The Equitable Life Assurance Society - European Parliament Investigation

European Parliament Investigation

In June 2007,the European Parliament issued a 385 page report on Equitable Life Its fifteen month investigation followed the implementation in July 2004 of EC Directive 92/96/EEC (the “Third Life Directive” or 3LD) which governs the single market in life insurance. This directive required the UK where Equitable’s headquarters were based to supervise its “entire business” and the curtailed the supervisory power of other EU countries where Equitable operated. The EU Parliament’s remit was to investigate without prejudice, alleged breaches of Community law in relation to the collapse, to assess the UK regulatory regime in respect of Equitable Life and to look at the adequacy of remedies available to policyholders including the 15,000 non UK members. The 22 member committee heard evidence from 38 witnesses and analysed 92 public documents and its report is the only one completely independent of HMG influence. Whilst a detailed summary of the full document is well outside the scope of this article, an examination of the effectiveness of the supervision of Equitable is given below and closely follows the wording.

• Financial supervision covering the Assurance undertaking's entire business.

The evidence suggests the regulator focused exclusively on solvency margins and took little or no account of accrued terminal bonuses in its overall analysis of the financial health of the company. It quotes Penrose as saying that the Policy Holders reasonable Expectation (PRE) would have included terminal bonus even if the amount was not defined, however the Government Actuary's Department(GAD) and the Treasury deny PRE existed as the terminal bonus was not guaranteed. The report goes on to say that if it is considered that these types of bonuses are an integral part of the company's ‘entire business', the regulatory authorities should have taken them into account. Although the Regulator was given the option of not forcing Equitable to build reserves for discretionary bonuses, that did not absolve the authorities from their duty of financial supervision covering the “assurance undertaking's entire business”.

• Every Company is required to have sound administrative and accounting procedures and adequate internal control mechanisms.

Though the Appointed Actuary (AA) is not a role required by the directive, it is an essential part of the UK national insurance. One of the AA’s missions was to act partly as a guardian of policyholders' interests but the overall evidence suggests “the UK regulator did not fulfil its obligation ..in that Roy Ranson became CEO without relinquishing his role as the Appointed Actuary.” HMT rejected this claim as the 3LD does not mention the AA.
The overall evidence received suggests that by not taking swift action on this matter, the UK regulator did not fulfil its obligation to require from ELAS sound administrative and accounting procedures and adequate internal control mechanisms, as demanded explicitly.

• Ensure that the competent authorities have the powers and means necessary for the supervision of assurance undertakings.

The UK had the legal power to supervise Equitable. The Baird report states that in January 1999, the total number of staff involved in the prudential regulation of approximately 200 insurance companies was less than 135. The Penrose report also states that "the DTI insurance division was ill equipped to participate in the regulatory process. It had inadequate staff and those involved at line supervisor level in particular were not qualified to make any significant contribution to the process. For all practical purposes, scrutiny of the actuarial functioning of life offices was in the hands of GAD until the reorganisation under FSA was in place". More evidence also strongly suggests that the regulator adopted a conscious and deliberate ‘hands-off’ approach with regards to the ELAS case. If this were proven to be the case, it would constitute a breach of the regulators’ obligation to ensure the respect of PRE and therefore a breach of the letter and aim of Article 10 of the 3LD. Both the Baird and Penrose reports contain criticisms of the regulator’s lack of a "pro-active approach".

In its conclusion on P117, the report says the powers bestowed on the Secretary of State (as prescribed by Section 68 of the ICA 1982) to waive the application of prudential regulations appear to be incompatible with the letter and the aim of the Directive and were used inappropriately (particularly when granting authorization on numerous occasions to include future profits in the solvency margin), and that therefore...there are serious concerns that the 3LD was not correctly transposed in full.

The committee is of the opinion that the application of the 3LD by the UK in respect of the ELAS case was deficient and that UK regulators and authorities did not adequately respect the ultimate purpose of the Directive.