FSA chairman: looking into the regulation of with-profits funds

During the hearing, Sir Howard Davies, chairman of the FSA, confirmed that the watchdog would be looking into the regulation of with-profits funds at other life companies.

In particular, the City regulator would study the terms and transparency of those policies and the payment of bonuses.

Sir Howard also defended the regulator's role in the affair, saying it had taken "reasonable" measures to protect Equitable policyholders.

The FSA is conducting its own investigation of the affair.

Sir Howard declined to discuss whether there would be a case for compensation if the FSA was found to have committed a regulatory lapse.

He appeared at the hearing with his arm in a bandage, but quipped that his injury was not a "plea for sympathy".

Under fire

The gloves had already come off earlier when MPs questioned Equitable about its bonus policy in the 1980s, its failure to build adequate reserves and its current state of solvency.

When asked whether Equitable could go bust, Equitable's Mr Headdon said there was a "remote possibility" if gilt yields declined and equities also fell.

If you're asking me 'did we miscalculate the outcome of the House of Lords case?' Yes.

Sir Howard Davies FSA

The company was also criticised for distributing its "orphan" assets in the form of discretionary bonuses to policyholders, rather than using the money to build reserves.

One committee member remarked that "you wouldn't be here this morning" if the company had been able to use reserves to cover the expense of guaranteed annuity policies.

The House of Lords ruling

Throughout the proceedings, it was clear that Equitable is still smarting from the House of Lords decision that precipitated its fall from grace.

Equitable was forced to put itself up for sale last July after the House of Lords ruled in favour of policyholders with guaranteed annuity rates.

Peter Martin, vice chairman, said at the hearing, "the reasoning of the House of Lords is very difficult to follow".

The FSA's Sir Howard seemed to endorse Equitable's view.

When asked whether he felt the ruling had been "perverse", he replied, "I wouldn't say that" but added that the Lords had overturned a fundamental principle of dealing with guaranteed policies.

He also added, "If you're asking me 'did we miscalculate the outcome of the House of Lords case?' Yes."

The Equitable affair

Equitable's difficulties began when its policyholders took it to court because the insurer could no longer afford to pay the bonuses to policyholders it had once promised.

The House of Lords ruling left Equitable with liabilities of at least �1.5bn, although the society was criticised for stating in its 2000 annual report that it only faced a bill of �50m.

The insurer is now selling some of its assets to the UK bank, Halifax.

During the hearing, Sir Howard described Equitable's difficulties as the combination of unique circumstances - being a mutual society, selling too many policies and not building up enough reserves.

Because of this, he said it was not a problem that would be "repeated elsewhere".

Mr Sclater, who expressed "deep regret" at the whole affair, also confirmed that he will step down as chairman in March.

He will be replaced by Vanni Treves, a leading City solicitor.