Brian Pomeroy CBE,                                                                         

ICELP,                                                                                               

Eastcheap Court,                                                                               

11 Philpot Lane,                                                                                

London EC3M 8UD                                                              

Sept 29^th 2010.

Dear Sir,

Thank you for your invitation for interested parties to submit preliminary observation on the Commission, its work and terms of reference prior to the results of the Government’s spending review.  I am an Equitable Life policyholder advocate of longstanding, whose more substantial observations, submissions and publications are now pretty much all a matter of public record.  These include my correspondence and minutes during the course of the Chadwick process, such that I need not refer to them in any detail. I was, however, one of those greatly concerned that the process would end in the unsatisfactory manner it now has, and for reasons that were made plain in advance.   I would like to think that those reasons remain valid.  So too is whatever I then wrote on the principles and methods of compensation, or the idiosyncrasies and deficiencies of the Parliamentary Omdudsman’s Second Report which have led to much of the ensuing difficulty.   That cumulative experience determines what I should now like to say to the Commission.

Firstly, I hope you will not take it amiss if I comment for posterity on the selection, independence and representative membership of the Commission itself.  As you will discover, Dr Andrew Goudie and I raised similar questions over the selection and motivation of Towers Watson’s panel of Independent Experts, to whom in the end everything appeared “reasonable”.  Within the artificial confines and dictates of Sir John’s internal relative loss scenario they took the line of the Three Wise Monkeys:  “See no evil; hear no evil and speak no evil.”  You spent much of your previous career with Deloitte Consulting, and will find that I have proposed that Bacon Woodrow Deloitte (BWD) be considered in matters of apportionment.  This arises from the organisation’s long support for the official line taken on the 2001 cuts, Compromise Scheme of Arrangement, FOS stance and compensation formula, and legitimisation of the disadvantageous WPA transfer to the Prudential.  Their office also sold or provided brass plate office cover for Equitable policies in Guernsey, and BWD advised their own clients or occupational schemes over matters Equitable.  Hence their long involvement and conflicts of interest should be readily apparent. Moreover ELAS appointed actuary Peter Nowell was also an ex-employee of BWD.

Similarly, the FSA  as agent for the Treasury was the subject of a number of the Parliamentary Ombudsman’s findings of maladministration, and the FOS, with which it has a governing memorandum of understanding, is in various ways subordinate if not directly subservient to it.  And so, without repeating all the adverse observation made at EQUI or elsewhere on how the FOS has behaved during the Equitable scandal, it should be clear that John Howard’s FSA Consumer Panel membership and his directorship of the FOS call into question his suitability as a member of your Commission.  It parallels or even reflects the absurdity of the Treasury’s determining role in awarding compensation against itself for its role and overall responsibility in the Equitable Life Scandal!

Secondly, the Chadwick process has revealed that electronic data for the pre-1992 era are in fact available, although no attempt has been made to read them into a more modern format for any official purpose.  Those data are crucial to fair compensation in order to avoid some of the highly dubious assumptions that have been made as to how to allocate compensation in their absence.  Indeed some of these perpetuate the very injustices that compensation should remedy.  Whatever else is now done, those data should be restored to the record using forensically approved methods as a matter of urgency.

Thirdly, the compensation logistics and your terms of reference indicate that an upper cap to compensation will be made in the October spending review, and that your job is to advise on the apportionment and/or pro rata distribution of it.  This permits the Treasury to nominate a sum in advance of any formal determination of the actual total deficit.   Allow me please to enter the strongest possible objection to this arrangement on the grounds that it is illogical, opaque, fundamentally undemocratic and potentially unjust.

Having thus reserved a position for posterity on the notion of an arbitrary advance cap, may we next consider the underlying principle? Firstly, Sir John Chadwick has advocated a two stage procedure involving a SAAMCO-style cap on the implicit assumption that the precedent to be followed is one of negligence on the part of an adviser or regulator.  But that flies in the face of much evidence submitted to Sir John himself that the actions of the prudential regulator were not simply trustful or negligent, but were in fact more actively deceitful.  I am no lawyer, but under these circumstances I do not expect the SAAMCO precedent to be accepted by any competently attentive Court.  Much of  policyholders’ and the nation’s outrage stems from the fact that the regulators in effect conspired against the very people they should have protected by concealing the Society’s difficulties, misrepresenting them as relatively trivial, and then passing the losses back to policyholders under circumstances and conditions which denied them their rights.  This outrage also invalidates any notion of a cap in lieu of apportionment, which is in any case impossible because the authorities have sedulously avoided any conduct of business investigation.  And finally, if public purse considerations are to be invoked, then any cap has to be seen as in proportion to any other reduction of expenditure, which requires that the uncapped liability be determined first.

Fourthly, there may be an inherent confusion in your terms of reference between “priority” and “disproportionate impact” as determined by Sir John Chadwick in your paragraph 10.  In the end, the swingeing nature of Sir John’s compensation reductions circumvented his having to address disproportionate impact in any real detail, although Peter Scawen has extracted his observations on the predicament of annuitants.  Whatever, annuitants and so-called late joiners are widely acknowledged to have suffered proportionately greater losses than other groups. 

The distinction or even conflict between urgency and priority has only relatively recently been formalised in the discipline of project management, but is pertinent here.  Almost by definition those proportionally most affected are likely to be among the more urgently needy, but such may also include:

1)      Persons over the age of, say, 75, on the grounds that they have little time remaining to enjoy or pass on their savings, and who may need to purchase support or care provisions.

2)      Persons whose policy values fall below the average level, on the grounds that their other means will be comparatively slender.  (Whether the median, modal, arithmetic or geometric mean estimate of “average” is used as usual depends upon the underlying distribution.)

3)      International and overseas policyholders who may be unduly dependent upon their savings if their UK pension entitlements are frozen, are subject to exchange difficulties, and whose other local economic rights or circumstances cannot readily be determined.

This accepted, urgency irrespective of any cap is distinct from “priority” or “impact” which might end up being capped.  Dealing with the former is a logistic problem; determining the latter is one of classification.

Fifthly, there remains the international and EU dimension.  Although the Guernsey Financial Services Commission asked for Sir John Chadwick’s assurance that their policyholders be accorded equal rights with all other policyholders under international and EU Law, this was watered down in his Advice to the effect that international and overseas policyholders should be treated in the same way as UK ones.  But in fact, if other jurisdictions or ultimately the EU Commission decide that such policyholders (and therefore by implication UK policyholders also) have received insufficient compensation, then Europe rather than the UK could determine the final outcome of the Equitable Life scandal.  From Sir John Chadwick’s correspondence you will find that this position has been explained and an advance position reserved on it, which are based on the Francovich serious EU Law/Directives breach criteria.  International policyholder Margaret Felgate has covered much of this for you from her own experienced perspective in her submission.

If the odds are currently stacked against the UK satisfying its EU and international brethren, then the chances of your own success must sadly also be slim.  Even so, there is already enough in the public domain from which you can make a suitably rational and fair approach to your task.  That rational and fair approach should be practicable irrespective of whether a cap is applied.  Only if the cap is demonstrably or even arguably unfair will the UK process immediately break down, perhaps even before your own job can start.   Even so, given the gravity of the whole affair, the length of time over which truth and justice have been denied and its international ramifications, I do not personally concede that any sort of cap can ever be justified.

Does what I have thus far said also imply that is wise also to reserve an advance position on what the minimum sum should be, and if so what are the attendant dangers in so doing?  It is a classic finesse, but clearly something has to be said now.  So, without considering myself bound in every detail by posterity, let me propose that:

1)      The sum involved has to address ongoing and future losses for WPAs and Equitable’s remaining policyholders.

2)      That makes it substantially in excess of EMAG’s previous estimate, which ignored these considerations and was based on spot valuation methodology. It amounted to£3.2 billion following its own discounting and factorisation proposals, but rising to £4.8 billion after interest at 5% compound up to around 2008.

3)      To address future loss the correct accounting procedure should always have been an ongoing business valuation, and not simply a contemporary spot valuation such as Lord Penrose’s £4.9 billion.

4)      As I have previously advocated, that ongoing business valuation should be based on the Equitable always having had the necessary free reserves to support the with-profits, assurance and smoothing aspects of its business. Any dependent comparator has therefore to accord with this.

5)      Carrying that notional valuation forwards backed by the free reserves appropriate to an office not in run-off more closely defines the total deficit to be met.

6)      Opinions vary as to the total involved- I have previously (2004) put the ongoing business valuation deficit at £8-10 billion, which allowed for a 10-15% backing estate but did not include future loss from that approximate date.  Using a somewhat different methodology my colleague Michael Josephs has arrived at a figure of around £15 billion to around 2008.  (I shall not digress into how free reserves might notionally be carried forward and run off to replace income, or how it might influence these already broad estimates.)

7)      Assuming that Christopher Wiscarson does not bow to pressure from the authorities, then this general approach should  also address the ongoing and  future loss question for in force Equitable policyholders in the context of Solvency II.    The necessary extra monies must be substantial.

8)      To be credible, a cap based solely on public purse considerations could not be less than, for the sake of argument 75% of a current sum between £11 and 16 billion, and in that case necessarily also tax-free.

9)      These individual opinions in no way detract from or gainsay the primary validity of any contemporary others on the same broad subject, which likewise may need to be carried forward.

In conclusion, I hope these considerations are of use to you, and that you may also forgive what I have felt necessary to add in reserving a more general ongoing position.  Having done so, and explained that once the older data are read in there is more than enough already in the public domain for you to perform your task, I propose to say no more unless and until the UK process breaks down, whereupon  everything has to return to Europe.

 Yours sincerely,

 Dr Michael Nassim.

 Acknowledgements:  I remain happily appreciative of the continuing support and parallel activities of Peter Scawen, Margaret Felgate, Michael Josephs, Nicholas Oglethorpe and Dr Andrew Goudie.

E-mail copies:  Peter Scawen (ELTA); Michael Josephs; Nicholas Oglethorpe; Dr Andrew Goudie; Margaret Felgate; John MacLeod; Ann Abraham; Iain Ogilvie; Dr John London;  Liz Kwantes (ELM); Paul Weir (EMAG/ELCAG); Alex Henney (EMAG); Nicolas Bellord (EMAG); John Newman (EMAG); Christopher Carnaghan (EMAG); Colin Slater (Burgess Hodgson & EMAG); Paul Braithwaite (EMAG);  Markus Weyer (DAGEV); Chris Wiscarson (ELAS); Jonathan Scheele (EC Head of UK Representation); Diane Wallis MEP; Mairead McGuinness MEP; Andrew Tyrie MP; Vince Cable MP; Alan Duncan MP; Mark Hoban MP.