In the 1950s Equitable Life began selling life assurance policies promising investors an annuity with a minimum "guaranteed annual rate" (GAR) when they retired.  Equitable stopped selling such guaranteed policies in 1988.  In the 1990s the decline in interest rates started to make the GARs expensive to honour and the society found itself paying out more than it could afford to holders of policies which had matured. 

 

In 1994, seeking to maintain payments to the vast majority of its customers who did not hold guarantees, Equitable announced plans to cut the final bonuses paid to its 90,000 GAR holders. However, the case went to the House of Lords, which ruled in July 2000 that Equitable must meet its obligations to the GARs.  

 

Unable to find the £1.5 billion needed to meet its liabilities to over one million policyholders in the UK and more than 15,000 in other EU countries, notably Ireland and Germany, Equitable put itself up for sale and closed its doors to new business. 

 

In July 2001, invoking the need to prevent the society's collapse, Equitable announced a reduction of pension policy values for all its with-profits policyholders (GARs and non-GARs) by about 16%. Subsequently, investors faced further losses through additional cuts and "market value adjustments".

 

Two groups of policyholder were particularly disadvantaged: Firstly, the "late-joiners", who purchased policies shortly before Equitable Life's near-collapse at a time when the company was already aware of the problems it faced but may have concealed them, even from its own salesforce. The "late joiners" suffered cuts without having benefited from the society's generous bonus policy in previous years. The second group is referred to as "trapped annuitants'. Since they cannot transfer their policies to another provider, they have faced reductions in their annuity payments of up to 40%.

 

 

A number of inquiries have already been conducted in the UK. Among these, the first report by Parliamentary Ombudsman Ann Abraham (published 30 June 2003) looked into allegations of maladministration by the prudential regulators but found them not guilty. The wide-ranging report by Lord Penrose (March 2004) examined the circumstances leading to the crisis at Equitable Life. Its findings prompted the Parliamentary Ombudsman to embark on a review of the case in a second report (Editor's note: this second report had not been published at the time of writing). 

 

 

Under the rules governing committees of inquiry, the European Parliament could only investigate the EU-related aspects of the case.  The committee's remit was thus to:

 

 

 

Starting in February 2006, the committee took evidence from a range of interested parties, commissioned three external expert studies and, in October 2006, sent delegations of MEPs on fact-finding missions to Dublin and London. 

 

Witnesses at the committee's hearings included Equitable Life policyholders, the company's current CEO, a former Equitable salesman, government officials and regulators (including the UK's FSA, Ireland's IFSRA and Germany's BaFin), Internal Market Commissioner Charlie McCreevy and experts from the European Commission.

 

The inquiry's final report argues that the UK’s technique of implementing EU insurance legislation in a piecemeal fashion (through a number of different legal acts) “lacks clarity”, that "UK regulators and authorities did not adequately respect the ultimate purpose of the Directive" and that "the implementation process as a whole was flawed”.

 

 

The UK regulatory system (including such bodies as the Financial Services Authority, the Treasury and the Department of Trade and Industry) is severely criticised, notably for its “excessive leniency” towards Equitable’s solvency margin. This supervisory failing is attributed partly to Britain’s “light touch regulatory policy", which the report says "went a step too far and contributed to a weak regulatory environment, which allowed the difficulties at ELAS to grow unchecked" [ELAS = Equitable Life Assurance Society].   

 

Another factor was the UK regulators' “undue awe or deference” towards Equitable.  The regulators apparently believed the company “to be ‘too good and too reputable’ to make mistakes”. They also "knowingly failed to challenge" the “conflict of interests” in the fact that Equitable’s Appointed Actuary was simultaneously its Chief Executive. Overall, the report challenges the Penrose report’s view that “regulatory system failures were secondary factors”.  

 

 

In connection with the problem of the "late joiners" - those who were sold policies after the company realised it was in difficulty - the inquiry supports claims that Equitable was guilty of "mis-selling and misrepresentation to policyholders and potential clients, both in the UK and in other Member States", and in particular of "knowingly omitting to draw their attention to the GAR risk".

 

This was a problem not just in Britain: in its sales operations outside the UK, the company claimed falsely that "Irish or international policies were 'ring-fenced'" from Equitable's problems in the UK and that "German policies were subject to the German Financial Regulator's control". 

 

Here too, however, the regulatory bodies are criticised, with MEPs saying that Conduct of Business regulators in the UK and other Member States "reacted late". The inquiry concludes that "both Irish and German regulators have pursued an unjustifiably passive approach to the conduct of business regulation in respect of Equitable Life" and finds it "regrettable" that no Irish authority assumes responsibility for "the grossly inadequate actions undertaken by the Irish regulator in relation to Equitable Life prior to 2003". 

 

 

Many victims of the crisis “had great difficulty in knowing what route to take or who to apply to in trying to obtain information, make a complaint and obtain redress”, says the report. The result was “a pattern of confusion and much inequality of treatment”. Taking Equitable to court was an option available to “only a few affluent policyholders”, while ombudsman schemes, such as the UK's Financial Ombudsman Service, proved ineffective.

 

…let alone in other Member States

 

Non-UK policyholders, such as the 8,000 in Ireland and 4,000 Germany, suffered from a further problem: which regulatory bodies were responsible?  Was it those in the “home state” (the company’s country of origin) or the “host state” (the country where it sold its policies)?  Too often, home and host state authorities were able “to shift responsibility from one to another for dealing with complaints” and this led to non-UK policyholders "falling between two stools".

 

Ultimately, say MEPs, "the Third Life Directive lacks clarity in defining the powers, roles and responsibilities of home and host Member State authorities". This lack of clarity is a problem not just for the Equitable life victims, but also, more broadly, for business and consumer protection in a Europe-wide single market.

Following up on its conclusions, the inquiry's report makes a large number of proposals.  These include recommendations on the plight of the Equitable victims but even more attention is devoted to the wider dimension of 'lessons learnt', i.e. ways to improve the drafting and application of EU lawmaking in future. 

 

 

The European Parliament cannot force the payment of compensation. However, the report argues that, in view of its "failure to comply" with EU legislation and in the absence of any real possibility of redress for the victims, "the UK Government is under an obligation to assume responsibility". It therefore "strongly recommends that the UK Government devise and implement an appropriate scheme with a view to compensating Equitable Life policyholders within the UK, Ireland, Germany and elsewhere". It also “urges the UK Government and all affected parties to accept and implement appropriately any recommendations the UK Parliamentary Ombudsman may make" in her second report on Equitable Life.  

 

 

Turning to the lessons for the future, the report points out that "investments in pension products are set to play in increasingly important role in the European economy in view of demographic imbalance and ageing populations".  It therefore particularly emphasises "the need to foster consumer confidence in pension products" and "strongly requests that any financial services legislation duly recognises the priority of consumer and investor protection issues", while still minimising red tape and not stifling innovation.

 

In addition, it calls for "the further strengthening of prudential supervisory and regulatory standards throughout the Union, including an obligation to reserve for liabilities such as bonuses" (since the Equitable Life crisis arose because the company did not set aside adequate reserves). 

 

Cooperation between national regulatory authorities should be improved: national financial regulators should not play a passive role, limited only to their national jurisdiction. EC legislation is thus needed "to highlight the collegial responsibility of national regulators".

 

 

The report also calls for EU financial services legislation to give consumers “clearly defined rights which can be relied on before national courts”. And for out-of-court settlements, better EU-wide alternative dispute resolution schemes are needed.  In short, if business is to get the benefit of the single market, consumers must have clear rights too.  Companies must be told there is "no mobility without liability".

 

 

The European Commission, according to the report, did not monitor the application of the EU insurance legislation effectively. In future it should be “more proactive” on this front "to ensure that the legislation is producing the required effects".  For this purpose it would need more resources and staff (particularly lawyer-linguists).  

 

The inquiry highlights the potential problems caused by allowing options, exceptions or derogations to EU legislation or letting Member States "gold-plate" EU laws (i.e. add extra national requirements). MEPs believe the Commission should compile "correlation tables", to show clearly how directives have been enacted into each national legal system.  But they also recommend that, where possible, "regulations - and not directives - are chosen as the standard legal form" where pan-European legal consistency is needed, since it is directives that give rise to differing national versions of EU legislation.

 

The inquiry also suggests that the European Parliament's standing committees should play a more active role in following up the implementation of legislation in their own policy areas, for example through their rapporteurs or an “implementation taskforce” to be set up within each committee.

 

 

Committees of inquiry, as provided for in the Maastricht Treaty, allow the European Parliament to investigate alleged contraventions or maladministration in the implementation of Community law.  Parliament has set up only two previous inquiries under this procedure, both completed in 1997. The first investigated the Community transit system and the second the bovine spongiform encephalopathy (BSE) crisis.

 

However, witnesses cannot be compelled to give evidence to such committees and in the present case some did not do so. The report of this committee therefore "expresses irritation and regret at the discourteous conduct of several witnesses who did not cooperate with the Inquiry". Witnesses who failed to attend are listed in Part 1 (iv) - Introduction of the report.  MEPs consequently call for broader powers for the EP’s committees of inquiry, notably regarding the summoning of witnesses and cooperation by Member States' authorities.