
policyholders. We took the view after the House of Lords judgment
that it was appropriate for Equitable Life to be able to sell
itself as a going concern. That was the key decision that we needed
to make. The report does not disagree with that decision and accepts
in paragraph 6.21.5 that it would have been inconsistent with
that decision to require them to suspend advertising or to give
any special health warnings to new investors about the operational
risk faced by it. I accept that with the benefit of hindsight,
and this report is written explicitly with the benefit of hindsight,
that there will be those who wish to argue that a different decision
should have been made. I can only say to you, Mr Cousins, that
that decision was made by the Authority with a single-minded view
that we needed to do the best we could for policy holders. That
is the basis on which we took that decision, not as a matter of
collusion with the company and not to attract policyholders in
to solve a prudential problem. I very strongly reject that accusation.
We did our best as we saw it for policy holders in the light of
the information that we had and the probabilities that we had.
These are very difficult decisions to make and we made them as
best we could. Others will need to judge, notably the Penrose
Inquiry when it looks at the full story, whether there should
have been different decisions made either during this period or
subsequently, but at this point I continue to stand by the decisions
that we made.
262. Sir Howard, you cannot hide behind the
Penrose Inquiry. The words I read out to you at the beginning
are your contractual duty as the successor of the PIA to ensure
that the material going out to policyholders and potential policy
holders was fair, clear and not misleading in either design or
content. That was a contractual duty you had as the successor
to the Personal Investment Authority.
(Sir Howard Davies) Mr Cousins, I very much hope that
one thing I cannot be accused of at the present time is hiding.
We launched our own report. We have published it. We have let
an independent team review our regulation as they have seen fit.
We have not sought to interfere with it. As a result we are having
to answer many questions about this one period, albeit it is a
period in a very much longer story, so I really do find it extraordinary
for you to suggest that I am hiding.
263. Paragraph 5.30.7 deals with a draft letter
to complainants under the conduct of business heading. It is not
clear whether this letter was ever sent out. The letter says that
given that there was a realistic chance of a successful sale of
the business, newspaper advertisements inviting potential customerspotential
customersto request additional information from the company
were not misleading. It is page 201.
(Sir Howard Davies) I am sorry; I was looking for
5.37 as opposed to 5.30.7.
264. It is the last sentence.
(Sir Howard Davies) What is the question?
265. The question is that the problems you had
with prudential regulation, which are very real and which the
Committee has explored this morning, were completely dominating
your judgement, your action and your behaviour as a conduct of
(Sir Howard Davies) I do not believe that is the case.
We were pursuing enforcement action against the Equitable at the
time in other areas. I would certainly recognise that in any regulatory
regime, whether it is in one regulator or in two, there is always
a need to consider the conduct of business on the prudential side
together and there can be sometimes a tension between the two,
but the tension is more apparent than real because the underlying
objectives of both the prudential regulator and the conduct of
business regulator are to protect policyholders. It is important
not to do things on the conduct of business side which would damage
the interests of policy holders even if they might appear to be
helpful in relation to one individual or a small group. We have
to take a balanced judgement and I would accept that we are in
the risk assessment business here and the key balance judgement
that we took was whether to allow the company to continue on the
basis that it was far more valuable as a going concern, it was
far more likely that it would find a buyer who would recapitalise
the company and provide a happy outcome for the existing half
million or so policy holders. We took that judgement at the time
based on the best available information that we had. I have to
say that I would still take the same judgement again.
266. But you did not have the material to make
that judgement. The Baird Report makes it clear. When I say "you",
your organisation as the successor to the Personal Investment
Authority, as the conduct of business regulator, never sought
that information. You do not have the material to plead your defence
in the way that you just have.
(Sir Howard Davies) I believe that we did have the
material on which to make the key decision that we had to make.
I recognise that the Baird Report suggests that we should have
looked for other material, that we should have got more detailed
information from the company. I have to say that I note that but
I am not sure that it would have led us to make a different key
decision which was the one that I have described. It may have
been better to have done so and, as in the case of the prudential
side, the report has emphasised and identified in detail things
that we could have done better as a management team. What I think
you have to keep coming back to is, what would you have done as
a consequence? Would you have fundamentally taken a different
decision? There I feel that we would not have done, and further
more I do not find support in the Baird Report for thinking that
we should have done.
267. You cannot take the credit for the fact
that Equitable Life stopped advertising, though, can you?
(Sir Howard Davies) No.
268. How did that come about?
(Sir Howard Davies) Equitable decided themselves that
it would be better for them not to advertise in the way that they
had been doing because they were concerned about the impact it
was having on the confidence of the company in its sale negotiations.
269. What is your own view now about the quality
of that advertising?
(Sir Howard Davies) I share the company's second decision
which was a decision to withdraw it. It was probably unwise for
them in the circumstances they faced at the time, but those are
judgements which are for the company to make. We do not write
the advertising copy for firms. That is a commercial judgement
270. Would you accept that there was at that
time (and for all we know may be now) a culture within the FSA
as the successor to the Personal Investment Authority as a conduct
of business regulator in which there was little appetite or capacity
to examine the wider implications of an issue?
(Sir Howard Davies) No, I would not, frankly, accept
that characterisation. That would not have been my description
of the PIA that I have inherited. I recognise that that is a view
that the Baird Report has come to and they have reasons for doing
it, and clearly if people can come to that view by investigating
and interviewing my staff, clearly there is a problem that I need
to address. It would not be my characterisation of their approach.
271. So you dispute the outcome of the Baird
Report in that respect?
(Sir Howard Davies) I think I would say exactly the
same words as I have just used. It would not have been my conclusion.
I recognise that they have reached it in a review which I consider
to be of high integrity, and therefore I have to accept that someone
coming from the outside and interviewing staff has reached that
conclusion. It is valid in the sense that that is the conclusion
they have reached. It was not my conclusion, but I accept that
if people can reach that conclusion then we should address whether
or not we are conveying our attitude properly, whether or not
we are being convincing and maybe we are not looking as broadly
as we ought to do. You asked me specifically whether that was
my characterisation of the PIA and it is not.
272. Exactly, so you are disputing the terms
of the Baird Report and its conclusions in this really rather
fundamentally important respect.
(Sir Howard Davies) I have answered that twice, Mr
Cousins. I cannot answer it any differently.
273. Would you accept that if the Baird Report
and its characterisation of the culture of your organisation as
the successor to the Personal Investment Authority as a conduct
of business regulator was indeed accurate, then that would be
strong, powerful evidence of the failure of your organisation
as a conduct of business regulator?
(Sir Howard Davies) That is a hypothetical question.
274. A hypothetical question?
(Sir Howard Davies) Yes. You said if this were this
and if this were that then would I accept that it was a failure.
That is a hypothetical question. What I have said is that it is
not my characterisation of the PIA or of the inheritance of the
organisation which has inherited the PIA's responsibilities and
therefore I cannot proceed any further down your question.
275. Where are these issues going to be resolved
about the evidence we have here for a potential failure of the
FSA as a conduct of business regulator? How do you see them as
being resolved? How are you dealing with people who complain to
you about your activities as a conduct of business regulator?
(Sir Howard Davies) There are management issues to
be dealt with here and we are certainly pursuing the management
issues that are identified in the Baird Report. There are specific
issues about the individual policy holders which are either being
pursued by our staff or being pursued by the Ombudsman, and of
course there is in the long run the overall character and culture
of the regime which is something for which my board is responsible,
so we are certainly picking up all the criticisms of the Baird
Report and seeking to act on them.
276. I happen to have a letter in front of me
which was written by Mr Walton in your organisation in May of
this year to one such complainant who was complaining about the
FSA's activities as a conduct of business regulator. The indication
is given in his letter that there could be action against Equitable
Life and this complainant is told that information about the regulator's
activity will be made public as soon as it is appropriate to do
(Sir Howard Davies) That is the position, yes.
277. When will it be appropriate to do so?
(Sir Howard Davies) I could not say precisely on that
and I find it difficult to answer questions about individual enquiries
that we make.
278. Could I go back somewhat further on the
question that Mr Cousins has been dealing with, into the very
nature of how the GAR policy was sold? They were offered to people
so that people could have a guarantee that if interest rates fell
their pension had a floor to it, and they bought those in the
belief that they had got that reassurance. But as soon as the
interest rate fell to that level the guarantee was abrogated,
but it was worse than that in that the compensation they were
given in terms of the terminal bonus put them on the same basis
as anyone who had never even chosen a GAR. Is this not a strange
conduct of business? Why did the conduct of business regulator
not take this up? This was the company that was the flagship (or
seen to be) of the life assurance sector and, moreover, when we
were questioning this before we were told that this sort of practice
was quite common in the whole life assurance sector. First of
all, should not the conduct of business regulator have picked
that up because that is the nub of this whole business, and secondly,
what will the FSA be doing about this not just for Equitable but
right through the life assurance sector?
(Sir Howard Davies) As I pointed out on the last occasion,
the conduct of business rules which we inherited were focused
on the rules at the point of sale, and of course these policies
were all sold even before the 1986 Financial Services Act came
into force, so the issue about what was described to policyholders
and whether that was misleading has never arisen in relation to
these policies because they were all sold before 1988 and before
that regime came into effect. What therefore happened during the
course of the 1990s was that a few policy holders came to the
PIA Ombudsman in order to argue that the way in which the Equitable
Life was dealing with the bonus allocation was inappropriate.
It was because the Ombudsman picked up those cases and began to
review them that Equitable Life decided that, rather than allow
the regulator to decide whether or not this was appropriate behaviour,
it would seek a test case in the courts. As I said earlier in
answer to the Chairman, there is this dual track if you like of
the regulatory side plus the courts ruling on the contracts. The
court case as it were took this away from the regulator and resolved
it ultimately in the House of Lords.
279. Sir Howard, at best this was deception
and at worst it was fraud. Why did it just escape the attention
of everybody in the business and what is to be done about it recurring
in the future?
(Sir Howard Davies) You say at best it was deception.
That was not the view taken by the insurance regulators in the
DTI. It was not the view taken by the Government Actuary's Department,
and those were the two views which I inherited, nor was it the
view taken by the Vice Chancellor in the first High Court. They
took the view that the right of insurance companies to determine
the nature of their terminal bonuses and the discretion inherent
in those policies overrode if you like the specific guarantees
and that it was reasonable to adopt a differential bonus rate
in the light of the guarantee because otherwise there was a risk
that people would take away a significantly larger proportion
than their asset share in the company, and that (as it was argued)
the fundamental principle on which the life sector had been built
was roughly that you were entitled to your asset share of the
fund. Therefore the courts were faced with this difficult tension
between an asset share view of the distribution of assets in a
life fund and the specific guarantee promises that were given
in the guaranteed annuity rate policies, and that was what was
ultimately resolved in the House of Lords.