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Expectations are rising that investors who lost money through the near-collapse of insurer Equitable Life could be offered financial help later this week, when the government is expected to make a long-awaited statement on the debacle.
Equitable Life and campaigning groups representing policyholders are expecting the Treasury to make a statement in response to last year's report on the affair by parliamentary ombudsman, Ann Abraham. A statement was originally due before Christmas and that time the government seemed set to withhold any compensation. Now it appears that – after interventions from chancellor, Alistair Darling, and prime minister, Gordon Brown, – the prospect of some assistance is much more likely.
The possibility of a hardship fund has been discussed at the Treasury, as has the idea of setting up an organisation to assess the size of possible claims.
"I am trying to dampen expectations of full compensation," said Labour MP Paul Flynn. But he added: "I believe the government might well find it an attractive proposition to consider a hardship fund because of the age and circumstances of some of the people involved. A hardship fund would be financially manageable."
Flynn is one of 11 MPs on the Public Administration Select Committee who, in December, published a unanimous report on Equitable, supporting the ombudsman's call for compensation for its members.
The ombudsman had lambasted four government bodies – including the Treasury and Financial Services Authority – for their regulatory failings in the monitoring of Equitable Life over a decade. The announcement expected this week is the official response to that call for compensation.
Until December the government had seemed prepared to take a tough line and make no financial offers. Ministers seemed to support the argument that Equitable's failure should be pinned mainly on its own management rather than on external regulators.
One reason campaigners and MPs expect a softer response from the Treasury now is that Gordon Brown is directly involved. He had personally promised a response by Christmas – and, when that promise came to nothing, expectations rose that there would be a change of heart. The government is in danger of looking foolish if it emerges that it kept more than 1.5 million policyholders waiting, despite a prime ministerial promise, only to say that nothing had changed.
In the past year the case for compensating Equitable Life has strengthened as the government bailed out other financial institutions, including Northern Rock, HBoS, LloydsTSB and RBS.
Although Flynn supports some form of payout he is not pushing for full compensation, which could cost more than £5bn. He said: "The great dilemma for the government is accepting full responsibility. It must be nervous of setting a precedent. If you blame the regulators, it means the end of regulation because regulation would become too expensive if they had to cough up £4 to £10bn every now and again."
A hardship fund could be the perfect compromise – with payouts based on people's present circumstances as much as on what they actually lost.
This might stop a flood of claimants since, in theory, many of those who had policies with Equitable in 2000 – when it came to the brink of collapse and closed for new business – could claim they suffered loss. Even if they later transferred out of Equitable, they might be able to argue they had lost money as a result, and that regulatory failure was to blame. Many holders of additional voluntary contribution pension plans, for example, took hits of up to 20% in the form of exit charges so they could transfer their money away from the society – and there are many other policyholders who suffered far greater losses.
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