EQUITABLE LIFE MEMBERS
TREASURY SELECT COMMITTEE
Last Updated: Monday, January 21, 2002 11:29 PM
The Treasury Select Committee held a review of the ELAS situation on Thursday 15th February 2001. Both ELAS representatives and the FSA were interviewed by the MPs over a period of nearly three hours.
We ask policyholders to write to members of the Treasury Select Committee to carry out the recommendations made by the Committee last March.
There were 15 main points as follows:
(a) We would like the Financial Services Authority (FSA), Faculty and Institute of Actuaries (F&IA) and Institute of Chartered Accountants of England and Wales (ICAEW) to take on board the points we make in this Report in the context of their own inquiries, so that the Equitable Life affair can be properly and fully explained and to help the Committee continue the investigation (paragraph 5).
(b) We could not form a firm conclusion as to whether rapid institutional change coupled with continuity in staff did or did not contribute to the Equitable Life affair. The Committee will wish to return to this issue (paragraph 10).
(c) The F&IA report should consider whether the actuarial guidance provided by the F&IA was appropriate at the time, and whether such general advice was suitable. It should also consider the extent to which the F&IA's opinion was based on the prudential insurance regulator's view (paragraph 17).
(d) Equitable Life's risky decision in 1993 not to build up a reserve to cover the cost of Guaranteed Annuity Rate (GAR) liabilities was a crucial turning point. We return later in this Report to the level of information given to policyholders and potential policyholders (paragraph 19).
(e) The relationship between firms' Appointed Actuaries and management boards, and with the body of policyholders, is in need of review, in the light of the Equitable Life affair (paragraph 20).
(f) It is unclear to us why the issue of GAR liabilities and reserving was not considered by the prudential insurance regulator at least by 1993, rather than only in 1998. We believe that the current inquiries should pursue this closely (paragraph 21).
(g) We ask the FSA to consider whether cash reserves only need to be accumulated when required by the economic circumstances—or whether there are other circumstances in which cash reserves may be required (paragraph 26).
(h) We ask the FSA to reconsider whether it was right to accept the reinsurance contract given its terms, and whether it was prudent to allow such a contract to have accounted for half of the Equitable Life's statutory reserves (paragraph 28).
(i) Equitable Life demonstrated that the information provided to policyholders, through the statutory accounts, and to the regulator, through the regulatory return, differed substantially in their treatment of the GAR liabilities and the consequential reserving that had been undertaken. As a result, policyholders were not able easily to establish the true position of the company. We ask both the FSA and the ICAEW to consider whether statutory accounts and regulatory returns should draw upon the same information and assumptions wherever possible, in order to improve transparency. In addition, the FSA should consider whether a life office's reserving policy should be made clear to policyholders, either in statutory accounts or in some other way (paragraph 31).
(j) We do not believe that the auditing arrangements for the statutory accounts and, in particular, the regulatory returns of life offices were adequate. In their memorandum to us, Ernst and Young set out the judgments that they made concerning disclosure. We ask the FSA to consider the justification for the auditors' judgments and whether there are implications for future reporting practices by auditors generally (paragraph 32).
(k) Equitable Life failed to explain to their policyholders the full implication of Lord Woolf's judgment. The FSA should therefore consider whether the assessment made by Equitable Life, and indeed by themselves, of whether the eventual House of Lords ruling could have been predicted, was justified, especially given Lord Woolf's judgment (paragraph 37).
(l) We welcome the FSA's review of Equitable Life's selling practices after the Court of Appeal decision and we ask the FSA to review the Equitable Life's practices when pension policyholders gave up rights to guaranteed annuity rates (paragraph 42).
(m) We welcome the announcement of an FSA review of management discretion in the with-profits business. We recommend that the FSA analyse the extent to which financial services, in particular life assurance, rely on managerial absolute discretion (paragraph 46).
(n) It is important that the role of regulator since 1993, when Equitable Life began to operate a policy of terminal bonus differentiation, should be analysed in order for the regulatory lessons to be properly learnt, for policyholders to fully understand the history of the affair and for Parliament to undertake its scrutiny of this topic properly and fully. The Committee will await the FSA's report. It will want to examine what it has to say on the regulatory background to the Equitable Life affair between 1993 and 1999, and then decide how to proceed (paragraph 50).
(o) We welcome the announcement that the FSA inquiry will have access to Government Actuary's Department (GAD) files and personnel. In our recent report on GAD, we recommended that GAD should publish a regular report to Parliament on the life assurance sector, so that public attention can be drawn to trends and issues of concern. We recommend that the FSA inquiry make suggestions as to how this could best be achieved and how better public information about the condition of individual life assurers can be published, on the basis of the actuarial advice received by the FSA (paragraph 53).
Minutes of Evidence 15 February 2001
Treasury Select Committee Report re Equitable Life and the Assurance Industry 27 March 2001
Uncorrected Evidence presented by the Rt Hon Gordon Brown, MP, Chancellor of the Exchequer, on 20 March 2001 (Section 420 onwards)
James Plaskett (Labour, Warwick and Leamington) : Phone: 0171 219 6207