Equitable Life loses key mis-selling case

Up to 70,000 policyholders could be in line for compensation, landing society with £70m bill

Equitable life yesterday suffered its biggest setback for three years when the Financial Ombudsman Service (FOS) decided that the embattled mutual insurer had mis-sold policies and should compensate the people who had bought them.

This is the first time since the House of Lords decided in 2000 that the 341-year-old Equitable had to stand by its cripplingly expensive guarantees that the society has been censured by an official inquiry.

Next month the Treasury is due to receive Lord Penrose's wide-ranging report into the disastrous decisions which led to Equitable closing to new business at the end of 2000 and suffering a £1.5bn shortfall in meeting policyholder guarantees.

The FOS verdict completes a painful week for Charles Thomson, Equitable's chief executive, who was forced to admit that he had left his wife and was now in a relationship with his secretary, Verity Coutts, 27.

Paul Braithwaite of the Equity Members Action Group said FOS's parent, the Financial Services Authority (FSA), should take the blame for encouraging Equitable policyholders to sign a compromise in which they gave up rights to further legal action in return for a 2.5 per cent uplift in their policies' value. These policyholders, therefore, have no redress to FOS following yesterday's verdicts.

Mr Braithwaite said the compromise deal was "a con trick" and those who signed it had been "grossly misled" by the fact that the FSA had endorsed it.

The FSA said it did not formally approve the compromise, but did say that a successful compromise offered Equitable the best chance of stability, which it has.

In four of yesterday's five test cases, FOS decided that the former policyholders had been "induced" to enter into their contracts on the basis of "material misrepresentations" of fact, and that Equitable was liable to compensate them for any loss.

In the last case, the conclusion is that "Equitable Life failed to take reasonable care in the provision of advice" and that similar compensation was due.

These cases cover guaranteed polices that were removed from Equitable's with-profits fund before 8 February last year, and so are not bound by the terms of Equitable Life's compromise scheme struck on that date. The policyholders in question are so-called "late joiners", who bought policies after September 1998. By that stage doubts were being raised about Equitable's guarantees, so anyone who was sold a policy after that date has a particularly strong mis-selling case.

FOS added: "We are investigating these lead cases as a way of establishing key general principles, which we then anticipate being able to apply to other similar complaints against Equitable Life that we are dealing with."

The Ombudsman has received 2,500 similar claims, but there are understood to be another 16,000 late joiners, and a total of 70,000 who bought policies after September 1998. All theoretically may have a case for complaint.

A spokesman for Equitable said yesterday that the society had set aside £70m in its accounts for possible compensation payments, an amount he described as "adequate and affordable".

He said that Equitable was writing in the next 10 days to all late joiners who had not signed the compromise deal, inviting them to submit claims.

However, Equitable is still reserving its right to appeal against the five FOS verdicts while it considers their detailed wording.

If Equitable appeals, a formal decision will then be taken by the ombudsman. But it would then still be open to Equitable to seek a judicial review of the ombudsman's verdicts.