Parliamentary Ombudsman supports Equitable Life victims
by Dr. Ros Altmann
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The Government’s handling of financial services has, yet again, be found wanting. The long-awaited Parliamentary Ombudsman report into the Equitable Life collapse was a damning indictment of our financial regulators and put blame squarely on the Financial Services Authority (FSA), which was acting on behalf of the Treasury, on the Government Actuary’s Department (GAD) and on the Department for Trade and Industry (DTI). She has recommended that the Government should apologise to the victims for its regulatory failures and set up a fund to pay compensation to some of the victims. Her report highlights a catalogue of failures at the highest level by regulators and their advisers who should have known far better. , this will be yet another example of our so-called “light touch” regulatory system being more like “hands off” or “eyes shut”.
She has pointed out that the official regulatory oversight of Equitable Life first failed to spot its fundamental weaknesses because the Regulators did not bother to verify the information provided by the company. Then when the GAD did actually realize that something was very wrong with Equitable Life’s business model and governance structure it failed to alert anyone to the problems. Then when the FSA took over and realized that the problems were much worse than previously recognized it seemed to almost conspire with the management of the company to allow misleading and incorrect accounts to be published, which gave a false impression of Equitable’s financial strength. Once the company hit the buffers, the FSA continued to mislead investors by saying the firm was solvent, when it knew it was not. Finally, the Government seems to have tried to cover up its role in all this by setting up inquiries that were not asked to look at the whole picture, but only parts of it. The Ombudsman said this was ‘iniquitous and unfair’. Strong language.
Investors were left exposed to unforeseen risks which they had no way of knowing about, even though the Regulators who were charged with overseeing the firm on behalf of the Treasury knew the truth. To add insult to injury, the victims had paid a levy to fund the Regulator whose actions let them down so dreadfully.
The Ombudsman says that the problem did not lie with our system of regulation itself. In theory, the system was alright. However, in practice, those operating the Regulatory system did not do what they should have done. They were either asleep at the wheel or decided to allow the company to flout the rules.
This whole affair has serious implications for anyone involved in financial services in the UK. If the Equitable Life scandal had been a one-off, something that happened many years ago and which subsequently had led to much better regulatory oversight, I would not be so concerned. However, the Government’s attitude to the victims and the fact that only last year Northern Rock collapsed despite a new regulatory system, leaves me wondering whether this could all just keep on happening. How much money do taxpayers have to stump up to remedy regulatory failures that should not have happened in the first place?
Even more worrying, however, is that confidence in financial companies could be even further eroded if people see that those who lose out due to failure of regulation are left high and dry, fighting for redress and being ignored even when independent inquiries recommend compensation is due.
As with Northern Rock, one has to ask whether the holes in our regulatory regime are due to a system driven too much by the interests of the industries being regulated, rather than the ordinary people who need to be protected? If there then proves to be inadequate protection to ensure quick redress for failures, then our system may not be fit for purpose.
Equitable Life victims have already waited years for some redress and had high hopes resting on the Ombudsman’s investigation. Ann Abraham has concluded, after painstakingly examining all the evidence, that their losses were partly caused by Government failings, but will the Government compensate them? Will it even offer an apology, which costs nothing at all.
My fear is that the Government could try to resist any calls for Equitable Life compensation in the same way that it continuously refused to properly remedy the occupational pensions scandal over the last 10 years. Then, 150,000 people piled their money into pension plans which they were assured would be able to pay their pensions but when their schemes wound up, they were often left with nothing at all.
The Ombudsman’s February 2006 report ‘Trusting in the Pensions Promise’, also produced by Ann Abraham, found the Government guilty of misleading members about the safety of their final salary pensions. She recommended the Government should apologise and fully replace the lost pensions plus compensating for the distress suffered by those whose life savings were so cruelly snatched away from them. Yet, more than two years later, the issue has still not been properly settled.
In fact, although the Parliamentary Ombudsman found the Government was clearly responsible for causing the losses, ministers were able to evade her verdict. Even after also being found guilty by the parliamentary Public Administration committee, the High Court and Court of Appeal, the Government has still not apologized or paid proper compensation to everyone. So, Equitable Life victims are likely to have more fighting and delays ahead of them, as the Government takes its time to consider the Equitable Life report and its response.
After that, it may simply decide to retreat to its bunker and deny all wrongdoing, as it did with the occupational pensions case, rather than hoisting the white flag, accepting the verdict and paying up.
The victims may then have to launch a judicial review of any Government decision to reject the Ombudsman’s report. They will also need to appeal to their MPs and the Parliamentary Public Administration Select Committee for support. Worryingly, this will inevitably mean further heartache and delays for the victims. And, unfortunately, more public money may have to be spent on the issue.
Three shortcomings are central to the Equitable Life scandal and also to more recent problems such as Northern Rock. Firstly, the people implementing our system of financial regulation have not been sufficiently tough or on the ball to deal with serious problems in a timely manner. Secondly, when problems are discovered it seems to take far too long for strong action to be taken which can protect consumers. And thirdly, there is often a lack of official understanding about how ordinary people engage with financial services and the importance of helping them access the information they need to make proper choices. How many more financial scandals will taxpayers be asked to foot the bill for, before we can be reassured that the Government actually understands what it is doing in this area?
Ministers and regulators must pay more attention to the needs of those buying financial products, instead of those selling them. This means more intelligent understanding of how unsophisticated investors think and more in-depth questioning of financial providers’ business models.
In addition, when things do go wrong, they need to be sorted out quickly, with the Government taking responsibility for what has happened, rather than just denying its responsibility. This is important for us all. Everyone knows mistakes can happen, nothing is perfect. But if the consequences of such mistakes are that Government will first try to ignore them and hope they will sort themselves out, then attempt to cover them up and finally deny any wrongdoing when found out, who can ever again have confidence to invest in companies regulated in this country?
Taxpayers, whether they are investors or not, have an interest in ensuring that government improves its act on financial regulation. If the system only works as long as it is not tested, then it is no use. Also the public needs reassurance that if things do go wrong, and it is proved to be the Government’s fault, that they will be speedily compensated and receive a proper apology, rather than being forced to fight for years for justice.