Policyholders of Equitable Life had hoped the much-anticipated Penrose Report would provide them with the legal firepower to demand compensation, and both regulators and former directors of the society were criticised for allowing the company to reach near-collapse. But the prospects of imminent payouts for policyholders were still distant last night.
While Penrose makes no accusations of regulatory negligence or maladministration, he did find that multiple errors had been made by regulators. This, MPs and policyholders hope, should present a "moral" case for compensation. But this has already been dismissed by the Government, which agrees with Penrose that "regulatory system failures were secondary factors" in the company's troubles and the first call of blame lies on the society's former directors. The directors had systematically over-paid bonuses at an unsustainable level and had failed to take account of the rising guaranteed liabilities on its books. Penrose said regulators did fail policyholders, but largely because the system in which the regulators operated was inadequate.
Vanni Treves, the chairman of Equitable, had vowed to sue the Government if the Penrose Report gave enough evidence of regulatory failure. But to take a case against the Government, the society would have to prove misfeasance in public office, negligence, or breach of statutory duty. These are very high legal hurdles, and the society repeated its view yesterday that the best route for redress was not through the courts. "We call on the Parliamentary Ombudsman, who has the statutory power to recommend compensation, to re-open her inquiry into Equitable Life," Mr Treves said yesterday. The Parliamentary Ombudsman has conducted an inquiry in to the role of the Financial Services Authority and concluded in 2003 that there had been no regulatory failure, but may be persuaded to look again given the serious findings.
The current board of the society already has under way two legal actions against 15 former directors and its former auditors, Ernst & Young. The case against Roy Ranson and Chris Headdon, former actuaries and chief executives of the company, should have received a boost from Penrose's findings. Mr Ranson, who was chief actuary and chief executive until 1997, was described as "manipulative" by Lord Penrose. He was ascribed as using "dubious" actuarial practices to compile Equitable's accounts, said to be "obstructive" of scrutiny and "dismissive" of regulatory concerns. The returns he filed to the regulator were "opaque and uncommunicative". Mr Headdon, who succeeded Mr Ranson, "did not make good the lack of information" and continued to use Mr Ranson's questionable actuarial techniques.
The Serious Fraud Office and the Department of Trade and Industry are still considering the evidence they have been presented with and the Government said criminal proceedings may now take place. In 1983, the company decided on a strategy to claw back guaranteed values it had promised policyholders by lowering bonus levels if the need arose, but this was not communicated to the board until 1993. Policyholders were not told of this "differential bonus policy" until 1996, and even then, this communication was "ill-conceived, poorly expressed and confusing".
"The SFO is still considering the issues raised and in particular where the adoption of a differential bonus policy was communicated to policyholders," a statement said, giving rise to the possibility that further mis-selling claims could be lodged with Equitable.
While Government compensation is likely to remain a political hot potato for some time, the recriminations of the report will be felt across the industry. The Government set up two new inquiries yesterday to tackle issues arising from the report and requested the Accounting Standards Board undertakes an urgent study into the accounting of with-profits business.
Penrose exposes the over-reliance on the company's appointed actuary, who was revered by other board members and whose decisions went totally unquestioned. The non-executive directors at Equitable were without any actuarial knowledge and were "so wholly dependent on the actuarial input from the chief actuary that they were largely incapable of exercising any influence on the management of the society". In light of this, Sir Derek Morris will undertake a "wide-ranging review" of the Actuarial profession.
Paul Myners, the former chairman of Gartmore Investment Managers who reviewed the role of institutional investors in light of the Maxwell scandal, has also been called in to overhaul corporate governance standards of mutual companies.
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