An Equitable Assessment of Rights and Wrongs

by Dr Michael Nassim

8.  Mis-selling, misrepresentation, misdirection, and inducement

8.  Mis-selling, misrepresentation, misdirection, and inducement

The writer maintains that mis-selling embraces all the subsequent categories given in the above heading, and hence that they are subordinate to it.  Misrepresentation is holding the facts to be other than they are, and may be unconscious and honest, if then sometimes also negligent or incompetent, or it may be intended and thus deceitful ab initio.  Misdirection is the recommendation to purchase something specific when the seller knows that more suitable options exist.  Inducements include, but are not limited to, an enumeration of the benefits, real or illusory, that may reasonably be expected to attend the purchase.  If the seller knows or suspects that there is no real likelihood of these materialising, then they too are falsely based.

In the present circumstances misrepresentation, misdirection and inducement all apply to the various categories of Equitable policyholders.  Examples of misrepresentation include inappropriate claims of financial strength and prospects of the With Profits Fund, that the effects of the House of Lords Appeal would be inconsequential, or that the cost to the fund would not amount to more than £50 million pounds.  Misdirection in this instance includes the steering of clients towards the inherently unsound Equitable With Profits Fund when other sound funds were on offer by the Equitable, or sound with With Profits funds which were known to exist and to be offered by other insurers.

The writer also holds that, in the case of the Equitable, inducement has been a significant factor.  All or nearly all Equitable clients were told that they would do better if they used a mutual office which did not have to pay dividends to external shareholders, and better still if they used one that did not pay commissions to outside salesmen and advisers.  They were also told that, in no small part as a result of this, the Society had a high overall administrative efficiency and a much lower expense ratio than its competitors.  They were further told, or allowed to believe, that these continued advantages had over many years led to the strength and enviably good bonus record of the With Profits Fund.  We now know that the last of these inducements was also a misrepresentation.  However, the first two were not.  They may properly be regarded as intrinsic benefits stemming from direct collective ownership and expense-free sales.  If so, they are rightful and reasonable expectations upon which a defined value can and should be placed. And as such, had the Society been correctly administered, they would have accrued to the lasting benefit of members.  If one looks at the dividend paid by other U.K. insurers, we may rate this benefit conservatively as 3% per annum, plus, say, another 0.5% per annum for the low cost of sales. This must be borne in mind when members’ losses are estimated.  Furthermore this combination of benefits appeared unique at the time.  This highlights the difficulty (for those such as B. & W. Deloitte at the behest of the Society²¹) who wish to factor in fluctuations in market value by cross-reference to the fate of comparable products offered by other providers when estimating loss and making offers of compensation.  But in any case, we shall later see that market fluctuations are by no means the only factor to take into account.

The mis-selling approach has had its value when considering what should have taken place during the exchanges between individual representatives and their clients.  It has also been useful in establishing what information should have been presented in the Society’s literature, and to its representatives.  Even so, it is very much a “bottom upwards” approach.  It must therefore be complemented by a “top down” assessment, which conveniently happens to be essentially the same one as for fraud.  Here the crucial fact remains that the representatives were kept in material and continuing ignorance of the risks and weaknesses at the heart of the product they were selling.  Moreover, they may at the same time have been encouraged to direct clients towards the With Profits Fund rather than to safer investments- key features of a Ponzi operation.  The level within the Society at which incentivised ignorance of sales personnel began therefore remains a highly pertinent item, and we should look to the Penrose Report for an authoritative lead into it.  Fraud thus again emerges as the dominant and central issue, of which mis-selling was merely a contributory part.

Elements of this section are also relevant to the substantial number of members who were persuaded by Society representatives to adopt the income drawdown option, and so unwittingly forfeited their valuable GAR rights.