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Past scandals and regulatory intervention

This article is part of
Guide to With-Profits

Mortgage endowment mis-selling and the collapse of the Equitable Life Assurance Society, founded in 1762, changed the way with-profits was regulated forever.

Equitable Life

Between 1956 and the advent of personal pension schemes in July 1988, Equitable Life sold policies with an option to select either a guaranteed annuity rate (GAR) or the current annuity rate (CAR).

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The GAR assumed 4 per cent interest until 1975 when it was increased to 7 per cent, as firms competed aggressively for business.

In January 2000, the Court of Appeal ruled against the world’s oldest insurer’s differential final bonus practice. In July 2000, the House of Lords ruled against differential final bonus and against ‘ring-fencing’ of the with profits fund.

The board of the mutual society decided that it was in the best interests of members to put the insurer up for sale. No immediate buyer leapt forward by December 2000 the society had closed to new business.

By May 2001, of Equitable Life’s 1.1m policyholders about 16 per cent held a GAR option and it was clear what was in the pot was not sufficient to meet the promises that had been made. Stories over-reaching on guarantees and bonuses to win business were, unfortunately, widespread.

As soon as the plight of Equitable Life’s annuitants became clear questions started to be raised about why the regulators and successive governments had failed to question “too good to be true” promises. Angry annuitants also demanded action to make sure a repeat could not happen.

Back in 2004, in light of the scandal at Equitable Life, HM Treasury asked Sir Derek Morris to review the actuarial profession.

Sir Derek was asked to have a particular focus on considering how best to modernise the profession and make it more open, challenging and accountable, following Lord Penrose’s earlier report into the downfall of Equitable Life.

It was Lord Penrose’s 818-page report that branded Roy Ranson, former chief actuary and chief executive of Equitable Life, as a “manipulative and autocratic character”.

The saga of compensation for Equitable Life policyholders has been a blight on the sector for many years and rolls on: in 2013 additional redress was announced for annuitants not covered by an earlier £1.5bn package announced in 2011.

Payout schemes have been bestet by delays amid wrangling over policyholder data, which has kept negative headlines relating to the scandal flowing.

Endowment mortgages

The regulator was also forced to act following the rise and fall of endowment mortgages.

At the end of the 1980s, mortgage endowments were presented as a great way to pay off your mortgage and have a nice nest egg on top.

By the middle of the 1990s, it became obvious that the expectations created by promises were, in much the same way as the with-profits sector - overly ambitious and unlikely to be met, and the regulator demanded insurers warn investors about potential shortfalls.