Your IndustryNov 13 2014

Past scandals and regulatory intervention

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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).

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.

According to the regulator, the mortgage endowment scandal saw almost 2m complaints and more than £2.7bn paid out in compensation for mis-selling products.

According to the Money Advice Service website, ‘mis-selling’ related to these policies included:

• no explanation that there could be a shortfall at the end of the mortgage term;

• claims the endowment would ‘definitely’ pay off the mortgage;

• fees and charges not being explained;

• the policy and mortgage being set up to run into your retirement without consideration of whether a client would have income to meet payments; and

• advice to cash in an existing endowment in order to sell another.

Regulatory consequences

Paul Turnbull, actuarial and capital director at Aviva, says it is in the harsh light of these scandals all insurance companies must now:

1) Publish a Principles and Practices of Financial Management (PPFM) document to explain the management processes for the with-profits fund.

2) Put aside enough reserves to protect the company in the event of falls in the markets.

3) Appoint a with-profits actuary to be responsible for reporting publicly whether the insurer has taken a proper account of policyholders’ interests.

4) Provide independent input into the process of with-profits fund governance, typically through a committee including representatives not allied with the insurer.

Much investment and pensions business sold before 2000, whether with-profits or unit-linked, is also currently the subject of FCA’s heritage product review.

One focus of the review appears to be on ‘value for money’ for policyholders - though apparently it will not, following a storm in the wake of newspaper revelations, seek to retrospectively ban certain charges such as exit fees.

Mike Kipling, with-profits actuary at Friends Life, says this is not yet a clear concept, but important features such as guarantees and options are likely to be taken into account when considering how these policies provide fair value.