The Financial Services Authority will be dealt yet another hefty blow to its credibility today, as the Parliamentary Ombudsman, Ann Abraham, reverses her decision of five years ago and accuses it of maladministration for its role in the collapse of Equit-able Life eight years ago.
The FSA is one of four institutions – along with the Department of Trade & Industry (DTI), Government Actuary Department (GAD) and HM Treasury – which are accused by Ms Abraham of presiding over a "decade of regulatory failure", which culminated in the insurer's collapse in December 2000.
Although the Ombudsman gave the FSA a clean bill of health in her first report into Equitable, which was published in 2003, her latest and infinitely more thorough investigation reverses that decision.
"The case of Equitable Life, which echoes earlier cases such as Vehicle & General in the 1970s and shares some similarities with the current example of Northern Rock, illustrates the need for absolute clarity as to what can and cannot be expected from financial regulation and the development of shared understandings as to the limits to the protection that such regulation offers to investors both before and after problems arise, as they inevitably will," said Ms Abraham.
"Key, however, is that those responsible for undertaking financial regulation should act in a way that is compatible with the duties and powers which Parliament has conferred on them. Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report."
The new Ombudsman report is a study which the FSA never wanted to see. Callum McCarthy, the outgoing chairman of the FSA, tried to prevent Ms Abraham embarking on a new investigation – the 13th inquiry into Equitable – in 2004, writing her a letter, saying: "I ... believe a further review would raise consumer expectations which in reality it could not meet, because it is very unlikely to be able to conclude that there was maladministration."
Today's report, however, not only concludes that there was maladministration, but calls on the Government to apologise as well as fully compensate the thousands of people who were affected by Equitable.
The report lands several charges at the feet of each of the four institutions which had responsibility for its regulation in the 10 years leading up to its closure. Before July 1998, Ms Abraham accused the DTI and GAD of regulating in a "passive, reactive and complacent" manner. Specifically, she criticised the regulators for letting one person hold the role of both chief executive and appointed actuary for more than six years, as well as a failure to seek to resolve any of the issues which were apparent within the insurer's annual regulatory returns. She also criticised the DTI and GAD for allowing the introduction of a differential terminal bonus policy, which was later to become central in Equitable's collapse.
During the two and a half years leading up to the Society's closure, the FSA (acting on behalf of the Treasury) took over responsibility for the regulation of the insurer. However, Ms Abraham said that while the FSA and GAD "often initiated discussions appropriately with Equitable", they still allowed Equitable to take credit on their books for reinsurance contracts which had not been concluded. The report also said the FSA failed to ensure that Equitable warned policyholders of the serious implications of losing a pivotal court case in 2000, which eventually led to its demise. After losing the case, the regulators also allowed Equitable to stay open to new business, even though the business was at this stage unsound.
The FSA said yesterday that it was not willing to comment on the report, and would wait for the Government to make its response first.
The Government will ann-ounce today that it intends to spend the summer analysing the report, before formally responding to it in the autumn. However, Vanni Treves, the chairman of Equitable, yesterday accused the Treasury of employing stalling tactics, claiming that it had been in possession of almost all of the current report since the beginning of the year.
Indeed, the report already contains preliminary responses from both the FSA, which became an independent, non-governmental organisation in 2001, and the Government itself, which said it does not believe the Parliamentary Ombudsman has the power to recommend it to pay compensation.
The report recommends that an independent body is set up to establish exactly how much of investors' losses was caused by maladministration – as opposed to the subsequent market collapse. The Equitable Members' Action Group (EMAG) suggests this amounts to £4.65bn.
If the Government rejects the findings of the report when it rep-orts to Parliament in the autumn, there is likely to be a backlash from both opposition and backbench government MPs. Over the last three years, the Government has already dismissed two Ombudsman reports – relating to tax credits and the regulation of occupational pensions – which found it guilty of maladministration. A third would bring into question the Government's respect for the British democratic system.
"After eight years and 13 rep-orts, it's time for the Government to finally admit that it comprehensively failed to regulate Equitable Life properly," said Vince Cable, the Liberal Democrat Treasury spokesman. "For years, ministers have acted like they were in a castle under siege, hoping that Equitable Life policy-holders would give up and go away. Today's report shows that, rightly, this is not going to happen."
The Shadow Chancellor, George Osborne, said: "The Ombudsman rightly highlights regulat-ory failings, including those between 1998 and 2001, when Gordon Brown and the Treasury had responsibility for this area. He cannot escape the blame for what happened on his watch. We're glad that the report accepts the principle that there should be payments to those who lost out. The job now is to assess how much those payments should be and to whom they should be paid.
"It is up to the Government now to admit its responsibility, issue the apology that the Ombudsman demands and create the payment scheme. If it doesn't, we will."
EMAG said that if the Government refuses to follow the Ombudsman's recommendations, it will take the report to judicial review in the High Court – a case it would be expected to win. "We want to ensure that the Equitable scandal becomes an embarrassing election issue" said Paul Braithwaite of EMAG. "If we can hit them where it hurts in the marginals, perhaps at last the Government will start listening to the victims.
Countdown to the Ombudsman's report
1762: Equitable Life, the world's oldest mutual insurer, is founded
1950s: Equitable starts selling guaranteed annuity rate (GAR) policies that guarantee investors a minimum annuity rate on retirement
1990s: Falling interest rates and inflation make GARs increasingly expensive to honour
January 1994: Equitable says it will cut the size of final bonuses paid to its 90,000 GAR policyholders
July 2000: The House of Lords orders Equitable to meet obligations to its GAR policyholders. The insurer puts itself up for sale
December 2000: After failing to find a buyer, Equitable shuts for new business
August 2001: The Government launches an independent inquiry under Lord Penrose to investigate the Equitable affair
March 2004: The Penrose report blames Equitable management for the company's woes, but also criticises regulators
June 2004: The Parliamentary Ombudsman seeks opinions on whether she should investigate regulation of Equitable
July 2008: The ombudsman's report is publishedReuse content