MPs attack Equitable regulators

By JOANNE HART
Updated:

 

THE Treasury Select Committee has broken with tradition and rushed out an interim report on troubled insurer Equitable Life. The decision was made ahead of the forthcoming General Election to guide the Financial Services Authority, which is holding its own investigation into the Equitable fiasco.

The committee spares no one. The mutual itself, its regulators and its auditors are criticised explicitly or implicitly and recommendations for the future are made.

The report follows last summer's historic House of Lords judgment that Equitable should pay terminal bonuses to holders of its guaranteed annuity rate policies (GAR), a ruling that left the mutual with an unexpected £1.5bn bill.

Select Committee members say the Financial Services Authority should look closely at the role of Equitable's regulators since 1993, when the guaranteed annuity rates first began to hold value.

From 1993 to 1998, the insurer was regulated by the Department of Trade and Industry. It then came under the Treasury and from 1999 the Financial Services Authority.

Equitable's decision not to build up a reserve against GAR liabilities from 1993 was described as 'risky' and 'a crucial turning point'.

'It is unclear to us why the issue of GAR liabilities and reserving was not considered by the prudential insurance regulator (the DTI) at least by 1993,' says the report.

Questions are also raised about the reserving levels suggested by the Treasury and the FSA.

The committee suggested the FSA should look into whether Equitable could have predicted the House of Lords ruling and criticised the mutual for failing to explain to policyholders the implications of a Court of Appeal judgment.

The group's selling practices following the Court of Appeal judgment are called into question, as is the way in which some members gave up their GAR rights at that time. Equitable is also accused of failing to communicate its true position to members.

In what could be construed as criticism of auditors Ernst & Young, who announced their resignation on Wednesday, the committee says it does not believe the auditing arrangements were 'adequate'.

The entire with-profits industry is also questioned.

'We recommend that the FSA analyse the extent to which financial services, in particular life assurance, rely on managerial absolute discretion,' says the report.

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