EQUITABLE LIFE MEMBERS

Commentaty of Jonathan Hirst QC's Opinion of 10 July 2003

Oliver Parsons’ Commentary on

Jonathan Hirst QC’s Opinion of  10 July 2003

Contents

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1. Introduction

2. Hirst’s Objectives

3. Hirst’s Starting Point

4. Hirst’s Main Conclusions

5. What has Hirst taken into account?

6. Hirst’s Reasoning for his Conclusions

  6.1  Misrepresentation claimants are entitled to the fraud measure of damages under Sec 2(1) of the Misrepresentation Act 1967

  6.2  FOS should have regard to the market loss that the claimant would have sustained anyway

  6.3  The key question is what sum was actually received by the claimant

  6.4  He recommends the date of the award as the Date of Assessment

  6.5  The figure to be awarded

7. Compared Hirst with Moss / Glick

   7.1  Fraud Measure of Damages

   7.2  Exit Charge

8. Compared Hirst with Bompas

  8.1  Basis of Comparisons to derive the amount of loss

  8.2  The Date of Assessment

9.  Compared Hirst with FOS Ombudsman on a Lead Case

10.Compared Hirst with FOS adjudication re Mr O

11.Compared Hirst with ELAS recent letters making offers

12. The Negative Smoothing Reserve 

Appendix     Table of Contents of Hirst’s Opinion

1. Introduction - (back to top)

 1.1  I must stress that I am not a lawyer.  But I can read and I can think, so it is my thoughts that follow.  If I have misunderstand the law, I would welcome correction.

I was trained as an accountant, and I have studied the Equitable financial situation in some depth.

1.2  I have studied Mr Hirst’s Opinion, and found it rambling;  he does not state his terms of reference, and does not draw his conclusions together.  For that reason I have prepared and attach a table of Contents and give below my understanding of his Objectives and his Main Conclusions.  Where I have quoted Hirst, I have used “ordinary type” and where I have quoted authorities that he has quoted, I have used “italics”.

1.3  The first thing that I have tried to discover is what Hirst was trying to do, then his starting point, and then his reasoning and conclusions, and most importantly what he has not addressed.  Finally, I have briefly compared Hirst’s Opinion with other opinions.

2.  Hirst’s Objectives - (back to top)

Hirst has been asked to advise the FOS of:

• The appropriate form and level of remedy for the five lead claimants.[para 17]

• The appropriate method and date of valuation and heads of loss.[para 17]

3.  Hirst’s Starting Point - (back to top)

Hirst starts from FOS’s adjudications finding that Equitable is liable, because:

• Misrepresentation has occurred.[para 14]

• The claimants were induced by misrepresentations to purchase investments.   [para 14]

• Equitable have failed to show reasonable grounds to believe that their statements were true. [para 14]

• But for the misrepresentations, none of the claimants would have entered into their contracts with Equitable. [para 30]

4.  Hirst’s Main Conclusions -   (back to top)

4.1  Misrepresentation claimants are entitled to the fraud measure of damages under Sec 2(1) of the Misrepresentation Act 1967 [para 36]

4.2  FOS should have regard to the market loss that the claimant would have sustained anyway. [para 45]

4.3  The key question is what sum was actually received by the claimant. [para 67.b]

4.4  He recommends the date of the award as the Date of Assessment [para 59]

4.5  The figure to be awarded should be the difference between (a) the value of the pension fund that the claimant now has based on the notional reinvestment of the proceeds into an averagely performing W-P fund; and (b) the value of the alternative investment that the claimant would now have, assuming the investment had been into an averagely performing W-P fund. [paras 74 and 86]

5.  What has Hirst taken into account?  (back to top)

• The FOS adjudications -  Hirst’s Opinion is subject to the Ombudsman’s decision in the context of points raised by Equitable.

• Opinions including Warren, Moss, Glick, Carr and Moss, Clarke Willmott & Clarke -  

• Hirst does not say that he has considered Blake, Burgess Hodgson or Bompas

• Legal Precedents, quoting Lords Denning, Blackburn, Hoffman and Steyn

• “Common Sense”

6.  Hirst’s Reasoning for his Conclusions -  (back to top)

6.1  Misrepresentation claimants are entitled to the fraud measure of damages under Sec 2(1) of the Misrepresentation Act 1967 [para 36]

• He quotes the Act “.... if the person making misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently.” [para 32]

• He discusses the 1991 Court of Appeal case of Royscot in which it was held that the measure of damages under section 2(1) is the same measure as for fraud. [para 33]

• He concludes: “FOS is bound to apply the fraud measure of damages to claims under section 2(1) of the 1967 Act.” [para 36]

6.2  FOS should have regard to the market loss that the claimant would have sustained anyway. [para 45]

•  Under the heading of ‘Damages for fraud’, Hirst has quoted Lord Denning:  “The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement.” [para 37]

• and Lord Steyn: “It is squarely based on the overriding compensatory principle, widened in view of the fraud to cover all direct consequences.  The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was made to him with his position as it became as a result of his reliance on the fraudulent statement.” [para 38]

• Under the heading of  ‘The bad bargain and market losses’ Hirst has quoted Lord Hoffman: “even if the maker of the fraudulent misrepresentation is liable for all the consequences of the plaintiff having entered into the transaction, the identification of those consequences may involve difficult questions of causation.  The defendant is clearly not liable for losses which the plaintiff would have suffered even if he had not entered into the transaction or for losses attributable to causes which negate the causal effect of the misrepresentation.” [para 41]

• As a commentator, my understanding of the Act and these three learned statements is that to assess damages the claimant is entitled to have the clock wound back to the date that he was induced by misrepresentation to enter into the contract.

• Mr Hirst appears to have the same view at para 39, which I quote in full: “It is clear from Doyle and Smith New Court that a claimant who makes a bargain which, apart from the misrepresentation, turns out to be a bad one does well out of the tortious measure of damages.  He suffers no reduction in the damages recoverable on account of the fact that the bargain was a bad one.  It follows in my opinion that, insofar as Equitable under-performed the market, the claimants’ damages will not be reduced on that account”

• So far we are all agreed, but ......

• Mr Hirst then says “it is necessary to keep the liability within practical and sensible limits - this is achieved through the rules of causation, remoteness and mitigation.”  [para 41]  ‘Sensible Limits’ is not defined.  To recompense the whole of the loss experienced does not look to me to go beyond ‘sensible limits’.

• Then Mr Hirst has taken a huge leap in his reasoning about causation.  Lord Hoffman said the defendant is “not liable for losses that the plaintiff would have suffered even if he had not entered into the transaction.”  Mr Hirst appears to have read this to mean “the defendant may offset a loss that would/might have been suffered by a probable/possible alternative course of action.”  Lord Hoffman is talking about what the plaintiff had experienced in addition to the transaction.  Mr Hirst is talking about what the claimant might/would have experienced as an alternative course of action.  Hirst says: “Here I consider that, in common sense terms it cannot be said that the market loss which the claimant would suffer anyway was caused by the misrepresentation or by the transaction entered into as a result of misrepresentation.” [para 42]   This view does not follow from Lord Hoffman’s statement, and is in contradiction to the Act and to the quotes from Lords Denning and Steyn.

• Hirst concludes: “I conclude that if FOS is satisfied that the claimant would have invested in an alternative but similar “with profits” investment, FOS should have regard to the market loss that the claimant would have sustained anyway.” [para 45]   “Where FOS concludes that the claimant would not have made a equity based investment, but kept the money in a deposit style account, in my opinion it would be wrong to have regard to the market loss, to which he would not have been exposed.” [para 47]

• Hirst continues: “I understand that it is quite possible to work out the average performance of “with profits” funds.  In my view the average should be used.” [para 46]

Maybe silly instance - A man met two thugs in a dark alley.  One of them beat him up, while his mate watched.  The man had a  broken nose, resulting time in hospital and off work, and some disfigurement.  He claimed damages against the thug who beat him up. The facts and the amount of damages were not disputed. However, the defendant asserted that no damages were due “because my mate would have beaten him up anyway if I hadn’t”.

6.3  The key question is what sum was actually received by the claimant.       [para 67.b]

•   “It is said that if the claimants had been members of a different with-profits fund, they would in all probability have had to bear a financial adjuster if they decided to transfer elsewhere.  That may well be so, but there is no reason to think that had they joined another fund, they would have wanted to transfer.” [para 67.d]

• “I am clear in my opinion that in assessing damages, account must be taken of the financial adjuster.” [para 67]   

6.4  He recommends the date of the award as the Date of Assessment [para 59]

• “The general rule is that damages are assessed as at the date the wrong was committed - in these cases, that would be the date when the claimant relied on the misrepresentation by taking out a policy.   ....that is not an absolute rule ....” [para 48]

• “Conventionally the latest date for assessing damages would be the date of sale of the investment.  What happened thereafter would not have been caused by the misrepresentation.” [para 52] .

•  “Ordinarily, damages would be assessed as at the date of the transaction and, at the latest, as at the date the claimant sold the investment.  That is because what happened thereafter was not caused by the tortious conduct.” [para 58]

• Hereafter, in paragraphs 52 to 59 he rambles through the possibility of using the date of discovering the misrepresentation, and the date of transfer of funds, and alights on the date of the award as his opinion of the best Date of Assessment.

• I found no cogent reasoning for selecting the assessment date contrary to the general rule, which is conventionally and ordinarily used.

•  “In my opinion, it would be open to the Court [what Court?] to assess damages in these cases as at the date of the award if it concluded that it would most accurately and fairly compensate the claimants for the loss truly suffered by them as a result of the misrepresentation.” [para 59

I see no justification at all to project the date of assessment further forward beyond the date that the claimant has transferred his fund.  This is the very latest date when the fortunes of the W-P fund are of any concern of the ex-policyholder, who left in order to mitigate the loss. To project both the “would have had in the hypothetical average W-P fund” and the “notional investment of the proceeds into the hypothetical average W-P fund” would cause considerable calculation of highly conjectural figures, to add the same proportion to both sides of the equation. The further the date moves forward, the more conjectural elements are introduced. On a practical plane, it would be impossible to give a precise award at the time, if the value of two hypothetical funds had to be calculated as at the date of the award.  Equitable have pointed out that the calculations would have to be started again - a huge task  By contrast, it is a simple concept that the loss as at the date of Investment is defined by subsequent events.

6.5   The figure to be awarded should be the difference between (a) the value of the pension fund that the claimant now has based on the notional reinvestment of the proceeds into an averagely performing W-P fund; and (b) the value of the alternative investment that the claimant would now have, assuming the investment had been into an averagely performing W-P fund. [paras 74 and 86]

• “....there remains a tricky question of how the claimant’s loss is calculated.  One side of the equation is straightforward.  FOS will calculate the value of the asset that the claimant would have had by reference of an average “with-profits” fund, unless it is established that ... the claimant would have invested in a particular fund.” [para 60]

• “The ingredients for the other side of the equation are more difficult.” [para 61]

• “The key question is what sum was actually received by the claimant.” [para 67.b]

• Equation is not defined.  Dare one assume that Hirst means that it is:

• (Would have had in average W-P fund at assessment date) = (Proceeds reinvested in average W-P fund at assessment date) + (Loss) ?

• Under the heading of ‘Assumed investment of the proceeds’ there is brief discussion at paragraphs 72 and 73 of the notional funds to be compared.  Hirst decided that there should be a comparison between a notional average performance with-profits fund that the claimant would have invested in, and the proceeds at transfer, notionally reinvested into the same notional average performance with-profits fund.

• He explains that it would be normal to award interest on the sum [para 54], but that if the damages are being assessed as at the date of award, it would be inappropriate to award interest.[para 75]

• Hirst quotes no authorities or precedents for his reasoning in this section.

• “....the conventional approach is very advantageous to the claimant because it awards a capital sum reflecting a loss calculated as at a particular date plus interest thereafter.” [para 54]

• “If damages are being assessed as at the date of the award, it would be open to FOS to conclude that it would be inappropriate to award interest.” [para 75]

I cannot agree that by using the date of the award would give rise to a straightforward calculation of the value of the asset that would have been reached by reference to an average with-profit fund (even if this was a correct basis).  I am surprised that the FOS would be willing or even able to make the “straightforward” calculation, as stated by Hirst at para 60.  The establishment of an average W-P fund, and to prepare an index of the movement of its value for policyholders joining all dates between September 1998 and December 2000, and receiving awards at all future dates in 2003 onwards would be extremely difficult, and would give rise to dispute.

I believe that Hirst is flawed about the basis of the comparisons to calculate the loss on two counts:

• The concept of an assessment date later than the termination of the policy contravenes the principles that Hirst has set out.

• The concept of notional funds contravenes the principles that Lords Denning, Steyn and Hoffman that Hirst has quoted.

7.   Compared Hirst with Moss / Glick  (back to top)

7.1  Fraud Measure of Damages - Both Moss and Glick have discounted the Roystock judgment because that they consider that it will be eventually reversed.  Hirst has pointed out that Roystock must be treated as being the law, which accords with Section 2(1). Thus he concludes that misrepresentation claimants are entitled to the fraud measure of damages.  Hirst adds that it makes no difference in these cases, because there is no claim for consequential loss.

7.2  Exit Charge - Moss says that policyholders who have chosen to leave the Society will not be able to recover the financial adjuster.  Hirst says that he is of the clear opinion that in assessing damages, account must be taken of the financial adjuster, and that the key question is what sum was actually received.

8.  Compared Hirst with Bompas (back to top)

8.1  Basis of Comparisons to derive the amount of loss - Bompas compares the amount invested and the amount transferred, plus interest.  Hirst compares the present value of the amount invested into a hypothetical average w-p fund, and the present value of the transfer sum invested into a hypothetical average w-p fund.  Thus Hirst would reflects the average fall in w-p funds, whereas Bompas would ignore stock market movements and bring the ex-policyholder back to where he was before the investment, without any consideration of what else the investor might have done with it.

8.2  The Date of Assessment  -  Bompas would have assessment at the date of investment, and consequently would add interest.  Hirst would have the assessment at the date of award, and therefore would not attract interest, and it would reflect stock market movements up to that date.

9.  Compared Hirst with FOS  Principal Ombudsman, Jane Whittles on a Lead Case (back to top)

-  In her present view, Whittles has gone along with Hirst, and would add interest at 8% pa from the final decision if ELAS do not pay within 14 days of acceptance.  ELAS have responded, saying that Hirst’s Opinion runs counter to both Moss and Glick, and that they are seeking further advice from Moss.  ELAS also pointed out that Hirst has not addressed how actuarially the formulae would be applied to achieve the desired result.

10.  Compared Hirst with FOS adjudication for Mr O - (back to top)

The adjudicator has taken the goal posts away altogether!  Despite the attitude of Jane Whittles, this adjudicator has introduced a new element required to establish a claim.  He says that there must not be proof that Equitable Life had reasonable grounds to believe and did believe that the facts represented were true.  The strong evidence of misrepresentation and concealment in the advice given a few days before 8.12.00 was rejected, and the adjudicator therefore concluded that the claim failed.  So strictly, there was no comparison with Hirst, because his Opinion started at the point were liability was established.

11.  Compared Hirst with ELAS recent letters making offers, without admission of liability, of half of the 5% loss calculated by the B&W Deloitte method - (back to top)

ELAS have ignored Hirst, and made this offer in line with Moss Opinion.

12. The Negative Smoothing Reserve - (back to top)

Since the lead claims were submitted, Burgess Hodgson’s addendum published in June 2003, shows not only the GAR Costs, but in addition a substantial deficiency of the order of £1 billion on the W-P Fund, arising out of excess bonuses allocated in earlier years, thereby creating a negative smoothing reserve.

The smoothing reserve situation at the end of the years was:

The concept of Smoothing has been sold to prospective policyholders as a virtue.  The reality is that those joining in 1998 to 2000 were joining a fund that they were to underwrite this deficiency.  All the argument supporting mis-selling due to non-disclosure of the risk of the then possible GAR costs, apply to the negative smoothing reserve.  The difference is that this deficiency was already a quantified reality.  If the risks of With-Profits policies had been explained, it would have been probable that the claimants would have not invested in the Equitable W-P Fund OR IN ANY OTHER W-P FUND.

This topic had not arisen in the five lead claims, and was therefore not dealt with by Mr Hirst.  However, it further weakens his conjecture that the claimants would in all probability have invested the money in another similar w-p fund if they had the full information.

Oliver Parsons

11 September 2003

Jonathan Hirst QC’s Opinion of  10 July 2003

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