4 July '03 - LETTERS TO THE EDITOR: Ombudsman was too kind to FSA By Alex Henney in the Financial Times

Sir, Your editorial "In-Equitable Life" (July 2) was very kind to the parliamentary ombudsman's lightweight report on Equitable Life, which was little more than a get-out-of-jail card for the Financial Services Authority and looks like part of a Treasury whitewash.

The crux of the case Ann Abraham was investigating related to a policyholder's reasonable expectations, which the FSA was supposed to protect. If the FSA had taken the trouble to understand Equitable's financial situation in 2000 beyond its regulatory solvency, it would have known that Equitable had been over-bonusing for a decade. For this reason, and because policies with guaranteed annuity options could be topped up, there was no way Equitable could meet new policyholders' "reasonable expectations"; nor was it sellable. The FSA should have been able to work this out, and to have closed it following the House of Lords decision on July 20 2000. Although the Equitable Members Action Group provided Ms Abrahams with the evidence on the over-bonusing, she did not mention it. Perhaps she was not able to understand its significance.

In a comment revealing of her own casual judgment and damning of the FSA, she observed: "It is quite clear from my investigation that the [FSA] took the firm view that it was not reasonable to allow Equitable to continue trading, but then to require them to disclose to potential policyholders that there were concerns about the company's solvency, such that Equitable should not be viewed as a good investment". The statement shows that the FSA was not fulfilling its duty to new policyholders, nor to existing policyholders without guaranteed options who were making additional contributions. It also reveals the inherent conflict between prudential regulation and conduct of business regulation, which should be the responsibility of a separate body. The ombudsman was not able to work this out either.

Surely investors in an organisation regulated by the British government, who they pay for the regulation, have a right to expect something better than the shambles of Equitable Life. Contrary to the ombudsman's claim that the legislation envisaged light-touch regulation, the 1982 Insurance Companies Act (under which the FSA operated until December 1 2001) provided the government with draconian powers. But what it did not do was to provide it with any obligations to investors. For that we have to appeal to European legislation.

Alex Henney, Chairman, Equitable Members Action Group