Whistleblowing about the Scottish Widows demutualization (Lloyds TSB)

WHISTLEBLOWING ABOUT THE SCOTTISH WIDOWS DEMUTUALIZATION

(Note that Scottish Widows is part of Lloyds TSB)

Website updated to 20 November 2007 (including full transcripts of interviews with Group Fraud & Security here and here and letter of dismissal)

There is a VERY BIG NUMBER at the bottom of this page - if you get that far.

This website is available via Google Directory > Society > Work > Whistleblowing

INDEX

Part 1 (this page) - Uncovering a scandal (Equitable Life, Lloyds TSB, Scottish Widows and the Financial Services Authority)

1. Introduction

2. Background - Equitable Life

3. What I was doing at the time of the Equitable Life case

4. The Scottish Widows Demutualization

5. The Penny doesn't drop

6. The Penny Drops

7. Implications for Scottish Widows

8. Wider implications

Part 2 - The turn of the screw (Reporting to management, suspension, investigation, dismissal)

Part 3 - A banner with a strange device (Follow-up actions)
Part 3 explains what I have done since I was dismissed to follow up:

the original whistleblowing matter;

the victimization by my management resulting from the whistleblowing;

the failure of Scottish Widows' auditors (PricewaterhouseCoopers) to qualify the 1998 accounts of that company on account of the whistleblowing matter.

1. Introduction (Top of page)

E-Mail to me dated 12 February 2007 from a member of EMAG (The Equitable Members Action Group):
'The FSA [Financial Services Authority] and the Treasury are of course determined to keep the general matter of GARs benefiting at the expense of non-GARs out of sight, and will fight like hell to avoid public scrutiny.'

Legal Notice

'The search for truth implies a duty. One must not conceal any part of what one has recognized to be true.' - Albert Einstein

'The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end there it is.' - Winston Churchill

'A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.' - ICAEW 'Additional Guidance on Ethical Matters for Members in Business', section 1

'The philosophy of the organisation [Lloyds TSB] has got to be reflected around treating people fairly, treating people equitably. We've got to deal with people with the utmost responsibility; with everybody whether it's members of staff, whether it's customers, whether it’s in the community, whether it's shareholders.' - Peter Ellwood, Chief Executive of Lloyds TSB (the one who refused to protect a whistleblower).

'this swamp of oily people on the make' - Simon Heffer, Daily Telegraph, 5 Dec 2007

Welcome

Welcome. My name is Graham Senior-Milne (formerly Milne). I am British, was born in 1955 and am a Chartered Accountant. I live in Northumberland, England. You can E-Mail me at graham@gmilne.demon.co.uk. First of all I would like to apologize for the length of this paper (although this part is only 6 pages of A4 and less than 2500 words, excluding notes) but it is necessary to name names and to state the facts, including dates, documents and brief details of applicable laws and regulations. Also of course I have to explain why I believe that the actions or opinions of certain people are wrong and one cannot do this with a few soundbites; it requires facts and reasoned arguments. I have tried to do this as succinctly as possible. I have written this paper as a story so, hopefully, you will find it quite interesting as you get into it. This paper describes a financial scandal but in essence it is very simple, as you will soon find out. Please do not be put off before you start. Courage, mes amis!

'Quis custodiet ipsos custodies?'*

This paper describes a financial scandal involving major financial institutions, regulators, civil servants, professional bodies, the police, politicians, prominent business leaders, lawyers and so on. Most of the people mentioned here were not party to the original scandal, they are those who have failed to act when they should have. Delay is their most powerful weapon and there appears to be a universal assumption that if they stonewall you long enough you will eventually go away. Bullies always assume that you will not take the next step. Almost without exception every person who you would have thought had a duty to do something about it has 'run a mile'. In short, when it came to the test they demonstrated what I can only call a despicable lack of moral fibre, if not, in some cases, downright dishonesty, as you will see. There is no conspiracy (naturally) amongst those who have failed to act, just cowardice which manifests itself as a willingness to ignore or bully the 'small guy'. I have been appalled at how widespread this conduct is amongst those whose duty it is to protect the public interest. 'Quis custodiet ipsos custodies?' indeed. Most of the (highly-paid) regulators, 'ombudsmen' and so on seem to think that their main function is to obstruct or ignore members of the public rather than to help them. The classic example of this is John McFall MP, Chairman of the Treasury Select Committee, who has successfully stonewalled me for over two years (see section 19).

*'Who shall guard the guardians themselves?'

Key points

Please bear in mind the following key points while reading this paper:

that I became a whistleblower on the basis of written advice from the Ethics Advisory Service of the Institute of Chartered Accountants in England & Wales (ICAEW);

that one month later I was suspended from my job on the basis of a series of allegations which were later found by Lloyds TSB's own investigation to be unsubstantiated, as confirmed in writing to my solicitors by the bank's own Legal Department;

that no disciplinary process was ever started against me but that I was sacked shortly after the end of the investigation (which took almost a year) in clear and blatant breach of the bank's own rules;

that those responsible have not been held to account by the bank in spite of the fact that the management of the bank, up to and including the Chairman and the Chairman of the Audit Committee, are fully aware of the facts;

that I am a Chartered Accountant with more than 20 years experience. I was recruited by Lloyds TSB in 1998 as an IT audit manager on account of my IT expertise. At a PDP (Personal Development Plan) meeting with my line manager on 2 August 2001 he said "You have forgotten more than I have ever learned." My Appraisal for 2000 stated that 'Graham has made a valuable contribution to the 2000 Audit Plan. His technical knowledge and E-Commerce experience has been of great benefit during the auditing of the development of the key online banking project.' I only include this here because character assassination is one of the first weapons used against whistleblowers (see section 27), so it is necessary to establish one's credibility.

that although I have notified Lloyds TSB, the ICAEW, ICAS and the IIA about this website not one of them has taken any action. Now, I am, for example, a member of the ICAEW and have publicly called the Investigation Committee of the ICAEW liars (and continue to do so). In anyone's book the ICAEW should have taken immediate disciplinary action against me and the fact that they haven't done so speaks volumes. Note also that I signed a compromise agreement (designed to prevent you from revealing information) with Lloyds TSB in early 2004 and yet they have taken no steps to enforce that agreement. One can understand the difficult position they are in (and, believe me, they are monitoring this website); the moment they take any action that will not only immediately draw attention to the issues raised here but will also lend credence to what I say (but the facts stand on their own merit as you will see), so they have little alternative but to ignore me.

2. Background - Equitable Life (Top of page)

Equitable Life was one of the biggest financial institutions in the UK. It closed its doors to new business in 2000 with liabilities of GBP*1.5 billion (about 3 billion US dollars). The liabilities that led to the collapse were caused by the sale (from 1956 onwards) of guaranteed annuity rate (GAR) policies, that is policies which gave the policyholder the right to purchase an annuity** at a fixed rate. From 1993 actual annuity rates fell below guaranteed annuity rates thus creating a financial 'black hole' of about GBP1.5 billion. Equitable Life attempted to address the problem by paying reduced terminal bonuses to GAR policyholders exercising their right to buy an annuity at the guaranteed rate. This led to the 'Equitable case' of 1999/2000 in which it was ruled by the House of Lords (the highest court in the UK) on 20 July 2000 that Equitable Life should meet their liabilities to their GAR policyholders in full. Of course, Equitable Life only had a finite pot of money*** so the effect of the ruling was to force one group of policyholders (the ordinary or non-GAR policyholders, who were the majority) to pay another group of policyholders (the GAR policyholders, who were a minority).

*GBP = UK pounds sterling

**An annuity is simply a regular income paid, usually monthly, to an individual from a lump sum investment, usually for the purposes of providing retirement income. In the UK you have to use a proportion of your pension fund 'pot' at retirement to purchase an annuity and this provides your retirement income. The ways these policies work is that the policyholder pays a regular (usually monthly) amount for a period of time (e.g. 25 years) and, at the end of that period, the sum accumulated is used to buy an annuity. The amount of the annuity (i.e. the amount of the regular payments) depends on the 'annuity rate' at the time of the purchase of the annuity, as well as other factors such as age, health and so on. Annuity rates fluctuate in relation to long-term interest rates. If you have purchased a guaranteed annuity rate policy then the company is contractually bound to buy your annuity at that rate regardless of the market annuity rates. In other words, if the market rates are unfavourable the company has to pay a bigger lump sum than has been accumulated in your 'pot' - and fund the difference from somewhere. Multiply this by, say, 100,000 people and you can begin to get an idea of the problem.

***This 'pot' was called the 'With-Profits Fund'.

Note: On 12 January 2006 the European Parliament announced the setting up of a Committee of Enquiry to look into 'alleged contraventions or maladministration in the implementation of Community law' (Article 193 of the EC Treaty) and also to 'assess allegations that UK regulators consistently failed to protect policy holders by rigorous supervision of accounting and provisioning practices and of the financial situation of Equitable Life'. The committee, which has now issued its report, was empowered to hold hearings and invite EC institutions or national governments to send representatives to testify at those hearings. It could also request national or EC authorities to provide any documents necessary to carry out its duties. I had hoped that it would use these powers to investigate the Financial Servies Authority's supervision of the Scottish Widows demutualisation, particularly given that the Committee's mandate required it to identify systematic weaknesses and allowed it to make ANY proposals it seemed necessary. Unfortunately, the Committee refused even to list my evidence (also sent to them by the European Commission) as 'evidence received'. See section 8 below and also section 30.

3. What I was doing at the time of the Equitable Life case (Top of page)

At the time of the Equitable case I was working as an IT auditor with Lloyds TSB in London, one of the big UK 'clearing banks' and one of the largest financial institutions in the world. I joined them in 1998 and was transferred to a similar job in Edinburgh with Scottish Widows in January 2002 following a heart attack in September 2001. Scottish Widows had been taken over by Lloyds TSB in March 2000. I had no involvement through my job with the Scottish Widows demutualization* but my mother did hold a Scottish Widows policy and she received, as far as I can remember, something in the region of GBP4,000 as a result of the demutualization.

*Scottish Widows was a 'mutual' organization, which simply means that it was owned by its policyholders. When the policyholders sold Scottish Widows to Lloyds TSB it ceased to be a mutual organization and became an ordinary public limited company - hence 'demutualization'.

4. The Scottish Widows Demutualization (Top of page)

The Scottish Widows demutualization of 2000 was effectively the sale of Scottish Widows by its owners (the policyholders) to Lloyds TSB. The purchase price was GBP6 billion, of which GBP4.5 billion was paid by Lloyds TSB to Scottish Widows policyholders and GBP1.5 billion (about 3 billion US dollars) was retained in a so-called 'Additional Account'. I think my understanding of the matter at the time was probably the same as that of other Scottish Widows policyholders; I did not understand why this GBP1.5 billion had been held back (there was no meaningful explanation in the documentation sent to policyholders) but my understanding was that it would be distributed to policyholders in some way after the demutualization (see page 2 and page 23 of the Demutualization and Transfer Policyholder Circular of 19 November 1999), presumably on the same basis (i.e. pro rata) as the GBP4.5 billion that was paid to policyholders. I suspect most people assumed that they (Lloyds TSB and Scottish Widows) 'knew what they were doing and it had all been approved by a Court anyway'.

5. The Penny doesn't drop (Top of page)

Since I look after my mother's financial affairs, I did receive the demutualization documents sent to Scottish Widows policyholders including the key document, the Demutualization and Transfer Policyholder Circular of 19 November 1999. Perhaps surprisingly (but as an IT specialist I am not an expert in this area), it did not occur to me that most, if not all, of the other life companies in the UK had been selling GAR policies in the same way as Equitable Life and, as a result, had similar, if not larger, GAR liabilities. It certainly did not occur to me that this was the case with Scottish Widows.

6. The Penny Drops (Top of page)

On 31 January 2002, shortly after I joined Scottish Widows in Edinburgh as an IT auditor, I was summoned to a meeting with the other staff of the Internal Audit Department. This meeting took place at the Scottish Widows headquarters in Morrison Street, Edinburgh. It was explained by the Head of Internal Audit that the meeting had been called to inform us that Lloyds TSB/Scottish Widows were about to issue a press release to the effect that the GBP1.5 billion in the 'Additional Account' was not now going to be paid to ordinary policyholders but would be used instead to uplift the benefits to GAR policyholders or words to that effect. I understand that the Internal Audit Department were informed of this because some of them had been involved in the demutualization.

7. Implications for Scottish Widows (Top of page)

It may sound dramatic but the implications of what had been said hit me like the proverbial brick as I came out of that meeting:

that Scottish Widows had sold GAR policies in the same way as Equitable Life (I believe that they had actually sold more than twice as many - 200,000 against 90,000);

that the directors of Lloyds TSB and Scottish Widows* must have known from the start of the demutualization process about the existence of a contingent liability (contingent on the outcome of the Equitable Life case) of GBP1.5 billion in respect of GAR policies;

that the sale of Scottish Widows to Lloyds TSB had been engineered as a way of dealing with this liability (You can picture the Board Meeting of Scottish Widows (September 1999 at the latest) - 'Do you realize that if the Equitable Life court case goes the wrong way, we will go down the tube? What are we going to do about it?');

that the GBP1.5 billion had been set aside specifically to meet this liability;

that the directors of Lloyds TSB and Scottish Widows had misled both the policyholders of Scottish Widows and the Court of Session (who approved the demutualization scheme under the Insurance Companies Act 1982) as to why this GBP1.5 billion was set aside - in rugby parlance they had sold the policyholders a dummy**;

that in misleading the policyholders and Court of Session the directors had committed a criminal offence under s.71 Insurance Companies Act 1982;***

that in not properly diclosing the matter in the accounts of Scottish Widows for the years ended 31 Dec 1998 and 31 Dec 1999 the directors of Scottish Widows had committed a criminal offence under s. 19 Theft Act 1968;****

that in not properly diclosing the matter in the accounts of Lloyds TSB for the years ended 31 Dec 1999, 31 Dec 2000 and 31 Dec 2001 the directors of Lloyds TSB had committed a criminal offence under s. 19 Theft Act 1968;*****

that because the Scottish Widows policyholders had not been properly informed of this matter they had a reasonable expectation that the GBP1.5 billion would be paid to them and had approved the demutualization on this basis;

that the Scottish Widows policyholders had therefore been effectively (i.e. actually) defrauded of GBP1.5 billion;

that Lloyds TSB, Scottish Widows and the directors of Lloyds TSB and Scottish Widows were liable to a civil action in damages.

Notes on section 7:
*The directors of Scottish Widows were:

Lawrence M Urquhart LLB, CA (Chairman)
Gavin J N Gemmell CBE CA (Deputy Chairman)
Richard H Davey BA
Orie L Dudley Jr BA
G Ronald G Graham CBE, LLB
Angela A Knight BSc
Alistair J Low FFA
William H Main CA
Dr Chris Masters BSc, PhD, AKC
Michael D Ross, FFA, CIMgt
Newton Scott
Charles G Thomson BSc, FFA
Rosalyn S Wilton BSc, FFA

The directors of Lloyds TSB listed in the 1999 accounts were:

Sir Brian Pitman (Chairman)
Sir Nicholas Goodison (Deputy Chairman until 11 April 2000)
Alan Moore CBE (Deputy Chairman from 11 April 2000)
Peter B Ellwood (Group Chief Executive)
Michael E Fairey (Deputy Group Chief Executive)
Michael D Ross (Deputy Group Chief Executive from 3 March 2000)
M Kent Atkinson
Dennis Holt
Archie G Kane
David P Pritchard
Ewan Brown CBE (Non-executive)
A Clive Butler (Non-executive)
Sheila M Forbes (Non-executive)
Christopher S Gibson-Smith (Non-executive)
L E (Paddy) Linaker (Non-executive)
Thomas F W McKillop (Non-executive) (from 1 May 2000)
Peter C Nicholson (Non-executive) (until 11 April 2000)
Dame Bridget Ogilvie DBE (Non-executive) (until 11 April 2000)
The Earl of Selborne KBE (Non-executive)
Lawrence M Urquhart LLB, CA (from 3 March 2000)

The directors of Lloyds TSB listed in the 2000 accounts were:

Sir Brian Pitman (Chairman until 18 April 2001)
Maarten van den Bergh (Chairman from 18 April 2001)
Alan Moore CBE (Deputy Chairman from 11 April 2000)
Peter B Ellwood (Group Chief Executive)
Michael E Fairey (Deputy Group Chief Executive)
Michael D Ross (Deputy Group Chief Executive from 3 March 2000)
M Kent Atkinson
Dennis Holt
Archie G Kane
David P Pritchard
Ewan Brown CBE (Non-executive)
A Clive Butler (Non-executive)
Sheila M Forbes (Non-executive)
Christopher S Gibson-Smith (Non-executive)
L E (Paddy) Linaker (Non-executive) (until 18 April 2001)
Thomas F W McKillop (Non-executive) (from 1 May 2000)
The Earl of Selborne KBE (Non-executive)
Lawrence M Urquhart LLB, CA (from 3 March 2000)

The directors of Lloyds TSB listed in the 2001 accounts were:

Maarten van den Bergh (Chairman from 18 April 2001)
Alan Moore CBE (Deputy Chairman)
Peter B Ellwood (Group Chief Executive)
Michael E Fairey (Deputy Group Chief Executive)
Michael D Ross (Deputy Group Chief Executive)
M Kent Atkinson
J Eric Daniels (joined 2001)
Archie G Kane
David P Pritchard
Ewan Brown CBE (Non-executive)
A Clive Butler (Non-executive)
Sheila M Forbes (Non-executive)
Christopher S Gibson-Smith (Non-executive)
DeAnne S Julius CBE (Non-executive) (joined 2001)
Thomas F W McKillop (Non-executive)
The Earl of Selborne KBE (Non-executive)
Lawrence M Urquhart LLB, CA (until 17 April 2002)

**The Demutualization and Transfer Policyholder Circular was dated 19 November 1999. The Special General Meeting to approve the demutualization was held on 22 December 1999, one month later. Court approval was obtained on 28 February 2000 and the demutualization (sale of Scottish Widows to Lloyds TSB) took effect on 3 March 2000. There does seem to have been an unseemly haste to complete this process. There is of course no suggestion that this process was driven by the Equitable Life case then before the Court of Appeal, which ruled on 22 January 2000 that Equitable Life had to meet its GAR liabilities in full, which decision was upheld on appeal to the House of Lords on 20 July 2000 (the originating summons in the Equitable Case was issued on 15 January 1999; the High Court found in favour of Equitable Life on 9 September 1999 and appeal was then made to the Court of Appeal). In any event, the directors of Lloyds TSB and Scottish Widows knew full well, before 19 November 1999, of the potentially critical consequence of such a ruling in the Equitable case (i.e. that the ordinary policyholders would be GBP1.5 billion worse off) but did not mention this in the circular.

Note that England and Scotland have different judicial systems. Scottish Widows is a Scottish company and the highest court in Scotland is the Court of Session. Appeals from the Court of Session are to the House of Lords (in England). In England, civil proceedings are normally started in the County Court or the High Court. Appeals from the High Court are to the Court of Appeal and from the Court of Appeal to the House of Lords. The Equitable Life case followed this latter route.

Note also that the decision of the Court of Appeal in the Equitable Life case was made on 22 January 2000 yet the Scottish Widows demutualisation scheme approved by the Court of Session ('The Scheme') on 28 February 2000 makes no mention of the impact of this decision (i.e. that the ordinary policyholders would be GBP1.5 billion worse off). This is absolutely critical because it means that the contingent liability had crystallised (become an actual liability), according to the ruling of the Court of Appeal in the Equitable Life case, and subject only to an appeal to the House of Lords in that case, BEFORE THE COURT OF SESSION APPROVED THE SCOTTISH WIDOWS DEMUTUALISATION SCHEME. (If you read section 19 of the demutualisation scheme concerning the operation of the 'Additional Account' you will understand why the judges of the Court of Session were probably completely out of their depth, not that this was intentional on the part of Scottish Widows of course.)

***THE INSURANCE COMPANIES ACT 1982

The 'Scheme' document dated 11 November 1999 was put before the Court of Session in Edinburgh under section 49 of the Insurance Companies Act 1982. Section 49(2) of the Act states that the Court will not approve an application under section 49 unless, inter alia, the requirements of section 49(3) are met. The requirements of section 49(3) include a requirement that a statement setting out the terms of the scheme should be sent to all policyholders (this was done via the policyholders circular dated 19 November 1999 referred to above). Section 71 provides that any person who causes or permits to be included in any statement sent out under section 49(3) a statement which he knows to be false in a material particular or recklessly causes or permits to be so included any statement which is false in a material particular shall be guilty of an offence and liable to imprisonment for a term not exceeding two years or a fine or both (section 49 - image 1, image 2, image 3; section 71 - image 1, image 2, image 3).

'Material false statement'

The pertinent question here is what constitutes a 'material false statement'. In the first place no-one I think would question that GBP1.5 billion is 'material', so that just leaves the question of whether what was or was not said in the policyholder circular of 19 November 1999 was 'false'. A statement is clearly false if it says something that is untrue but a statement is also false where it omits to say something and that omission leads the reader to a false understanding, particularly where this involves an understanding of the consequences of an important proposal. Truth is more than the absence of lies. Note, in this context, that clause 17(1) of the Law Commission's Draft Criminal Code states that 'a person causes a result... when... (b) he omits to do an act which might prevent its occurrence and which he is under a duty to do according to the law relating to the offence'. It is my view that this was the situation in relation to the statement or statements made in the policyholder circular dated 19 November 1999. This document says (page 23) that the GBP1.5 billion balance on the Additional Account will be paid out as terminal bonus on with-profits policies to the extent not needed to meet contingencies allocated to the with-profits fund. These contingencies include 'any additional cost of meeting guaranteed benefits'. What is not mentioned is the fact that Scottish Widows had at that time a contingent liability of GBP1.5 billion in respect of GAR policies, that there was a court case (the Equitable Life case) then before the Court of Appeal and that if the decision in that court case went against Equitable Life (as actually happened 2 months later in January 2000) then the balance on the Additional Account would NOT be available to ordinary policyholders as terminal bonus but would be required to meet the GAR liabilities.

Financial Reporting Standard 12

The question is, of course, whether the statement on page 23 does actually make clear, in accordance with relevant accounting standards (FRS 12), the nature and extent of the contingent liability and the director's assessment as to the likelihood that the contingency would crystallize; in other words, having read the statement would a policyholder understand:

that Scottish Widows had a contingent liability of GBP1.5 billion in respect of GAR policies at that time?

that if the Equitable Life case, then before the Court of Appeal, went against Equitable Life then the GBP1.5 billion put aside by Scottish Widows in the 'Additional Account' would not be paid to ordinary policyholders as stated on page 23 of the Demutualization and Transfer Policyholder Circular of 19 November 1999 but would be paid to GAR policyholders instead?

what the assessment of the directors of Scottish Widows was as to the likelihood of the liability crystallizing?

The answer to these questions is, of course, a resounding 'No'. The wording on page 23 ('any additional cost of meeting guaranteed benefits') falls so far short of adequate disclosure that it amounts to positive concealment - in other words a material false statement.

Note that FRS 12 applies to financial statements, that is sets of accounts. Nonetheless, financial statements are designed to present a true and fair view and it therefore follows that any financial-type document which is supposed to present a true and fair view should comply with Financial Reporting Standards (FRS). It is for those who seek not to comply with FRS who need to justify their position. FRS 12 is therefore the 'yardstick' by which the adequacy of the disclosure of the contingent liability in respect of GAR policies should be judged.

The point here is that we all know that hardly any policyholders will have read the full policyholder circular and that it would be unreasonable to have expected them do so. Many were elderly people with no understanding of the life industry. Are they really going to read actuarial reports and all that muck? They will have read the first couple of pages at most, perhaps the summary and, more importantly, the section titled 'How much will I receive?' (which just happens to be immediately below, in large letters, the bit about the Additional Account - drawing the attention away). Of course, the directors of Scottish Widows were perfectly well aware of this fact and it was therefore incumbent on them to make sure that important matters were put in an obvious place and were not buried in the middle of the document. One way to ensure that things are as confusing as possible is to keep referring to other parts of the document, so that the reader loses their way i.e. on page 2 it says 'See page 23', then on page 23 it says 'see below', then when you look below it says 'see above' (referring to a different above which, given the columnar layout of the page, is actually left and below). Helpful is it not? But all technically legal of course. The simple fact of the matter is that had the directors wished to make sure that the policyholders read about and understood the GAR issue, they could have done so very easily by including a few sentences in the summary (we are, after all, talking about GBP1.5 billion). Would that really have been too much in a 100 page document? I don't think so.

Permitting the inclusion of a material false statement

A specific consideration here is that section 71 of the Insurance Companies Act 1982 provides that any person who causes or permits to be included in any statement sent out under section 49(3) a statement which he knows to be false in a material particular or recklessly causes or permits to be so included any statement which is false in a material respect shall be guilty of an offence and liable to imprisonment for a term not exceeding two years or a fine or both. Now, if the FSA were aware that Scottish Widows had a contingent liability of GBP1.5 billion at the time of the demutualization and they allowed (permitted) Scottish Widows to issue a policyholder circular (the one dated 19 November 1999) which failed to properly disclose this fact then, it seems to me, that they (the FSA and possibly the individuals concerned) committed a criminal offence. Now the FSA must have been aware of the existence of the contingent liability in respect of GAR policies and must have had sight of the policyholder circular of 19 November 1999 before it was issued.

****THE THEFT ACT 1968

(Note also s.17 Theft Act 1968 relating to false accounting)

Section 19 Theft Act 1968 states that: 'Where an officer of a body corporate or unincorporated association (or person purporting to act as such), with intent to deceive members or creditors of the body corporate or association about its affairs, publishes or concurs in publishing a written statement or account which to his knowledge is or may be misleading, false or deceptive in a material particular, he shall on conviction on indictment be liable to imprisonment for a term not exceeding seven years.'

Note that s. 19 covers those who 'concur' in publishing such written statements or accounts and so it could apply to officers who do not directly 'approve' documents.

Scottish Widows - 1998 Accounts (for the year ended 31 Dec 1998)

As at 31 Dec 1998 Scottish Widows had a potential liability of GBP1.5 billion in respect of GAR liabilities. The Equitable Life case started with an originating summons in the High Court on 15 January 1999, before the Scottish Widows accounts were signed off on 2 Mar 1999. The commencement of that case gave rise to a contingent liability for Scottish Widows (contingent on the outcome of the Equitable Life case) which was a material post balance sheet event. The only circumstance where disclosure of such a matter is not required is where the likelihood of the contingency crystallising is considered to be remote (that is something significantly beyond unlikely). If the directors of Equitable Life had considered the likelihood of the GAR liability crystallising to be remote, then it is logical that they would not have taken the matter to court; so the fact that they did take the matter to court is firm proof that they considered it to be more than a remote likelihood that the liability would crystallise - and if the directors of Equitable Life believed that, what reason would the directors of Scottish Widows have for coming to a different conclusion?

Scottish Widows - 1999 Accounts (for the year ended 31 Dec 1999)

The 1999 accounts were signed off on 16 Feb 2000, after the ruling of the Court of Appeal in the Equitable Life case on 22 Jan 2000. While that ruling was subject to appeal to the House of Lords, the fundamental accounting principle of prudence would require that the GBP1.5 billion GAR liability should have been provided for in the accounts (i.e. where the second highest court in the land has stated that a liability exists, it is prudent to provide for that liability), failing which, and as an absolute minimum, the GAR liability should have been disclosed as a contingent liability (contingent on the House of Lords ruling). Neither of these things were done and the omission must have been a conscious one on the part of the directors.

Lloyds TSB - 1999 Accounts (for the year ended 31 Dec 1999)

The acquisition of Scottish Widows by Lloyds TSB took place on 3 Mar 2000, after the the ruling of the Court of Appeal in the Equitable Life case on 22 Jan 2000. The accounts were signed off on 10 Feb 2000. The acquisition of Scottish Widows was a material post balance sheet event for Lloyds TSB and the ruling of the Court of Appeal was also a material post balance sheet event, not only in the context of the Scottish Widows accounts but also in the context of the accounts of the Lloyds TSB group. On this basis the GAR liability should have been disclosed in the 1999 accounts of Lloyds TSB, either as a provision or as a contingent liability (see preceding section). Pro-forma consolidated results for the combined group (Lloyds TSB and Scottish Widows) for 1998 and 1999 were presented as part of the financial review but the GAR liability was not disclosed either there or in the accounts proper.

Lloyds TSB - 2000 Accounts (for the year ended 31 Dec 2000) and 2001 Accounts (for the year ended 31 Dec 2001)

By 31 Dec 2000 Scottish Widows was part of the Lloyds TSB group. Also, the House of Lords had ruled in the Equitable Life case on 20 July 2000, so the GBP1.5 billion GAR liability was undeniably an actual liability from that date and should therefore have been provided for and disclosed as a provision for the GAR liability in the 2000 accounts. As it was, the GBP1.5 billion was sitting in the 'Additional Account', which the Scottish Widows policyholders had reasonable grounds for believing would be paid to them over time as terminal bonuses, because this was what they had been told in the policyholder circular of 19 November 1999 and because the existence of the GBP 1.5 billion GAR liability had not been disclosed to them in ANY set of accounts of either Lloyds TSB or Scottish Widows as detailed above. The truth of the matter was not 'slipped out' (as a 'change in practice' - which the media fell for, by the way) until the press release of 31 Jan 2002. This press release was clearly issued because of the imminent signing of the 2001 accounts (which happened on 14 Feb 2002) where this 'change in practice' was revealed. Note that the 2001 accounts refer to 'an extensive review of current practices' but it was, of course, nothing of the sort because Lloyds TSB were obliged to meet their GAR liabilities in full as a result of a ruling by the House of Lords; it has nothing to do with 'practices' because they had no choice in the matter. To this extent the 2001 accounts were also misleading and the reference to an 'extensive review' was simply designed to provide some sort of excuse/explanation as to why the matter had not been dealt with sooner.

Excuses, excuses

According to a BBC news report of 31 Jan 2002 in response to the press release: 'It has taken 18 months for Scottish Widows to make the changes - and the company defended the delay. It said the Equitable ruling was "complex" and only parts were relevant to Scottish Widows' policyholders. Mr Naismith said: "We have got a lot of policies going back 30 years and had to look back and see how it applied. We then had to consult the FSA, and Inland Revenue and make computer system changes." "We wanted to get it all sorted before making any announcements," he said.'

Note:

The GAR problem was coming to a head well before 1998. Scottish Widows had public notice of the problem in Jan 1999. It took them 3 years (so they claim) to work out the monetary impact of the GAR problem. Sure! All they had to do was to calculate the liability on the basis that they would need to pay their GAR liabilities in full, which was the outcome, thus giving them the worst case scenario. In any event, they would be required to know this sort of information for regulatory monitoring purposes and, in fact, the FSA had been chasing all the life companies on a regular basis in order to monitor their potential exposure to GAR liabilities.

The House of Lords ruling was not complex. In essence it was quite simple i.e. 'Pay up in full'.

The reporting requirements for company accounts quite simply do not allow companies to delay revealing information in their accounts on the basis that 'we had to make computer changes' or similar excuses. Where a liability or a contingent liability cannot be quantified precisley (and remember Scottish Widows 'happened' to put just the right amount into the 'Additional Account' in 2000), the directors are required to make the best estimate they can and explain the basis of estimation in the accounts. It is for the auditors to decide whether they accept the estimate and the basis on which it has been made. If they don't agree with the estimate and the amount is material then they should qualify their audit report. Simple.

Looking at the above, you can see that 5 sets of accounts covering a period of 4 years had to be fiddled in order to conceal the GBP1.5 billion GAR problem. This must be the largest sustained 'cooking of the books' in the history of financial reporting in the UK. What were the auditors (PricewaterhouseCoopers), who audited both companies, doing during this period? Keeping their fingers crossed perhaps?

8. Wider implications (Top of page)

In addition, there was an implication, though I did not raise this with my management (see section 9):

that most, if not all, of the other life companies in the UK had also sold GAR policies in the same way as Equitable Life and had similar, and in some cases larger, GAR liabilities than Equitable Life (this is exactly what had happened);

that the FSA must have been aware of this (there is no question that this was the case);

that the FSA had not only failed to take any proper steps to ensure that the public were properly informed of this matter (thereby preventing policyholders from taking any steps to mitigate their potential losses had they wished to take such steps) but may actually have acted as 'dishonest broker' in the Scottish Widows demutualization and may also have performed a similar role in the case of other life companies;

that, as a result, millions of policyholders of UK life companies have been effectively forced to pay for the GAR liabilities of those companies (which they, the policyholders, were not responsible for) amounting to tens of billions of pounds* WITHOUT THEIR KNOWLEDGE OR CONSENT.

that in some cases (at least) these losses may ('may' he says!) have been masked by the life companies attributing diminished policy values (more than half in some cases) to stock market fluctuations and, in particular, to the crash between 2000 and 2002. The refusal of the life companies to provide full and proper information to their own policyholders in this regard is particularly scandalous, but under current legislation they can - and do - refuse to disclose information with impunity. e.g. 'It has been a difficult time for many investors over the past 5 years. We experienced a dramatic fall in the stockmarket (FTSE 100) between 2000 and 2002 and have only seen positive returns over the past two years' (Letter of October 2005 from life company 'explaining' fallen policy values). What this letter does not explain is why policy values have not subsequently recovered in parallel with the stock market; in other words the stock market has 'bounced back' (see the graph below) but policy values appear to have been permanently diminished. Note also the article in the Daily Telegraph business news on 19 April 2006 ('Standard Life - it's time to take the money and stay'), which states 'Anyone with the good fortune to have taken out a 25-year endowment policy with a GBP50 a month premium in 1975 will have received a payout of GBP110,000 in 2000, but if you started six years later you are due to pick up just GBP41,000 this year. When you consider that the stock market is only 13pc below its 2000 peak, that is a breathtakingly poor performance.' Well, it's not exactly 'poor peformance' as such...

I am not aware that the accounts of any life company have been qualified as a result of GAR liabilities. Well done, the auditing profession!

This article in the Scotsman may be of interest.

*The only actual estimate of the total GAR liabilities of the life companies that I have seen was mentioned in The Daily Telegraph on 21 July 2000 (the day after the House of Lords ruling in the Equitable Case) which put the figure at GBP14 BILLION (about USD28 BILLION). Note that although there was speculation in the press about the possible extent of the GAR problem, this is a very different thing from the FSA, as the regulator whose duty it is to protect consumer interests, taking steps to ensure that the policyholders of individual companies were informed of the true situation of those companies with respect to GAR liabilities. In short, if the regulator (the FSA) will not reveal the true situation and the life insurance companies themselves will not reveal the true situation (and the policyholders have no legal right to obtain the necessary information from the companies), how is the ordinary policyholder supposed to find out the facts?
Other relevant articles in The Daily Telegraph are here and here.

FTSE 100 between January 2001 and March 2006

Next - Part 2 - Reporting to management, suspension, investigation, dismissal

Part 1 (this page) - Uncovering a scandal (Equitable Life, Lloyds TSB, Scottish Widows and the Financial Services Authority)

1.	Introduction
2.	Background - Equitable Life
3.	What I was doing at the time of the Equitable Life case
4.	The Scottish Widows Demutualization
5.	The Penny doesn't drop
6.	The Penny Drops
7.	Implications for Scottish Widows
8.	Wider implications

Part 2 - The turn of the screw (Reporting to management, suspension, investigation, dismissal)

Part 3 - A banner with a strange device (Follow-up actions) Part 3 explains what I have done since I was dismissed to follow up: the original whistleblowing matter; the victimization by my management resulting from the whistleblowing; the failure of Scottish Widows' auditors (PricewaterhouseCoopers) to qualify the 1998 accounts of that company on account of the whistleblowing matter.