No help with claims: now policyholders who lost 25% will gain 5% compensation at most

Policyholders who joined Equitable Life when it already started its ill-fated court battle, and who complained to the Ombudsman of mis-selling after losing 25% of their capital, are unlikely to get normal redress.

The Financial Ombudsman Service has admitted that 2500 complaints from former Equitable policyholders, many of which have already been outstanding for 18 months, may not be dealt with before a proposed legal compromise deal is drawn up by Equitable Life and put to a vote.

Equitable is proposing to treat 70,000 former policyholders, who quit the society before this year's compromise agreement vote and therefore still have legal rights, as creditors who, by voting in favour of the settlement, could then apply for compensation of up to 5% of their withdrawn investments. Even then, they would be required to "prove that their policies were mis-sold" - at a time when the Equitable sales force was being instructed to reassure customers that the court case and possible GAR (guaranteed annuity) liabilities were a non-issue.

Equitable has set aside from £40m to £75m, or an average payment of £570 to £1070 per former customer, for the payout following an "independent" report by B&W Deloitte, which, coincidentally, is the preferred advisory firm in the event of the society going into administration.

The Equitable Late Joiners Action Group (ELJAG), which has 165 members including 80 who have complaints with the Ombudsman, has now warned that late joiners can expect no help from the Ombudsman. Instead, if three-quarters of the 70,000 former members vote in favour of a settlement, losses of 25% will be compensated by payment of at most 5%.

Paul Weir, secretary of ELJAG, said it now appeared that Equitable Life, the Financial Services Authority (FSA) and the Financial Ombudsman Service, who had discussed the B&W Deloitte report at all stages, were now acting together to ensure that "we don't get the kind of compensation we would normally get either through the courts or through the Ombudsman".

Weir said ELJAG had gone to court last year to object to the original compromise agreement. "First", he said, "we were told it wasn't the right place to go and the second time we were told it was too late."

He said: "The vast majority of complaints are from late joiners who, by definition, had capital taken away with the 16% reduction [in July 2001] and then had to pay a 10% MVA (market value adjuster or exit penalty) to get out to protect our legal rights."

The B&W Deloitte report, under guidance from the FSA, identifies whether the late joiners were "financially disadvantaged from the GAR problem". It then compares Equitable's bonuses with those of other insurers over the period. Although Equitable was unique in withdrawing all bonuses for seven months of 2000 and then cutting 16% off all policies in July 2001, the report finds that although payouts were lower than at other insurers, "the shortfall was subsequently reduced as other insurers began decreasing their own bonuses".

The report stresses that losses must not be due to "other factors such as falling stock market values".

At that time, Equitable was keen to stress that the 16% cut was due entirely to the stock market, which at the time, had fallen by only 6% and had impacted less on Equitable because it had a rapidly reducing exposure to equities.

The report does not recognise any loss from the 10% exit penalty, claiming that this would also have been faced at other insurers - ignoring the fact that Equitable Life holders had to exit in order to pursue a claim for mis-selling which the society is now effectively admitting is valid.

B&W Deloitte concludes that the loss suffered as a result of "GAR costs" not being disclosed is only 5% on pension policies and 4.5% on life policies.

A year ago, Equitable Life persuaded most of its existing policyholders who did not hold GAR policies to accept a deal offering them a 2.5% uplift in return for abandoning their rights to compensation.

Weir observed that Equitable's proposal had been sent out on Monday, and on Tuesday the Ombudsman had sent its 2400 complainants an update, which also mentioned the Equitable proposal.

Paul Cresswell at the Financial Ombudsman Service said it only dealt with Equitable complaints that would not set a precedent, and had selected "lead cases" from the others.

"One of the things we have been waiting for is in the information from B&W Deloitte," he said. "Now we will be able to see how that information helps us in looking at the different groups of complaints. We will carry on working closely with the FSA to see what is the most sensible way of getting as many complaints as possible resolved at the least possible cost."

On whether the Ombudsman would resolve any cases before a possible Equitable compromise proposal, Cresswell said: "A lot of people are saying that would be a better way to resolve the issue …. But in the meantime we will continue with our own procedures."