Chris Headdon, the former chief executive of Equitable Life, could face the possibility of a criminal inquiry by the Serious Fraud Office after the Financial Services Authority said it was investigating allegations he misled regulators over the state of the company's solvency.
Mr Headdon failed to disclose to the FSA and Equitable's auditors, Ernst & Young, a letter that severely compromised a reinsurance agreement taken out with Ireco, an Irish subsidiary of GE Capital, in January 1999 to support the society's solvency. The reinsurance contract was meant to provide £700m of cover for guaranteed annuity rate (GAR) liabilities and was used to prove that Equitable met solvency requirements. According to the FSA, Mr Headdon, who was then Equitable's chief actuary, wrote "a letter of understanding" to Ireco in April 1999 promising not to claim more than a small fraction of the value of the reinsurance contract.
This was not disclosed to the FSA, which yesterday said that had it known about the letter the reinsurance would not have been adequate for reserving purposes. At the time, the society thought it would have to pay only between £50m and £200m to cover liabilities.
Mr Headdon's actions are being investigated by the FSA, which may pass its findings on to the Serious Fraud Office if there is evidence of criminal wrongdoing. The FSA said in a statement: "We are making further enquiries about the circumstances in which this letter was written and the intentions of the parties concerned. Consideration will be given to whether any action should be taken by the FSA or by other authorities."
Equitable's new board, elected after Mr Headdon stepped down in March, said it only discovered the letter two months ago and has passed it to the law firm Herbert Smith, which is working to establish whether Mr Headdon and other previous board members can be sued for Equitable's collapse. Mr Headdon could not be contacted. Ireco said the letter "involves a private business dealing".
Equitable tried to reassure policyholders yesterday that it was still solvent, saying it had negotiated a new reinsurance agreement with Ireco, which meets FSA solvency requirements.
The first reinsurance contract was taken out at the beginning of 1999 after the regulator concluded that the economic climate was making GAR contracts increasingly expensive and insisted life assurers raise their reserves. While other companies were able to fall back on shareholders' funds or other reserves, Equitable had no cushion and was forced to set up a reinsurance agreement.
The contract was based on the assumption that Equitable would be allowed to continue to pay out smaller final bonuses to customers who took up the guaranteed element in their contract. This was undermined in July 1999 when the House of Lords ruled that Equitable was not allowed to pay out different bonuses on this basis, leaving Equitable with £1.5bn liabilities.
Separately, Equitable's compromise scheme to cap GAR liabilities moved a step closer to success yesterday when the society won approval from the High Court to send out the proposals to policyholders, who must vote on it by 4 January.
Equitable said that the problems with the reinsurance agreement would not affect the levels of compensation policyholders would receive as part of the scheme.