Equitable Life: FSA statement on proposed compromise scheme

"We firmly believe that a successful compromise would offer the best prospect of bringing stability to the with-profits fund and improving the outlook for worried policyholders. We think that todays proposals offer a sensible basis on which Equitable Life can consult its policyholders.

"But we are, of course, in uncharted territory. There is no simple template for determining the overall 'fairness' of the proposed scheme, which needs to take account of the competing claims from guaranteed annuity rate (GAR) and non-GAR policyholders on a single pot of money. Whether or not the scheme moves forward will depend on how policyholders weigh up the offer of an increase in their policy value and the prospect of stability against what they are being asked to give up in return. So the results of this consultation will be very important when the FSA comes formally to assess the scheme before the final version is put to the vote later in the year.

"Policyholders will also want to know what will happen if a successful compromise is not achieved. In short, the outlook would remain uncertain, in already uncertain market conditions, and the fund would remain unstable. Equitable Life would need to set aside reserves against a range of competing claims that would have been resolved under the compromise. It would also need to adopt a more restrictive investment policy, with a lower proportion of equities, which could affect policyholders returns over the long term. There would also be a greater risk of extensive and costly litigation to sort out the various competing claims. All these costs would have to be met out of the single pot of money that is the with-profits fund. The opportunity to receive further money from the Halifax would also be lost.

The role of the FSA

"Our concern is to ensure that the interests of all Equitable Lifes policyholders are properly taken into account. We are keeping Equitable Lifes financial position under continuous review. We have also obtained independent legal advice on the issue of whether Equitable Life may be exposed to potential claims for compensation by non-GAR policyholders with a realistic chance of success. This Opinion, by Ian Glick QC and Richard Snowden, is published on our website today. Our formal assessment of the final scheme later this year will examine whether, for each relevant group of policyholders, the proposal put to them is a fair exchange for the rights they are being asked to give up. If that test is passed, we will also look to see that the scheme does not give disproportionately greater benefits or disbenefits to some policyholders.

The question of mis-selling

"The proposed scheme seeks to address the uncertainties associated with the claims which non-GAR policyholders may have concerning the information given to them at the time they purchased their policies. This issue is covered in legal Opinions commissioned separately by Equitable Life and the FSA. They conclude that there is the potential for claims for mis-selling, though the strength and potential value of such claims will vary according to individual circumstances.

"Given Equitable Life's particular circumstances, we think that a compromise scheme is a sensible way to seek to deal with the issue of potential mis-selling. So we will not require Equitable Life to take any further steps to resolve this issue whilst it is seeking to put in place an acceptable means of reaching compromise on the possible claims.

"If a scheme were not approved, we would be likely to require Equitable Life to carry out a review to establish whether or not there had been mis-selling and, if necessary, to rectify the problem. Policyholders would also have the right to take their claims to the Financial Ombudsman Service or to pursue them through the Courts. On the basis of the legal advice we obtained, we consider, on balance, that non-GAR policyholders would be unlikely to be better off were they to receive redress through the Court or elsewhere.

"The FSA has written to life insurance companies to draw their attention to the legal Opinions published today in relation to Equitable Life. The combination of circumstances that applied in the case of Equitable Life was unusual. The FSA does not believe it likely that examination of the issues raised in the Opinions will reveal any problems in the life insurance industry more generally. But it is important that life insurers should assess their own position in the light of these Opinions."

Notes for editors

1. The Opinion of Ian Glick QC and Richard Snowden is attached to the website version of this press release and is published today on the Financial Services Authoritys website at: http://www.fsa.gov.uk. It is published under section 206 of the Financial Services Act 1986, subsection (1) (c), which provides that the FSA may publish information or give advice in such form and manner as it thinks appropriate with respect to "anymatters about which it appears to [the FSA] to be desirable to publish information or to give advice for the protection of investors or any class of investors".

2. The FSAs letter to life insurers is attached to this press release on the FSAs website.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.