Brief summary:  Perspectives on the Actuarial Disciplinary Tribunal Equitable findings and Lord Neill’s FOS submission to EQUI have been made, and set against the current stance of the FOS and regulators.  The earlier Corley Committee is shown to have identified the means of wrongdoing without identifying disciplinary offences and breaches of statute or guidelines.  Conversely the Tribunal has established breaches in guidelines (though not of statute) without much analysis of or reference to means, let alone motive.  In the resulting hiatus the current government, FOS and regulatory positions have been left seemingly intact.  Similarly Lord Neill has focused mainly on irregularities, deficiencies and injustices in FOS process, without relating it to any underlying falsity of assumptions on which that process has been based.  In an attempt to remedy this the FOS assumptions are explained in more detail, so that they can more easily be assessed in the current context.  Some of the implications for EQUI, the forthcoming Ernst & Young Accountancy Disciplinary Tribunal, and the deliberations of the UK Parliamentary Ombudsman are discussed.  In the process, the wider aspects of scienter and accountability are shown to have great residual importance.  In all that follows we must never lose sight of them.

                                                ---------------------------------

While Chancellor Brown, his Treasury and regulators continue to praise themselves for their “look- no hands!” world of deceptive illusion and laisser faire lawlessness, the rest of the world has, however reluctantly, to deal with the fact that the United Kingdom is a rogue financial state.  The trial of Lord Black and the impending extradition of the ex-Chairman of Morgan Crucible remind us that the United States has got to grips with this following the Lloyd’s debacle, and will continue to prosecute those to whom the UK would rather extend honours and privileges.  One hopes that, as a consequence of investigating the Equitable Life and pensions scandals, the European Community will also become vigilant.  Where the United States and Europe lead, the rest of the world will follow, in which case the outlook for the UK financial industry threatens to become as dire as for manufacturing.  If something must be done, and soon, there is no immediate prospect of relief for the rank and file of the UK’s “insured” persons, savers and pensioners, who must continue to look elsewhere for safety and justice.

Though the UK establishment remains in outright denial it is increasingly overwhelmed by contrary evidence, which makes the longer term outlook rather more encouraging.  At last three of four Equitable actuaries arraigned have been disciplined by their profession, and one has been expelled (Panel of the Actuarial Disciplinary Tribunal, 30^th Jan 2007). But just as the Penrose Report and Parliamentary Ombudsman’s regulatory inquiries exclude conduct of business issues, the actuarial disciplinary judgement has ignored the wider implications of systematic irregularities in the regulatory returns.  And since the largest and original link in the causal chain was the disappearance of the Society’s estate under Sherlock, who also ended up wearing a regulator’s hat and headed the Society while the fraudulent 1987-9 transition was implemented, we need some very transparent reasoning as to whether the charges against him were correctly framed to start with, and if so how they could have been dropped. There is a corresponding omission to examine important matters such as inequity, imprudence, Ponzi pseudo-smoothing and overbonusing, non-disclosure or selective partial disclosure, systematic misrepresentation and fraud.  Instead, the Tribunal has accepted a post hoc explanation by Headdon of capital-based smoothing (consistent with that alluded to by Sherlock in 1989 and in the 1995 Headdon-Bannon exchange), and that he made some attempt to get policy values back in line with assets.  Implicitly it legitimises last resort capital adjustment in place of first resort income smoothing in insurance-based products. For reasons previously explained this is a pernicious trend.  The combined effect of all this is to leave prior official positions on the Equitable’s financial circumstances and the mathematics of the Compromise largely unchallenged, and seemingly intact.  This continuation of closed ranks also impedes any right and proper investigation of the regulatory dimension (notably including the Government Actuary and his Department) by the actuarial profession itself, or assisting the Parliamentary Ombudsman.   

Since the Disciplinary Tribunal relied largely upon politically acceptable evidence from the failed Ernst & Young show trial and the Penrose Report, without overt reference to the contemporary evidence available to EQUI, let alone the Parliamentary Ombudsman, we should not be too surprised at any of this.  It may also explain why the charges against Roy Ranson were formulated mainly as a litany of breaches in contemporary actuarial guidelines rather than looking at what underlay them all- an approach in part inherited from Lord Penrose.  Uninformed members of the public reading the Tribunal’s decision might be forgiven for asking what it really was that Ranson had done wrong.  Given all the emergent issues, we might reasonably have expected something more searching and impartially helpful.  Reprehensible though all this may be, we have once again to remember that the actuarial profession is comparatively young, and not yet endowed with a sufficiently strong ethical experience or tradition.  For example, the Chairman of the first actuarial Equitable report was also he who had, so to speak, been asleep in the Presidential Chair when “With Profits Without Mystery” was first presented to the profession in 1989.  Perhaps his Committee wished to forgive him this oversight, and so, while it described the essence of how the Equitable actuaries had evaded the regulators (something not directly considered by the present Tribunal), its overall conclusions were at implicit variance with the main findings:

90.               We have not found evidence to suggest that any Appointed Actuary of the Equitable failed to take account of the guidance that was current at the time the various decisions were made.  We do not know what conclusions any Appointed Actuary at the Equitable reached when considering how the published Guidance notes affected his decisions, nor what advice he gave to the Management of the Board.  We have seen no evidence to indicate that any Appointed Actuary at the Equitable was at any time so concerned about the nature of those decisions that he felt it necessary to “blow the whistle” to the regulator.  Our conclusion is that it was an accumulation and combination of decisions, actions and communications, over a very long period and involving not only the Appointed Actuary but also the management and the Board of Directors, that made the Equitable so vulnerable to the impact of adverse events.

91.              There are two clear lessons, or more properly reminders, for actuaries and perhaps for others concerned with life assurance companies and other risk-bearing enterprises.  The first, that it is not only individual risks that have to be taken into account but the chance of many of these risks arising at the same time and compounding the liability (paragraphs 49-50).  The second, that it is the cumulative and compounding effect of these risks that must be assessed in the context of the available unallocated capital (paragraphs 22-24).

With hindsight this looks more than a little perverse, but as we shall see it also remains enshrined in the FOS’s current position on events prior to March 1998. And so, whereas the Corley Report explained some of the mechanisms of non-disclosure and selective partial disclosure which helped the Society evade the regulators and public for so long, it avoided expressing opinions or making judgements based on what it already knew from its own guidelines.  With the Tribunal we have the reverse, which is judgement on breaches of actuarial rather than legal or statutory guidelines and recommendations, without reference to the underlying mechanisms and their constructive intent. Forensic investigators thus have both the right and the obligation to fill in the all-important common ground.   While doing so, they may with advantage note the Tribunal’s claim to have worked to criminal standards of proof, albeit coupled with their failure to ask whether any more deliberate malefaction might actually have occurred.

Fortunately the underlying mechanisms and the deficits they led to have already been described for EQUI in data from Lord Penrose, complemented by material from Michael Josephs, Colin Slater and the writer.  That said, Michael Josephs’ latest paper on the discounting arising from raising interest valuation rates has some notable further implications.   Firstly, because the discount depends upon future premiums it has to come onto the books when premium flow stops. And secondly, the discount is heavily skewed against new members, while of necessity lessening for earlier ones.  It is thus another aspect of intergenerational subsidy and Ponzi accounting on which the Society so heavily relied.  One must also realise that a Gross Premium valuation also diverts more premium flow from future to present, thus supporting and extending this mechanism.  It had previously led Ronald Skerman (J.I.A. 92: 75-84, 1966) to explain why gross premium valuations were incompatible with Policyholders’ Reasonable Expectations (PRE) in with-profits funds, but he did not examine the underlying skew in any detail, or how it might crystallise if premium inflow stopped.  It further adds to the importance of the regulatory implications, and any natural regret that the Disciplinary Tribunal dropped all regulatory charges.

Rather more to the contemporary point were some gems from Charles Thomson’s presentation: “A personal view of Equitable Life”, given to the Life Convention on 18^th Nov 2001. Two of his summary slides covered the Corley Committee.  Of enduring interest are:  “Profession appears reluctant to address differences between House of Lords decision and practice of Equitable Life (and others) in 1970s and 1980s, particularly with regard to PRE”, and:  “No comment on GAD weakening normal professional requirement”.   There were also three slides on lessons to be learned, of which the last stated:

• You’re a professional- The buck stops with you.

Don’t rely on:

• Your boss.

• Your peer reviewer

• Your auditor

to catch your mistakes or those of your colleagues for which you will share accountability.

Now although beyond the first line this is expressed defensively rather than positively, or that much hinges upon what the minimum attributes of professional people are, we could take it as good advice for any professional person irrespective of rank, seniority or experience.   More pertinently still, we might also have expected Equitable actuaries and officers generally, or even Mr Thomson himself, to stand or fall by it.  But perhaps the Equitable’s “Plaza-Toro Management” device, whereby senior and ultimately accountable persons delegate questionable actions which they have not officially approved and will not subsequently endorse to ignorant and vulnerable juniors, provides some of the necessary immunity.

Charles Thomson’s criteria also invite comparison with the 1945 Nuremburg Court’s approach to scienter and responsibility, plus what respectively attaches to senior versus junior ranks when implementing orders.   The Tribunal have accepted Mr Headdon’s explanation that he was too junior and ignorant to know what was going on during the years when he was subordinate to Ranson, even if he was a little too reticent for anyone else’s good during his own primary stewardship- for example with his own Board and the regulators on cumulative over-allocation, or with regulators and public over that now renowned side-letter.  On the latter points he was found guilty of misconduct, and reprimanded. Since Mr Headdon was a key senior management team member, “With Profits Without Mystery” co-author, and had intimately long knowledge of the contentiousness of the Differential Terminal Bonus Policy, let alone his greater responsibilities after 1997, it all stretches belief more than a little.  So to the extent that all this defies the current facts we may expect Mr Headdon to be commensurately grateful.  Mr Nash may similarly feel relieved, in that the Tribunal has taken a consistent view of his primary stewardship to that of Mr Headdon, and in particular over the information they are known to have shared in and after August 1997.  We should, however, note that the Tribunal has not examined the mutual duties of information and communication between Mssrs. Headdon and Nash over the indefensible February 1^st 2000 letter and related sales force briefing note BMBN 2000/12 (the ethical significance of which the Tribunal played down) in the light of what they individually and together knew.  Somehow it all smacks more of Lord Hutton than Nuremberg.  Meanwhile let us all hold our breath, because there are at least three large chapters in the story yet to come.  While waiting let us commiserate with Mr Ranson, who may with some justification consider that he has been made the sole official scapegoat for just about everything.   Even so, our sympathy is tempered by the FSA’s earlier decision to disbar Mr Headdon, and say nothing of Mr Ranson. In the show trial Sherlock was not a defendant and charges against Mssrs. Ranson, Headdon and Nash were dropped.  Differing perspectives in the show trial, FSA ruling, Corley Report and Disciplinary Tribunal not withstanding, the wider implications are decidedly unpleasant.

It is now pertinent to ask what influence the Tribunal’s decisions will have in four areas, namely:

1.      Issues of due diligence and disclosure during the break up of the Society, plus implications for divergences and disconnections in the liability trail.

2.      Impending accountancy disciplinary proceedings against Ernst and Young.

3.      FOS, Treasury, regulators.

4.      The European dimension.

1)   Issues of due diligence, liability and disclosure:

First recall that the Society’s primary insolvency was written off under the New Board in the regulatory approved 16% devaluation in July 2001.  Secondly, the GAR liability was valued on historical 50% uptake rate rather than current >90% uptake, so that, provided that the Compromise went through, its value could be held to be £1.6 billion rather than the £3 billion or so that would otherwise have had to come onto the books.  Thirdly, it was stated that the 1.6 billion could be recouped by withholding 7 months of bonus earnings in later 2001, which conveniently dissociated the nominal liability from the overall damage caused by everything else that had to come onto the books through persistent failure to disclose it (i.e. the deficits revealed when a Ponzi scheme implodes).  Fourthly, both the regulatory-approved insolvency and the Compromise ignored the pivotal importance of free reserves to achieve with-profits status in fulfilment of PRE.  Fifthly, we have lately seen that the whole thing was unduly dependent upon niceties of minimal solvency and levels of liability discounting which could be carried over to support it.  Yet sixthly, there remains the contentious issue of residual inequities of so-called guarantee now exemplified by the GIR and altered GAR Rectification Schemes. 

In retrospect we may well ask what we should have been told about all this at the time, whether by the New Board or the regulators.  Clearly the Compromise, 2000 bonus reduction and November 2002 annuity reductions cannot be dissociated from everything else that was hidden in the preceding insolvency devaluations.  And since the Compromise it has become painfully obvious that the absence of an estate and of investment freedom have been disastrous- so much so that it is now the official rationale for the currently mooted transfer of with-profits annuitants to the Prudential.   And if the with-profits annuitants can now fund their own transfer, together with a token estate to boot, it must at last be clear to them why their annuities have pretty much halved in value since the Compromise, and where the transfer monies must have come from.  With equal irony, one should ask how it is that the Prudential, which in 2000 declined to take over the Society because of all the deficits and liabilities in its with-profits fund, is now ready to accept the with-profits annuitants plus a small consideration without any external funds having been supplied.  Thus if and when they transfer ship, annuitants must ensure that both the Prudential and the Equitable allow them to take their rights in these matters with them. Besides the originating 1987-9 fraud, they have additional cases for regulatory connived conspiracy to defraud, and judicially approved fraudulent misrepresentation.    A positive triumph of good governance all round.

Now that the Disciplinary Tribunal has sounded the all-clear, it seems that things are moving towards a final fait accompli with increased speed.  Having (again so to speak) had his wicked way with the with-profits annuitants, Don Giovanni is about to discard them.  The UK government and the regulators have read the Parliamentary Ombudsman’s report, which has as expected been delayed so that EQUI cannot include it in its deliberations.  They must also have a fair appreciation of what EQUI will conclude (for latest development see concluding section).  As EMAG Secretary Paul Braithwaite has observed (EQUI March 23^rd) the FOS is correspondingly keen to close all outstanding claims quickly, and will require people to begin the entire complaints process all over again in the light of new evidence without being able to refer to their original and main claims.  A cynic might deduce that, with Chancellor Brown’s elevation to Prime Minister becoming both increasingly likely and imminent, it is best to dispose of the Society and tidy away as much as possible before EQUI, the Parliamentary Ombudsman and the accountancy Disciplinary Tribunal report.  Here too the three main categories of grievance and their somewhat different liability trails must be kept firmly in mind.

2) Disciplinary proceedings against Ernst and Young.

Where necessary, large accounting firms like Ernst and Young employ audit actuaries.  It thus becomes incumbent upon them to know what the minimally acceptable standards of actuarial behaviour are as defined by the Faculty and Institute of Actuaries.  Hence we may anticipate that the forthcoming Ernst and Young Disciplinary Tribunal will both heed the findings, whether explicit or by implication, of Corley and the actuarial Disciplinary Tribunal.  On first principles it is likely to seek to act in accordance with them, always provided that this exposes no material discrepancy with its own independent accounting standards.    Following what has been explained above, this must raise legitimate concerns.  Moreover we have also seen that the evidential base used by the actuaries is selectively biased by the show trial, insufficiently comprehensive in carrying forward the omissions of Corley and Penrose, and incestuous.  One can only hope that the accountants will be more industrious, and at the very least add some new material to the debate.

Lord Penrose is both accountant and judge, and in his Inquiry he mainly acted in that order of priority.   In aiming to explain things to the public at large he did not express a view on how either the Equitable’s or supervising accountants might or should have interpreted their role.  He contented himself by following on from Corley to describe the different accounting conventions underlying the Equitable’s three sets of books, and the overall effect they had.  Neither did he explain how the three viewpoints and the disparate pictures they painted should have been reflected to the Board of Directors and policyholders, the regulatory and Companies Act returns, or what duties of information thereby attached to the submitting and inspecting accountants.  We properly expect this to be clarified.  And though the Ernst and Young Tribunal will focus on what the scrutinising accountants should have discovered and done, it should also be possible thereby to see, albeit less directly, where and why the submitting accountants went wrong.

In effect, therefore, there should be no ethical distinction between the purpose served and the methods used in the presentation of accounts.  What can be described comprehensively and approved should be above suspicion.  If the actuaries have not addressed this because of the disconnection in their two sets of findings, then we must respectfully ask that the accountants do not make the same mistake.

It is for this reason doubly regrettable that the actuaries have given the nod to matters such as negative free asset ratios, primary capital smoothing, debt acquisition, liability discounting and future profits implicit items in assurance-based with-profits funds.  Either alone or in combination they can be disastrous, and all have implications for hypothecation and accounting.  These are crucial and general issues for the entire insurance industry, on which a robustly independent accounting view is now essential.

3) FOS, Treasury and Regulators.

Following on from what was explained towards the end of Section 1, the pressure on the FOS to close its Equitable complaints before any more contrary evidence comes in must be obvious.  A timely assessment of Lord Neill’s findings in relation to other EQUI evidence and the Actuarial disciplinary Tribunal’s findings is therefore in order.   That accepted, we should begin by noting that Lord Neill’s main thrust is a detailed exposition of the manifold unfairnesses in the FOS process of handling complaints, rather than of the so called “Procrustean Bed” of underlying assumptions upon which that process has been based.  Even so, Lord Neill most definitely condemned the exclusion of “Penrose-related” complaints, and failure correctly to introduce unequivocal evidence of fraudulent misrepresentation as contained in the Bompas opinion.

In reply, the FOS has pointed out that Lord Neill’s observations are not representative, because they come from some thirty among thousands of cases.  The FOS might also have pointed out that the thirty were introduced to Lord Neill by EMAG, such that their initial selection was also biased.   However, this neglects that the Equitable saga is complex, and often deliberately obscure.  It takes determination and knowledge both to see the right path and hack through the dense jungle, such that only a minority have made it to the end.  This is the commonly expected outcome on which “Black Hole” defences classically rely, but in the internet era veterans can exchange information as they go; hence the writer has recognised three of Lord Neill’s cases.  Being independent of EMAG and not a member, he is not a case himself, but regards his EQUI testimony and Lord Neill’s findings as mutually and consistently supportive.   Furthermore, some veterans were asked to comment on the Society’s unapproved “Plaza-Toro” Factsheet and Houston letter.  Their efforts notwithstanding, the Chief Financial Ombudsman acceded to the Society’s wishes and excluded “Penrose-related” complaints on March 2005 (incidentally the same day as the Ms E Final decision).  And so if Lord Neill has later explained their arguments and complained on their behalf, they have achieved some effective representation in the end.  Perhaps the Chief Financial Ombudsman doth protest too much.

Time now to part the side curtains, and take a closer look at the deforming bed of FOS assumptions.  It comprises:

• Selective substitution of “lead cases” for a common cumulative evidential base.

• Following the no-evidence FSA pronouncement that claims relating to overbonusing (e.g. Ponzi implosion) are unsustainable.

• Disallowing “Penrose-related” complaints, and common cumulative evidential base relating thereto.

• Contrary to the mass of evidence submitted, limiting scienter to GAR issue and events after March 20th 1998, and nothing before that.

• Confining relevant scienter to that at starting date of policies, when most were RSP business reviewed annually, besides which there were later general duties of information. 

• Avoidance of linking more general scienter to consequent fraudulent misrepresentations:

• Overall 1987-9 fraudulent transition.

• Matters pertaining to GAR and GIR differential bonuses.

• Post 1998 as detailed by George Bompas QC on 9^th April 2003.

• Nash Feb 2^nd 2000 letter and Society briefing note BMBN 2000/12.

• Misrepresentations of insolvency, the Compromise Scheme et seq.

• Consequent and deliberate exclusion of fresh general evidence.

• Inappropriate fixity of lead case categorisations and judgements.

• Transferring the burden of proof to individual complainants where a general case already exists, albeit not under lead cases.

• Separating lead case judgements from principles and quanta of compensation, save as explained in the Ms E Final Decision.

• Failing unequivocally to explain that the FOS definition of “GAR-related” losses and claims is strictly limited to 7 months bonus withheld in 2000.

• Ditto an identical rationale in the much debated BWD market comparator compensation formula (David Gornall ELAS to GR on 8^th Nov 2006; un-retracted by ELAS or Walter Merricks on twice repeated query), which with false insolvency and Compromise accounting is material to the resulting underpayments recently illustrated by Paul Weir.

• The FOS will, however, look at ELAS non-GAR complaints, always provided that they can escape the “Penrose-related” classification (the writer considers that this let-out has been used compassionately by individual adjudicators on occasion).

Maintaining this overall position are the following lead cases:

• Mr B(22^nd May 2003); managed pension linked to WP fund comm. April 3^rd 2000.  Upheld.

• Mr D (22^nd May 2003); ditto Mr B; comm. April 2000.  Upheld

• Ms E (22^nd March 2005); Personal pension plan comm. Circa Oct 7^th 1999.  Upheld.

• Mr G (7^th Sept 2005):  Low risk personal pension plan-advised to invest in WP on 6^th Feb 1998; cooling off period extending into March.  Upheld.

• Mr H (6^th April 2006):  With profits personal pension plan comm. Jan 1998. Rejected.

• Mr & Mrs K(16^th Nov 2006):  with-profits personal pension plans comm. Dec. 1996.  Rejected.

• Mr N (31^st July 2003); with-profits personal pension plan comm. 1990.  Rejected.

• Mr O (28^th Aug 2003); advised over June-Dec 2000 to buy a managed pension linked to WP fund via his PPP.  Rejected.

The lead cases are also graded according to the authority of decisions made:  the Ms E and Mr & Mrs K cases are final decisions, whereas most of the remainder are more provisionally classed as adjudications.  The opinions given in the Mr G case are described even more tentatively as a view.  But the Mr G case is important because it defines what the FOS upholds as the earliest date of more general GAR scienter within the Society.  It relates to a circular letter issued by the Society in response to challenges on terminal bonus policy issued no later than March 20^th 1998, and to an 11^th March 1998 audit committee meeting (at which Headdon was present) minuted by Chris Matthews and dated March 27^th (Penrose 9.119).  At that meeting the GAR terminal bonus issue was considered as a risk.  Had a legal view then been taken, the Mr G view opines that it would not have been different from that given by solicitors Denton Hall on 8^th September 1998, to the effect that the Society might lose a court case on its GAR differential bonus decision.  Even so, an earlier date for GAR scienter could have been argued on the basis of Penrose 1.8-12. 

The Mr G view thus represents a watershed in FOS thinking; cases with joining dates and substantiated “GAR-related” claims on or after March 20^th 1998 should be upheld, but earlier joiners should be rejected.   On this basis cases B,D, E and G were supported, and H, K, N and O rejected.  Those accepted are subsumed under the Ms E final decision, and offered compensation under the BWD formula outlined therein.  Those rejected are subsumed under the Mr & Mrs K final decision, which is notable for its highly theoretical assumptions on what the Society might reasonably presumed to have known, and by when.  As explained below, these assumptions do not survive critical examination because they fly in the face of evidence in the Penrose Report, and of the more general scienter and accountability trail already established by the writer.  Hence the decision must be challenged robustly, else it will leave a malignant legacy.

All the above Procrustean bullet points have been brought to the FOS’s attention at some time or other, and two rather stiff extracts from a letter by MN to Mssrs. Merricks and Todd (Nov 28^th 2006, copies to Ian Ogilvie, Alan Duncan MP and MN’s circle of witness including action group personnel) explain much of them, viz: 

“The situation is further complicated by the FOS now being obliged to adhere to a dishonest fiction, namely that the cost of the GAR was met fully by withholding seven months bonus at the end of the year 2000.  This has considerably wider implications, because it also affects the official definition of what is “GAR-related” and what is not.  Hence, for example, JT’s ruling that my FSAVC complaint is not “GAR-related”.  After all this time and debate one might reasonably have expected the FOS to know what the true cost and implications of the GAR are, in distinction from all the other categories of financial deficit from which ELAS is suffering.  But since the FOS affects not to know this, let me explain it further for the benefit of my circle.

First and foremost, both Boards of ELAS have made a number of fraudulent misrepresentations about the cost and implications of the GAR, and were it not one of the manifold and pernicious consequences of regulatory concealment and collusion the FOS ought never have condoned, let alone espoused or promoted any of them.  The first of these was the Nash Feb 2000 letter valuing it at £50 million, and the second was the Old Board’s statement that the withholding of 7 months bonus would produce the necessary £1.6 billion cost of the GAR at an historical uptake rate of 50%.  Come Peter Nowell’s liability valuation for the New Board and the situation changed radically.  It led to the July 2001 declaration of regulatory-approved/contrived insolvency, with total policy value reductions of 16%.  Doubtless Nowell had also re-visited the GAR, with the inevitable conclusion that if GARs exercised their now legally confirmed option were they not bought off, then the realistic cost had to be based on the near-100% current uptake rate. As a result, the true cost had to be factored into the declaration of regulatory-approved insolvency in advance, after which the GARs could be paid an additional sum to renounce the GAR option in the Compromise.  As a result the GARs had their funds restored plus an effective 2% sweetener, and the great non-GAR majority was stuck with the 16% insolvency reduction such that it had inter alia now paid for the GAR in two instalments.  Not, of course, that any of the excess GAR benefits already crystallized could thereby be recovered, and these all policyholders save those favoured are still paying.

So, in a nutshell, if the cost of the GAR had been fully addressed by withholding 7 months of bonus in 2000, why was it necessary both to force and bribe the GARs to give it up by the July 2001 cuts followed by the Compromise?  And likewise, if the BWD market comparator has done its job properly, how can an additional MVA be justified? Doubtless the FOS will find this reasoning difficult to follow, but equally my circle will not.  Similarly, my circle will have less difficulty than the FOS in realizing that this is the result of a series of fraudulent misrepresentations.  The FOS is in a terrible mess: it has been caught aiding and abetting a fraud, so what’s to be done about it?  It’s a sad and bad day when complainants are so abused by their own Ombudsmen, but it is an established fact of life in modern Britain which we must confront squarely.”

- and this second extract, which coincidentally prefigures much of the context of the Actuarial Disciplinary Tribunal:

“ The different categories of undisclosed GAR cost are also highly relevant to the rationale behind  Principal Ombudsman Tony Boorman’s Mr. & Mrs. K decision of Nov 16^th, and in particular his sophisticated constructions on what the Society (or more rationally, the pivotal members of the senior management team) could reasonably have been presumed to know, and by when.  As above, we can see that the total cost of the GAR can be broken down into at least three separate categories, to whit:

i)                     The “official” cost of the GAR based on 50% uptake at maturity.

ii)                   The true and accruing cost of the GAR based on current 100% uptake.

iii)                  The continuing cost of meeting selectively overbonused GARs, and in particular those who had exercised their GAR on inequitably large funds before 1993, plus those who can show that they were misled by ELAS into forgoing it.

Very bluntly, we know that the inducements to pay the first of these on the basis that it discharged the whole was a revised fraudulent misrepresentation, and that the second was a further instalment exacted by a combination of regulatory-approved blackmail and fraud.  Only the non-GARs paid it.  The third, which the FOS discount as “Penrose-related”, has not yet been separated clearly into its sub-constituents, although a reasonable stab at this could now be made.  It has been funded by the non-GARs, and by post-93 GARs to some degree.  And since this third category so largely comprises the scienter element behind the 1987/9 fraudulent transition, we must yet again remind the FOS of what it would prefer to remain officially uninformed.  High time, too, that it stops pretending that the cost and extent of the GAR problem is limited solely to category (i).

So what did the senior management team know in the run-up to the 1987/9 transition, which determines much of our current thinking about (iii), and which Mr. Boorman has chosen to ignore?

1)       The Society was over-allocated before GAR/RAP policies were discontinued.

2)       It was improperly discounting and hence concealing the over-allocation in the regulatory returns of the pre-WPWM era ( Michael Josephs-Fraud and Failure-EQUI written evidence item 69)

3)       GARs were briefly in the money in the early ‘80’s (Penrose Chapter 2 para 61).

4)       1 & 3 are the reason why the DTBP was formulated as early as it was, and-

5)       The risk of its being needed was not merely theoretical even then.

6)       The senior management team elected to keep the new policyholders in the same bonus series, and continue overbonusing those originally favoured, thus wilfully extending and transferring both the cost and risk this involved.

7)       They concealed this knowledge from their members, non-executive directors and the rump of the sales force.

8)       Even so, expert actuarial discussants of the WPWM paper divined the underlying issues, and  cautioned about the impropriety  and risk of giving away the estate by intergenerational transfer, the inequities of the pooled fund approach, the implications of unequal guarantees and their costs, and the statutory/guideline requirements that policyholders be told about them.

9)       Despite this, the WPWM authors and critically knowledgeable senior management team members did not comply (1989 onwards).

10)   A critical quartet had essential continuity of background knowledge and the issues it raised over the period 1982-93 (Sherlock, Ranson, Headdon and Driscoll) and subsequently (ditto minus Sherlock.).  That included both the GAR and GAR/GIR differential bonus policies.  But given the logistic complexities and scale of the resulting fraud, it is highly likely that other senior management team members were also acting scienter to a greater of lesser extent.

My circle may therefore prefer to draw its own conclusions as to what the Society can reasonably be presumed to know from this list of data, all of which are in the public domain.  Of course the senior management team knew full well what it was or was not doing throughout the 1982 to the end of 2001 period-  and probably even from Maurice Ogborn’s retirement.  I am bound in consequence to say that I find Mr. Boorman’s arguments on the relative dependent merits of the lead cases at different times to be both objectionable and repugnant.  I also find his embracing Lord Penrose’s evidence or joining with the Chief Ombudsman in rejecting it as it suits him to be highly unfortunate for the credibility of his arguments and the reputation of his office.   I further surmise that Mr. & Mrs. K had recurrent single premium policies, and hence that the information supplied to them should have been amended and refreshed annually. Hence, even were we to allow Mr. Boorman’s reasoning, Mr. & Mrs. K should not be categorized merely by the starting date of their policies.   And finally, we should note that Mr. Boorman seeks to legitimize ELAS’s behaviour over the GAR by referring to the notorious indecision of the Bolton working party report on GARs and terminal bonus.  There was so much guilty awareness and conflicting vested interests at work inside and outside the working party that no useful conclusion could be reached.   In no way did this failure either remove or excuse ELAS’s fundamental obligations and duties in the matter.”

MN ended his letter to the effect that, in issuing the late Mr & Mrs K final decision and pushing for closure of cases before Chancellor Brown’s accession or EQUI and the Parliamentary Ombudsman had reported , the FOS had descended to unacceptably low levels.  Walter Merricks made brief acknowledgement on Dec 6^th, inter alia saying that he had nothing to add on the subject of Mr & Mrs K.

Assuming that this account summarises the FOS position well enough, we may reasonably assume that the FSA and Treasury will act in a consistent manner.  The Government and regulators have always denied both damage and liability; one may well suppose that this will continue, and that they will escape by any boltholes inadvertently left open. With luck this little article will have helped stop up some more of them.  And in that GAD and FSA actuaries have participated in the development of the overall position, we should reserve our more definite judgement until the Parliamentary Ombudsman has reported.  Even so, for reasons already advanced, an appropriate pressure of expectation should also be maintained upon the actuarial and accounting professions. 

4) The European Dimension.

Having largely concluded gathering its evidence, The European Temporary Committee of Inquiry into the Equitable is at a late phase in its deliberations.   At the time this article was being completed its draft report has been published, one implication of which is that some emendations or additions may yet occur.  If so, these must be prompt, and this article might also play its part.  The actuarial Disciplinary Tribunal’s pronouncement has come in at a very late stage in this process, such that its strengths and weakness must be correctly reckoned by all the EQUI participants.  There may in turn be implications for the accountancy profession and Parliamentary Ombudsman, the benefits of whose experience EQUI will now be denied.  Moreover unless EQUI’s reasoning and recommendations are very tightly argued, carefully linked and securely expressed, experience suggests that the UK government and regulators will avoid being bound by them.  And since government omissions are secondary to what the Equitable itself did wrong, we must hope that EQUI will take over where Lord Penrose left off, and leave us without too much official doubt as to what that originally was.  In this scienter is all, and it has implications not just for the UK itself, but for the UK’s future presence in Europe.

This being uppermost in his mind, the writer hopes that EQUI and the European Parliament will be able to follow the later developments, and take such helpful or remedial action as may be appropriate on behalf of the wider European Community

Dr Michael Nassim.   March 31^st, 2007.