Select Committee on Treasury Minutes of Evidence

Exmination of Witnesses (Questions 300-319)



Mr Laws

  300. Let me try something else then. The note contemplated closing of Equitable Life to new investors, which would have been a significant move.
  (Sir Howard Davies) Yes.

  301. And which would have potentially protected those people who put their money, after the date when you took over the regulation of this company into Equitable Life, in spite of the fact that you had been briefed about the serious questions over the company's solvency.
  (Sir Howard Davies) Yes.

  302. When you had that discussion and you contemplated closing Equitable Life to new business, why did you decide not to do that?
  (Sir Howard Davies) Mr Laws, I think it is interesting to note that on other occasions we are criticised for not scenario planning and yet on this occasion a bit of scenario planning is being seen as something which suggested that we should have done something. That is what we were doing at this point, in fact what the Treasury were doing at this point. The issue was whether we could reach agreement with the company to produce adequate reserves and as it was, as you were aware at the time, the company was disputing our view of the reserving that they needed to put in place.

  303. So did you seriously consider the issue of closing the company to new business?
  (Sir Howard Davies) There was a discussion which I think is fairly accurately described in the Baird Report which captures the essence of what was decided and what the note contemplated at 4.19.7 says, was whether we would have to close the Equitable Life to new business, which would need to be done if Equitable Life said that it was going to declare a bonus which would have had the effect of making the company breach its required minimum margin if full reserves were made for the GAOs. Therefore, all we were saying there, all the note was saying, was that if it were not possible to get Equitable in a position where it met its regulatory requirements, then we would have to consider intervention action and closing it to new business. As the story developed Equitable did put in place appropriate reserves, they undertook a reinsurance contract and various other efforts, they adopted a slightly lower bonus policy than they might otherwise have done, and they did meet our required minimum margin. Therefore we had no case for intervening to close the company to new business.

  304. What you are saying is that this consideration of closing Equitable Life to new business was only if they did not adhere to the measures you were trying to push on them?
  (Sir Howard Davies) Yes.

  305. Let me go a bit further than that. You have decided that you were going to leave Equitable Life open to new investors even though there were major concerns over the business's insolvency which were being revealed to you in internal guidance from those officials you were taking over. You allowed the company to go on in business and new investors to come and place money into it. In the light of that fact that you had allowed the business to go on and new investors to place their money into Equitable Life, do you not think it is astonishing that the response that you have given to Mr Cousins earlier suggested that you took a totally relaxed attitude to the way in which Equitable Life advertised its products and did not in this particular situation warn new investors about any of the risks that they faced?
  (Sir Howard Davies) I do not take that view, no, and I would quote back what the Baird Report says in 6.21.5, where it acknowledge that once a decision had been taken by the prudential regulator to continue to write new business it would have been inconsistent with that decision to require Equitable Life to suspend advertising or to require it to give any special health warnings to new investors about the operational risks faced by it.

  306. Let me quote back to you what you told Mr Cousins about five or ten minutes ago. You said that the company would have been better advised to set out the risks run in the court case to new investors. You accepted that its advertising over the period before it was shut down to new business was not good and you agreed with the fact that the company itself—not you or any of your officials—withdrew that advertising. You said that your regulation in terms of the conduct of business did not fail in an absolute sense but it was clear from your answers to Mr Cousins, and it is extremely clear in Mr Baird's report, that you did nothing after taking over a company in this situation to warn new investors about the risks that they faced and you did nothing to make Equitable Life put those warnings into its advertising and into the information which was given to new investors. Is that not the case?
  (Sir Howard Davies) The responsibilities for explaining the position of a company for meeting the requirements to be not unfair and to be not misleading rest firmly with the company. That is the way the regime works. Those are responsibilities on them. Mr Cousins asked me for my personal view on their advertising. Perhaps I should not have been tempted to answer that question which is not primarily my business.

  307. That is staggering. Here is a company that was virtually insolvent when you took it over.
  (Sir Howard Davies) That is really not the case, Mr Laws. It was not virtually insolvent. I cannot accept that.

  308. Do you want me to refer you back to the briefing note in which it said there were serious concerns—
  (Sir Howard Davies) There were serious concerns about its insolvency but it was not virtually insolvent. That is quite a different thing, which we resolved.

  309. There were question marks over whether new investors would be allowed to go into it or not. In spite of those facts you took no interest whatsoever, it seems, in the information which it was putting out. You did nothing to ensure that it warned new investors about the risks that they faced and, given these factors, a) is it not obvious that there is some potential compensation here due to regulatory failure, and b) what would you say to those people who frankly had no confidence in your ability or the FSA's ability to protect investors in the future?
  (Sir Howard Davies) I simply do not accept the characterisation that you have of what you say happened. I have explained that as part of good disciplines, of scenario planning and identifying what would happen if the company did not do things that we wanted it to do, the possibility of intervention action was raised. In other areas we have been accused of not taking such anticipatory thinking. I have to say that it will be a bit hard if whenever we do that, we are going to be accused of not having taken some action which is just in contemplation if things go wrong. We then pursued the reserving issue. The reserving was put in place. We then faced a decision as to whether we should allow the company to continue in operation and this is a binary question. You either do or you do not. As I pointed out last time, the FSA cannot be in a position of saying that companies can stay in business and all right to stay in business but none the less advise people not to do business with them. We made the crucial decision that we would allow them to stay in business because we believed that was the right answer for policyholders as a whole, and I would say that if I had in the circumstances to make that decision again, recognising that we came into this situation at a very difficult time, and I hope the Committee will acknowledge that, this was a problem that had been brewing for 30 or 40 years and which we inherited at an extremely difficult time—

  310. It was a very difficult time.
  (Sir Howard Davies)—when there were very difficult decisions to make, we made those decisions. I stand by those decisions we made. In the light of the information that we had at the time we made reasonable decisions that were in the interests of policyholders. The court case came out differently from what was expected and I fully recognise that many people now feel that it would have been better if we had made a different decision.

  311. You are happy then that you took over the regulation of the company in its parlous position and essentially did not lift a finger to make new investors aware of the risks that they faced?
  (Sir Howard Davies) I think that is a poor characterisation, if I may say so, Mr Laws, of what we did. We acted at all times in the interests of policyholders as we saw them.

  312. How did you warn new investors?
  (Sir Howard Davies) We acted as we saw them. We took the view that the company could carry on undertaking new business. As I have said, it is not possible at that point to say that you can take new business but if I were you I would not do business with them. That is not something that we can do in our regime.

  313. You did nothing to ensure that the company itself made its new investors aware of the huge risk they faced. That is the nub of it basically, is it not?
  (Sir Howard Davies) The report describes what we did and did not do.

Mr Tyrie

  314. A moment ago you said you stand by the decisions you took, Sir Howard. I would like to come back for a moment to the note that we have been discussing. Do you think it would be helpful for you in the presentation of your case that you stand by your decision for that Treasury note to be released?
  (Sir Howard Davies) No, I do not think it is particularly central because I believe that the character of the information and the decisions that were made around that time are accurately set out in the report.

  315. Would you be happy for that note to be released?
  (Sir Howard Davies) As I say, that is not a decision for me.

  316. Am not asking you what your decision is since you do not have a decision to take. I am asking you whether you would be happy for that note to be released.
  (Sir Howard Davies) I fear that if I say that I am happy then I am interfering in a decision which as I see it is essentially about rules of procedure which I would not wish to interfere with.

  317. Could I ask you about compensation? You have said that you do not think there has been regulatory failure and you denied Jim Cousins' allegations that there has been. If regulatory failure is found by Penrose do you think there should be compensation?
  (Sir Howard Davies) I am really not prepared to answer such a hypothetical question because I think it would clearly depend on the terms of Lord Penrose's report and I do not think it would be sensible to speculate or useful for me to speculate on that.

  318. I have one further set of questions I would like to clear up. When the Minister, Ruth Kelly, came before us we sought to ask her questions about the period for which the Treasury was responsible, which was the period prior to January 1999, she said, "We no longer retain the documentation for that period at the Treasury. What I am relying on"—by implication in all the answers that she then went on to give—"from my knowledge of this era is the Baird Report itself and the statements of fact that are in that." Do you think that is an adequate approach for somebody who holds responsibility for the regulation of this industry to take?
  (Sir Howard Davies) All I can say on that point is that it is true to say that the papers have moved to us. As to whether that is an adequate approach for Ministers I would think that is a matter for Parliament and not for someone who is a servant of ministers.

  319. Who do you think is responsible now? The person who holds the papers or the person who held the papers and took the decisions at the time?
  (Sir Howard Davies) The contracting out order that was made in relation to this was clear about the things that the FSA would do and the things that ministers would do, and it described the work that we would undertake on ministers' behalf and the then Economic Secretary said that ministers remained accountable to Parliament for the operation of those functions. That was clearly set out at the time and that was the basis on which we went forward, so on these matters I am accountable to ministers and ministers are accountable to Parliament through until 1 December.

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