Equitable policy holders: 'We had the rug pulled from under our feet'
Ministers should set up a compensation fund for policyholders in the Equitable Life, the Parliamentary Ombudsman says.
The life insurance company came close to collapse in 2000 after being ordered by the High Court to fulfil financial promises which it could not afford.
More than a million policyholders were left with reduced retirement savings.
Ann Abraham said the government should apologise for a "decade of regulatory failure" and identified 10 instances of maladministration by its departments.
Ms Abraham said that the various regulators, such as the Department of Trade and Industry, the Government Actuary's Department, and the Financial Services Authority, simply failed to use the powers available to them to protect the interests of the Equitable's policyholders.
She said that the regulators failed to verify the solvency of the company and make sure the information that was in the public domain was reliable.
The aim... should be to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred
"Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report," Ms Abraham said.
"I have alerted Parliament to the injustice which I have found in this case resulted from serial maladministration on the part of the former Department of Trade and Industry, the Government Actuary's Department and the Financial Services Authority," she added.
The Ombudsman did not say exactly how many people might be eligible for compensation, or how much they should receive.
"The aim of such a scheme should be to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred," she said.
Ms Abraham told the BBC that the Equitable's plight had unique features and said her report did not suggest that the conclusions drawn could be applied more widely.
The current executives of the Equitable, the oldest mutually-owned life insurance firm in the world, were appointed to replace the old management in the early years of this decade.
They welcomed the report.
Equitable chairman Vanni Treves said the Ombudsman's conclusions were damning.
"From a policyholder point of view we think this is as formidable a report as the Ombudsman could possibly have produced," he said.
"We could not really have asked for more. Her reasoning and recommendations are beyond argument."
The board also said it was ready to assist in a scheme to compensate its policyholders.
The Ombudsman's report did not look into what role Equitable Life executives played in its near collapse, a role which was examined in a 2004 report.
Mr Treves told the BBC the firm had already taken responsibility for its failings.
"We have done the right thing and paid out to all these who had a debt," he said.
"We've paid up for that responsibility. The government should now pay up."
However, it will be some months before the government responds to the proposal for a compensation scheme.
Equitable chairman Vanni Treves on the Ombudsman's conclusions
"The government recognises that the Ombudsman's report raises issues of concern for the parties involved," said a Treasury spokesman.
"The length and complexity of the report mean it would be inappropriate to comment before giving it our full and careful consideration.
"We expect to provide a full response to the House in the autumn," he added.
Campaigners welcomed the findings of the report, saying that it was a "devastating indictment" of the performance of regulators over many years.
"The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the company to suck in another £20bn in pension contributions from more than a million new investors," said Paul Braithwaite, from the Equitable Members Action Group (EMAG).
The Ombudsman says that in the run up to the Equitable's financial crisis, which eventually came to a head between 1998 and 2000, the society's regulators failed to check properly on its financial position and allowed it to dress up its finances to the tune of £2.7bn.
As such they allowed the society to continue giving misleading financial information to its policyholders.
Equitable came close to collapse in 2000
Then, "on an unsound basis", they allowed it to stay open for business even though it was in a "dire financial position".
As such, anyone investing in an Equitable policy after 1990 was misled and lost the chance to put their money elsewhere.
Ms Abraham also found that, after the Equitable shut to new business in December 2000, the work of the regulators was ineffective.
She said they misled policyholders and the public when they claimed, falsely, that the society had always been solvent.
Guaranteed annuity rates
The key to the Equitable's problems lay in the policy of its executives who had, for more than a decade, told policyholders that their investments were worth far more than was actually the case.
This was exposed in an earlier report by Lord Penrose, published in 2004.
The crisis in the society's finances were crystallised when it went to the High Court in 1999 for permission to continue ignoring promises to make minimum payouts to people who had invested in so-called "guaranteed annuity rate" pension policies.
The eventual loss of the court case in 2000 meant that society was immediately short of the £1.5bn necessary to make good the promises it had made when it first sold those policies, in some cases as far back as the 1960s, until 1988.
Attempts to find a buyer for the society failed and it closed to new business in December 2000.
It has been winding down ever since, with parts of the business having been sold off.
Most policyholders who were still with the society by 2001, about 1.5 million, found its near collapse a disastrous experience.
Those still saving had to face their money being invested in an ultra-safe but very low return investment strategy, or see the value of their polices slashed if they moved their money elsewhere.
Those who continued to invest in the Equitable's with-profits policies had the value of their investments cut anyway, by more than 30% over three years, because there simply was not enough money to go round.
This approach was also applied to some of those whose pension policies were already in payment.
People holding with-profits annuities saw their incomes cut by 30% in 2003 and 2004.
Ann Abraham pointed out that one of the decisions by the society's new management, to impose an across-the-board cut in policy values in 2001, cost society members £4bn and should have been fairer.
About 500,000 people are still saving in the society's £7bn with-profits fund, mainly for their pensions.
Of these, about 200,000 are individual clients while the rest are saving via group pension schemes.
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