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A consumer&#39s view

Self-interest was bound to prevail eventually. With so many lawyers and MPs standing to lose considerable sums of money on their Equitable Life pension contracts, it was only a matter of time before they leant on Michael Buckley, the Parliamentary Ombudsman, to set up an inquiry.

He has the powers to award compensation if it can be shown that a Government department has failed in its responsibilities.

The wonder is that it took the squabbling policyholder factions so long to see what had been blindingly obvious from the start. Equitable is a mutual and has no shareholders – the only institution in a position to compensate policyholders for their losses is the Government.

The investigation by the Parliamentary Ombudsman will take time. He has said that initially he will only look at the role of the regulators from January 1999 to December 8, 2000 – when the life company was forced to stop taking on new business. But he will also be looking at earlier regulation once the Government-commissioned Penrose inquiry reports some time in mid-2002.

The interesting point here is that the Treasury&#39s totally cynical move to head off the parliamentary ombudsman with the Penrose inquiry – which has no powers to award compensation – has failed.

Demonstrating that the regulators were inadequate, if not incompetent, should not be too difficult. The Department of Trade and Industry, which regulated life companies for decades prior to January 1998, has had a poor track record in this area.

It failed to head off the collapse of virtually every major insurance company that has gone under in the past 30 years. Fire Auto & Marine (1966), Vehicle & General (1971), Nation Life (1974) are just three that instantly come to mind – not to mention a string of others such as Lifeguard, London Life, UKPI and others which had to be taken over to prevent disaster.

Everyone in the marketplace had known there were problems over guaranteed annuities well before December 1998, when the regulator made the first move to warn life companies generally about making provision for guaranteed annuities. The question is, why didn&#39t the regulators?

The answer is that they are not practitioners, they are civil servants. They were advised by, and heavily dependent upon, the Government actuary&#39s department which long ago should have pointed out to Government – and made a fuss about it – that a system of regulation which allows life companies to value their liabilities in virtually any way they see fit, is worse than useless.

It was Equitable&#39s failure to make any provision at all for what could clearly become a huge liability – not even charging a notional extra £1 a year premium for what was a very valuable option – which got the company into difficulties.

In addition, the situation whereby the appointed actuary within a life company can, to this day, also be the chief executive – as was long the case at Equitable – should have been dealt with years ago.

The appointed actuary is supposed to represent the policyholders&#39 interests and act as whistleblower if he does not like what management is doing. There is a clear and obvious conflict of interest where he is also the chief executive.

In the case of Equitable, first Barry Sherlock and subsequently Roy Ranson held this dual role. To this day, the actuaries&#39 professional bodies are still refusing to agree that this is wholly unacceptable.

It had long been known that insurance company accounting left much to be desired and that the ability to shift assets and liabilities around within a life company and revalue them made any meaningful analysis difficult, to say the least.

A report by one of the top accounting firms, commissioned by the Tory Government in the 80s, came to the conclusion that a new Insurance Companies Act was urgently required. Needless to say, nothing has ever been done about this.

It is no use one Government department blaming their predecessors for this mess, because it has been the same individuals regulating life companies throughout. Those currently in charge of life company regulation at the Financial Services Authority were also at the Treasury between 1998 and 1999 and before that at the Department of Trade nd Industry.

What the Equitable Life disaster demonstrates is that regulation, even if competent, cannot prevent all disasters and probably not even the majority. History reveals that most regulation consists of shutting the stable door.

What is needed is fast and comprehensive compensation and a clear statutory process for achieving this where investors, through no fault of their own, lose all or part of their life savings.

This is worth more to investors than all the regulators put together.

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