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Verity&#39s View

It&#39s nice to know that in some corners of the Palace of Westminster the great British tradition of understatement is being kept alive.

Last week the Treasury select committee produced an interim report on the Equitable Life affair. Given the way that events were mishandled by the Treasury, the FSA and, above all, Equitable&#39s management, the language was mild.

This was not because the MPs do not feel strongly about the case – this is an issue that touches many of them intimately in the prospects for their AVC savings.

It seems more likely that this was an interim report and they wanted to keep their powder dry for a more damning indictment later on.

So most of the committee&#39s findings were couched in questions and recommendations to those in charge of inquiries into the affair at other bodies – the FSA, the Faculty & Institute of Actuaries and the Institute of Chartered Accountants.

But the evidence itself is so powerful that strong language is unnecessary.

One crucial question is why, for most of 2000, the FSA allowed Equitable to misinform its customers on the likely impact of the House of Lords decision. A year earlier, Martin Roberts, the head of the Treasury&#39s insurance directorate in charge of the supervision and “prudential regulation” of life insurers, (and now in a similar post at the FSA), wrote a letter saying his legal advice was that Equitable&#39s controversial approach to guaranteed annuity rate policies was permissible.

In January 2000, the Court of Appeal flatly contradicted this. In fairness to Mr Roberts, the Treasury and the FSA, one cannot second-guess appeal court judges. But at the very least, the regulators should have insisted that Equitable inform existing and potential customers of the possible impact on financial strength.

As every responsible IFA knows, financial strength is vital in advising a client whe-ther to commit themselves to a life insurer for up to 25 years.

Instead, as we know, the FSA allowed Equitable to write to policyholders saying even if the House of Lords&#39 decision went against it, the impact on its finances would be nothing more than £200m.

Before the committee, the FSA chairman Howard Davies and Equitable&#39s now departed chief executive Chris Headdon sang the same hymn.

Even after the appeal court decision, the possibility of a House of Lords&#39 judgment that would cost Equitable much more (by the way, it&#39s now a lot more than £1.5bn) and seriously damage its financial strength was regarded as remote. So much so, they did not even conduct an exercise to assess possible implications.

More than 25,000 customers bought policies in 2000 in ignorance of the facts. Am I alone in thinking it is part of the FSA&#39s job to prevent that?

Here, the MPs achieved something new. Both the FSA and Equitable had tried to defend their actions and the lack of warnings to customers on the flimsy basis that the House of Lords&#39 decision could not have been anticipated. The Appeal Court, they tried to say, was much milder.

Well actually, no. In January, Lord Justice Woolf was taking a very similar line to the later decision by the law lords. So the threat to Equitable&#39s finances was there in January and anyone with half-decent legal advisers should have anticipated that. The MPs simply asked the FSA to consider whe-ther its position was justified.

If the FSA was wrong in assessment and therefore wrong not to issue a warning about Equitable&#39s financial strength, the policyholders, already facing a complete lack of guaranteed bonuses and a 15 per cent MVA, may have a case for compensation.

But perhaps even more damning is a broader point. The whole issue of guaranteed annuity rates did not surface until 1998, after Sun Life of Canada admitted a huge liability because of them. I rang Equitable that day to find out if it had a similar issue. Equitable&#39s spokesman Nigel Webb said he didn&#39t know but would find out. It was not until the personal finance press had been banging on about it for weeks that the Government decided to find out the scale of the problem.

Now Equitable had adopted its controversial approach to guaranteed annuities way back in 1993. Nothing was said in the accounts seen by policyholders. Mr Roberts and his insurance directorate are supposed to look at these issues from the annual returns submitted by insurers (where information on its guaranteed annuity policy was buried in other guff). This was used as a fig leaf to suggest that the public “did know” about Equitable&#39s GAR policy.

Yet it is clear no one had a clue. Not only are we as a nation refreshingly largely free of people sad enough to go through the insurance returns just because they are a policyholder, we are also remarkably short of people who even knew about guaranteed annuity rates before 1998. There is a hidden scandal here – the millions of people who took ordinary annuities because no one advised them to take out guarantees.

This suggests the system of insurance returns and so-called prudential supervision and regulation is pathetically ineffective. Not only did the public not know from the insurance returns about the threat to financial strength, neither did the regulators. Or if they did, why didn&#39t they tell us?

Andrew Verity is the BBC&#39s personal finance correspondent


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