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113/01 17 October 2001 GOVERNMENT RESPONSE TO FSA REPORT ON THE REGULATION OF EQUITABLE LIFEReport of the Financial Services Authority The report of the FSA internal review of the regulation of Equitable Life was today presented to Parliament by Ruth Kelly, Economic Secretary to the Treasury. In response to the report Ruth Kelly has today written to Sir Howard Davies, Chairman of the FSA. In her letter she said:
She added:
She continued:
The report will be an important source of evidence to the independent inquiry being undertaken by Lord Penrose. Ruth Kelly has therefore also sent the report to him. In her covering letter to Lord Penrose, Ruth Kelly said:
But she continued:
The Government will, of course, provide Lord Penrose with any further evidence which he requires.
Notes for Editors1. The full texts of the letters to Sir Howard Davies and to Lord Penrose are attached to this press notice. 2. The FSA report has been published as a House of Commons paper after having been presented to the House by the Treasury on a return to a motion of the House. Copies are available from The Stationery Office. 3. The FSA report into Equitable Life was commissioned in December 2000 by the FSA Board from its director of internal audit, Mr Ronnie Baird, who has compiled it with the help of independent accountants and lawyers. It examines the FSA’s role in regulating Equitable Life from the beginning of 1999 to December 2000 when Equitable closed to new business. As such it is not intended to be a full picture of events. Mr Baird and his team had no access to documents held by Equitable Life or its advisers. Nor were they able to conduct interviews with any of the present or past Board members, staff or professional advisers of Equitable Life. As such they were not able to examine events as they unfolded from the perspective of Equitable Life itself. 4. The report contains a number of recommendations addressed to the FSA aimed at rectifying the deficiencies in regulation identified in the report. Ruth Kelly’s letter to Sir Howard Davies asks for an urgent report setting out the action which the FSA is taking to correct these problems. 5. Lord Penrose’s independent inquiry into Equitable Life was announced by the Treasury on 31 August. This Inquiry, of course, has a much more wide ranging remit than was possible for the FSA study. In particular Lord Penrose will be able to look carefully into the actions of Equitable over the years, going back well before the period covered by the FSA study – which only covers two years of an issue which began over 40 years ago when the Equitable began selling policies containing a guarantees annuity option. In addition, he will be free to look in detail at the actions, not only of the FSA, but of other key players as well, including the Equitable itself. 6. The full terms of reference for Lord Penrose’s Inquiry are:
7. Lord Penrose has not been set a deadline for completing his report. It is not expected before the second half of next year.
8. Press enquiries concerning the report and concerning Lord Penrose’s Inquiry should be directed to Simon Moyse in the Treasury Press Office, Tel. 0207 270 4420. This release is available on-line at www.hm-treasury.gov.uk.
Letter to Sir Howard DaviesSir
Howard Davies October 2001 EQUITABLE LIFEThank you for sending me the report by the FSA’s Director of Internal Audit, into the discharge by the FSA and Personal Investment Authority between January 1999 and December 2000 of their regulatory functions in relation to the Equitable Life. In line with its terms of reference, the report analyses conduct of business and prudential supervision over this short period. This is a helpful contribution to understanding aspects of the Equitable story. By its very nature the report deals with only two years out of a story that covers more than 40 years in total. It could not, as it acknowledges, deal with the actions of other key players; in particular, it could not look at the internal decision-making and actions of the most important of all, namely Equitable Life itself over the decades. The report is therefore a significant but necessarily limited part of a much larger picture of events relating to Equitable Life. I have therefore decided to send a copy of the report to Lord Penrose as evidence to his Enquiry into the circumstances leading to the current situation at Equitable Life. I am as envisaged presenting the report to Parliament. By virtue of its wide ranging remit, Lord Penrose’s Inquiry will be able to look back as far as necessary to the origin and development of the problems and in detail at the actions of the Society and all of the other key players. While Lord Penrose cannot be bound by either the analysis or the conclusions and recommendations of the FSA report, I understand he expects it to be an important piece of evidence to his independent Inquiry. The FSA report makes a number of recommendations about the regulation of life insurance, in particular its call for improved solvency and disclosure standards. Some of these recommendations will necessarily involve consultation with the industry, and I am anxious that the FSA should take this forward as a matter of urgency. The conclusions of this consultation will of course need to be considered alongside the recommendations of the Penrose enquiry, but I hope that the FSA can start this work immediately. The report also makes a number of important recommendations on strengthening the ‘regulatory approach’ – the FSA’s culture, processes and tools – to ensure that it achieves the “role, style and approach” envisaged for the FSA as a single, integrated regulator. In summary, it argues that the FSA should be prepared to take a more proactive approach to regulating the long term insurance industry, to ensure that the interests of customers are properly protected; take action to improve internal communication and co-ordination, especially to integrate conduct of business regulation and prudential supervision; and improve its use of risk assessment techniques. These are core proposals, and essential if we are to achieve the full benefits of the integrated risk-based approach envisaged when the FSA was originally established. Given their importance, I would very much welcome, by 20th November, a full report from the FSA Board covering the action you have taken, and intend to take, to implement the recommendations on the regulatory approach. RUTH KELLY
Letter to Lord PenroseRt Hon Lord
Penrose October 2001 I enclose as evidence to your Inquiry the report of the review conducted by the FSA’s Director of Internal Audit, into the discharge by the FSA and Personal Investment Authority of their regulatory functions in relation to Equitable Life in the period from January 1999 to December 2000. The report is being presented to Parliament. In line with its terms of reference, the report analyses conduct of business and prudential supervision over this period. This is a helpful contribution to understanding aspects of the Equitable story. I am sure that the report will prove to be a valuable input to your Inquiry. By its very nature the report deals with only two years out of a story that covers more than 40 years in total. It could not, as it acknowledges, deal with the actions of other key players; in particular, it could not look at the internal decision-making and actions of the most important of all, namely Equitable Life itself over the decades. The report is therefore a significant but necessarily limited part of a much larger picture of events relating to Equitable Life. By virtue of its wide ranging remit, your Inquiry will be able to look back as far as necessary to the origin and development of the problems and in detail at the actions of the Society and all of the other key players. The FSA report makes a number of recommendations about the regulation of life insurance, in particular its call for improved solvency and disclosure standards. Some of these recommendations will necessarily involve consultation with the industry, and I am anxious that the FSA should take this forward as a matter of urgency. The conclusions of this consultation will of course need to be considered alongside the recommendations of the your Inquiry, but I hope that the FSA can start this work immediately. The report also makes a number of recommendations on strengthening the ‘regulatory approach’ – the FSA’s culture, processes and tools – to ensure that it achieves the “role, style and approach” envisaged. I believe that implementation of these recommendations is crucial to the delivery of the full potential benefits of an integrated, risk based regulator and to the objectives underlying the creation of the FSA. I have therefore asked the FSA to provide a report by the 20th November, prior to the time at which it adopts its full powers, covering the actions they have taken, or plan to take, to implement these recommendations. While I expect this report to be an important contribution to your Inquiry, I would like to take this opportunity to make clear that you cannot, of course, be bound by the report or its recommendations. I know that you will wish to form your own views on the basis of all the evidence you gather. RUTH KELLY
Letter from Lord PenroseRuth
Kelly MP EQUITABLE
LIFE INQUIRY
2. As you rightly observe, it
covers a relatively short period and is narrower in its focus
than the Inquiry I have been asked to undertake. In particular,
my Inquiry will have to look more deeply than the review team
have been able to at the activities of the Society, its directors
and managers in relation to the classes of business that are
of primary interest. This difference of focus is bound to
be reflected in the conclusions I shall reach.
3. Nevertheless, the narrative
of the evidence collected by the review team, and the comments
made in the report, provide a valuable insight into the culture
and workings of the regulatory authorities over that period.
The report will help focus lines of enquiry extending over
the longer period I shall have to address, even though it
cannot, of course, confine the scope of my Inquiry.
4. As far as the review team’s
recommendations are concerned, you will appreciate that I
cannot comment at this stage on the extent to which the Inquiry
might come to agree with, or differ from, the Baird report.
The Inquiry will clearly need to arrive at its own conclusions
in relation to the issues addressed in the report. That said,
I have no reason to suppose that the review team’s recommendations
are likely to interfere with or frustrate the conduct of the
Inquiry’s work in any way. Indeed, it is my view that, on
the contrary, the recommendations will provide some points
of reference that will be of some value to the Inquiry. With
that in mind, it is most useful to the Inquiry that the report
has been presented to Parliament and will therefore be in
the public domain.
5. I look forward to the co-operation
of the FSA in ensuring that the further work that they are
undertaking to take forward the recommendations feeds into
the work of my Inquiry in an appropriate way.
The Rt Hon Lord Penrose
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