The failures of the regulators
Lord Penrose, whose report was published in March 2004, found that ‘principally, the Society was the author of its own misfortunes’. However he also chronicled a long series of regulatory failures, by the Department of Trade and Industry and the Government Actuary’s Department, who were responsible for its regulation during the early 1990s.
In short, he reported that the regulators knew what was going on, but took no action. Without such regulatory incompetence and inaction over an extended period, Equitable could not have expanded its business sixfold and created a financial disaster that ultimately affected over a million and a half people.
So clear were the signs of regulatory failure that the Parliamentary Ombudsman Ann Abraham was obliged to announce an investigation. Unlike Lord Penrose, she is empowered by Parliament to identify ‘maladministration leading to injustice’ and to recommend compensation.
The Treasury (and the FSA) had taken over regulation from DTI/GAD in 1998. It quickly identified deep-seated regulatory failure. In EMAG’s view it also embarked on a comprehensive cover-up. Equitable’s financial weakness continued to be concealed by endorsing dubious devices such as allowing Equitable to count ‘Future Profits’ of up to £1 billion (Dec 2000) and a worthless re-insurance policy of up to £1.1 billion (Dec 1999) as assets!
When Equitable shut its doors in December 2000, the closure was blamed on the GAR problem while regulatory failure and over-bonusing remained concealed. The policyholders were thus denied the information with which they would have been able to campaign for compensation for gross regulatory failure. A Government ‘lifeboat’ in 2001 might have allowed Equitable to survive the 2001-2003 stockmarket downturn and even recover in the 2003-2007 boom. Concealment meant the whole cost of the debacle was borne by the policyholders remaining in 2001. The Society was effectively doomed. It also meant that policyholders joining Equitable or investing new money from the late 90s were being grossly deceived with the connivance of the regulators.
The 2001 Compromise scheme (ostensibly to deal solely with the GAR) was pushed through with regulatory approval. But other very serious failings were concealed from policyholders who were effectively voting on a false prospectus:
- A decade of over-bonusing
- Probable regulatory insolvency
- The lack of any assets to cover the policy value ‘uplifts’ for which non-GAR policyholders gave up valuable rights. These were, in any case, taken away shortly after.