FOS and FSA, incestuous relationship?

Mortgage_Payer_2

Interesting article in the Sunday Times, 27th March 2005, primarily regarding the Equitable Life scandal but Paul Braithwaite's comments are very relevant to the activities of the FOS and the investigation of the sales of endowment policies.

“The ombudsman’s incestuous relationship with the FSA is totally unsatisfactory. The FSA is concerned primarily with industry confidence. That will always prevail over protecting policyholders, as Equitable Life has proved over and over.”
Paul Braithwaite, Equitable Life Members Action Group.

Full article:

March 27, 2005

Equitable: good news and bad
By Clare Francis
Some policyholders are now in line for compensation, but other complaints will go uninvestigated

THOUSANDS of Equitable Life policyholders who have been seeking compensation from the beleaguered insurance company received mixed news last week.

The Financial Ombudsman Service awarded compensation to a former member who joined Equitable after September 1998, when the board first became aware of its financial problems but failed to disclose them. The decision could trigger compensation payments totalling £75m to 1,500 former policyholders in the same position.

However, the ombudsman also announced that it would not investigate 50 other complaints relating to the overpayment of bonuses in the 1980s and 1990s, which precipitated the insurer’s downfall. The firm closed to new business in December 2000 because it could not honour expensive guaranteed annuity rates (Gars) on pension policies.

Will I get compensation?

The ombudsman’s decision to award compensation affects 1,500 so-called late joiners — people who joined the society after September 1998 but who left before the compromise deal in February 2002. Under the terms of the compromise, members agreed to relinquish their rights to legal redress from the company, in return for an uplift in the value of their underlying fund of 17.5% for investors with guaranteed annuity rates and 2.5% for those without.

These late joiners complained to the ombudsman because they took out their policies after the board was warned that it would struggle to meet its Gar liabilities. They argued that Equitable salespeople should have warned them about the risks prior to investing and the ombudsman, Walter Merricks, agreed.

He said: “Equitable Life had knowledge that the Gar issue could affect the return on the policy that it recommended to Ms E but did not tell Ms E about it. I find that it should have done. If the advice Equitable Life gave Ms E had met the standards she was entitled to expect, I am satisfied that she would not have put money into a policy with Equitable Life and she would have put her money into a policy with a different firm instead.”

However, other late joiners will not automatically receive compensation. The ombudsman said that the majority will, but it is not guaranteed.

They will each be sent a summary of the lead case and asked if there is anything they want to add about their own complaint. The ombudsman will then look at each case individually to assess whether compensation is due, and if so how much.

There is also speculation that Equitable could challenge the ombudsman’s decision.

How much compensation could I get?

Equitable Life has put aside £75m for compensation payouts and it says it expects this to be adequate, assuming it agrees to pay out. If the £75m is not sufficient, further money will come from Equitable’s investment funds, which will hit returns for policyholders who have stayed with the life insurer.

The ombudsman has ruled out compensation for distress and inconvenience on the grounds that it would have to be paid by the remaining members who have also suffered.

The compensation will be calculated to put people back into the position they would have been in had they not invested in Equitable Life. In other words, the ombudsman will compare each individual’s losses with the average return from a “similar product with an alternative provider” and make up the difference.

Who will not be compensated?

Policyholders who signed the compromise agreement in 2002 were given hope of compensation last year when Lord Penrose, a Scottish judge, published a report into the Equitable crisis. He claimed that the insurer had systematically overpaid bonuses throughout the 1980s and 1990s, which ultimately caused the firm’s demise.

In response to the Penrose Report, Ruth Kelly, who was then financial secretary to the Treasury, advised members to appeal to the ombudsman. As a result, it received 50 complaints, but Merricks said last week that he would not be investigating them, or any other “Penrose-related” matters.

Merricks said: “I am satisfied that there are court proceedings, disciplinary proceedings and other inquiries and investigations under way regarding some aspects of the subject matter of these complaints. Even if no current court proceedings determine the subject matter conclusively, I am satisfied that it would be more suitable for these complaints to be dealt with by a court.”

Member action groups reacted angrily to this announcement, claiming that the ombudsman had refused to investigate their complaints because it would open the floodgates for thousands more cases and bring about the insurer’s collapse.

Paul Braithwaite of the Equitable Life Members Action Group said that the ombudsman had buckled to the “bully-boy threats” of Equitable and the Financial Services Authority (FSA), which he described as the ombudsman’s master.

He said: “The ombudsman’s incestuous relationship with the FSA is totally unsatisfactory. The FSA is concerned primarily with industry confidence. That will always prevail over protecting policyholders, as Equitable Life has proved over and over.”

Are there any other options?

The parliamentary ombudsman, Ann Abraham, is investigating whether Equitable’s regulators, including the Treasury, the Department of Trade and Industry and the Government Actuary’s Department (GAD), failed in their duties.

If she rules against them, it could trigger compensation of about £1 billion for Equitable’s 1m members, which would be paid out of taxpayers’ money. Her decision is expected towards the end of the year.

The current Equitable management is also pursuing 15 former directors for £1.75 billion, and another £2 billion from its former auditor, Ernst & Young. The court cases start on April 11.