As the fallout from the Equitable Life debacle starts to settle and the industry considers its effect on the financial services sector, the roles of the regulator and civil servants are coming under increasing scrutiny.
Charges against the regulator include failure to act in the early 1990s when signs pointed to a low-inflation period, incorrect guidance on the cost of providing guaranteed annuities and demands for an explanation as to why Equitable was granted approval for stakeholder pensions just a month before it closed its door to new business.
Last week, Liberal Democrat leader Charles Kennedy accused the FSA and the Department of Trade and Industry of not taking action early enough to prevent Equitable from having to close its doors to new business.
But LibDem MP Vincent Cable has singled out FSA director of insurance and friendly societies Martin Roberts as having questions to answer over the affair. He wants to know why Roberts and his colleagues did not act sooner in the early 1990s when economic indicators pointed to a period of low inflation which would undermine the guarantees that Equitable was giving.
Cable says: “Why was it that Mr Roberts and his chums did not pick up on the fact that we were heading into a low inflationary period? Why were the DTI and the Treasury, as the regulators, not more aware of the dangers that existed?” Roberts joined the Ministry of Technology – later to be incorporated into the DTI – in 1970. He was secretary to the British Overseas Trade Board from 1985 to 1989, responsible for life insurers at the DTI insurance division from 1989 to 1992 and head of the DTI investigations division from 1992 to 1996.
He became head of the insurance directorate at the Treasury in early 1998 before being made FSA director of insurance and friendly societies later that year, the FSA having effectively taken over supervision of insurance companies.
The Treasury select committee will investigate the affair next month while the FSA is holding its internal probe into Equitable Life.
Roberts is expected to come under particular scrutiny for a letter dated December 18, 1998 written to “all companies authorised by the Treasury to carry on long-term business”. At the time, Roberts was head of the insurance directorate at the Treasury. At that point, the Treasury considered exposure to guaranteed annuity options was widespread across the industry and a potential concern for a number of companies.
Considering charging for the cost of providing the guarantee, Roberts wrote in his letter on December 18, 1998: “We take the view that policyholders entitled to some form of annuity guarantee or option on guaranteed annuity terms could reasonably be expected to pay some premium or charge towards the cost of their option or guarantee.”
The letter went on to say: “This could be achieved in some cases through some reduction in the terminal bonus that would be payable if there were no such guarantee.”
At the time, Equitable took the view that the Treasury guidance supported its approach to the problem.
The House of Lords disagreed and upheld the Court of appeal ruling against Equitable on July 20, 2000, preventing it from paying final lower bonuses to policyholders who had accepted a guaranteed annuity rate on their with-profits annuity contracts.
A week later, Roberts' department wrote to the insurance industry withdrawing the advice. In a letter to insurance companies dated July 27, 2000, the department wrote: “The guidance issued on this subject in Martin Roberts' letter dated December 18, 1998 is suspended.”
Roberts is likely to face questioning as to the extent to which the letter gave Equitable the Treasury's interpretation of the law, why the incorrect interpretation was arrived at and to what extent the regulator should have acted to consider the possibility that the House of Lords would not overturn the Court of Appeal decision.
On top of it all, the FSA is facing scrutiny over why it granted Equitable approval for stakeholder just a month before it closed its doors to new business of its own volition.
But Cable sees the regulator as having a wider role of protecting consu-mers by anticipating the effect of market conditions, such as low inflation and low annuity rates, on the viability of market sectors.
Cable says: “Before Equitable's problems, there were indications that we were heading for a low-inflationary period, going back to the early 1990s. It is the regulator's job to pick these things up.”
Whether this view relies too heavily on the benefit of hindsight is debatable. Many in the industry admit to not having been aware of the particular guaranteed annuity problem until the last two or three years although one source questioned had noted concern over Equitable Life back in 1994 for two factors – its practice of never putting aside sufficient reserves and the aloofness of its management.
Byrne Williams managing director Tony Byrne agrees. Byrne says: “The simple computer programs we used to assess institutions showed Equitable down in the rankings. Its reserves were too low, its capital adequacy was falling. It is staggering that the regulators could let that drift on.”
Cable certainly sees Roberts' continuing presence in the set-up through the 1990s as exposing him to criticism, wherever the point of fault by the regulator is identified.
Cable says: “Roberts was in charge of regulation at the Department of Trade and Industry. He was in charge of regulation at the FSA and in the intermediate period. The mistake was made at some point. There was only one person in charge and he has a lot of explaining to do.”
An FSA spokesman says: “We are conducting our own internal review and will be addressing these issues at that stage.”