Equitable Members Action Group, R (on the application of) v Her Majesty's Treasury

Key legal principle: a Minister may reject an Ombudsman’s findings of maladministration but only for cogent reasons; the court will review the Minister’s decision to reject such findings for irrationality, with particular regard to the statutory role of the Parliamentary Commissioner (see R (Bradley) v Secretary of State).

Decision: the court upheld challenges to aspects of the Government’s Response to the Ombudsman’s Report in relation to findings 2, 4 and 5 because the Government’s reasons for rejecting the Ombudsman’s conclusions lacked cogency. The court rejected other grounds of challenge (including as to findings 3, 6 and 10 and the general structure of the Chadwick exercise).

• Findings 2 and 4: Government acceptance of maladministration but rejection of the Ombudsman’s finding of injustice was insufficiently justified, particularly where actuarial and policyholders' reasonable expectations issues (PRE) were central and the Government relied on a limited actuarial report (Oliver Wyman) which did not adequately address the Ombudsman’s expert material.
• Finding 5: the Government’s narrow focus on legal obligation ignored the Ombudsman’s broader assessment that GAD’s failure to prevent misleading regulatory returns (and their influence on third parties such as rating agencies) fell below acceptable standards of administration.
• Findings 3, 6 and 10: the court found the Government’s responses to these findings to be within lawful bounds; the Government had accepted maladministration (in part or whole) in relation to some findings and had not acted irrationally in the remainder.

The claimant, Equitable Members Action Group (EMAG), a company representing about 21,000 current and former Equitable Life policyholders, sought judicial review of the Government’s Response (15 January 2009) to the Parliamentary Ombudsman’s Report (16 July 2008) into regulatory failures surrounding the Equitable Life Assurance Society. EMAG challenged the Government’s rejection of certain Ombudsman findings of maladministration and injustice, the refusal of the Government to adopt the Ombudsman’s recommendation for a compensation scheme, and aspects of the Terms of Reference under which Sir John Chadwick was asked to advise on proposals for ex gratia payments.

The factual background concerned Equitable’s long-term with-profits business, the guaranteed interest rate (GIR), guaranteed annuity rates (GAR), the differential terminal bonus policy (DTBP), persistent deficits in the 1990s and the effect of the House of Lords decision in Equitable Life Assurance Society v Hyman [2002] 1 AC 408. The Ombudsman’s investigation (four years, multi-volume report) made ten findings of maladministration and found injustice in six, recommending an apology and a compensation scheme. The Government accepted some findings and rejected others, declining a full compensation scheme but proposing limited ex gratia payments and commissioning Sir John Chadwick under specific Terms of Reference.

Nature of the claim/application: judicial review of the lawfulness of the Government’s Response to the Ombudsman, including (i) whether the Government gave cogent reasons for rejecting findings of maladministration/injustice; (ii) whether the rejection of the compensation recommendation was lawful; and (iii) whether aspects of the Chadwick Terms of Reference were unlawful or unintelligible.

Issues framed by the court:

• Application of the Bradley principle: to what extent must a Minister give cogent reasons for rejecting an Ombudsman’s findings?
• Whether the Government’s reliance on further actuarial advice (Oliver Wyman) and on a narrow legalistic reading of regulatory duties provided cogent reasons for rejecting findings 2, 4 and 5.
• Whether the Government’s rejection of a compensation scheme and the Chadwick Terms of Reference were Wednesbury irrational or unintelligible.

Court’s reasoning and outcome:

• On findings 2 and 4 the court held that the Ombudsman’s finding of injustice relied on the unreliability of Equitable’s regulatory returns and on lost opportunities that flowed from GAD’s failures; the Government’s counter-reasons, which focused narrowly on technical regulatory compliance and on the Oliver Wyman report, were insufficiently cogent. The court therefore upheld EMAG’s challenge in respect of those findings.
• On finding 5 the court held that the Ombudsman was entitled to adopt a broader administrative standard (beyond mere statutory obligation) and that the Government’s narrow focus on legal duty and its assertion that it had no obligation in respect of third-party ratings did not provide cogent reasons for rejecting the Ombudsman’s conclusion; EMAG’s challenge succeeded on this head.
• Findings 3, 6 and 10 were not successfully challenged; the court accepted the Government’s approach and its partial acceptances and qualifications were not irrational in the Bradley sense. The Chadwick Terms of Reference and the decision not to adopt a full statutory compensation scheme were reviewed on conventional irrationality grounds and not held unlawful; the court stressed deference on questions involving allocation of public resources and the special remit of the Ombudsman.

The court therefore allowed parts of EMAG’s claim and invited submissions on remedies and consequential orders.

This was a first-instance judicial review. The court allowed part of the claim: it upheld EMAG’s challenges in respect of the Government’s rejection of the Ombudsman’s findings numbered 2, 4 and 5 because the Government’s reasons for rejecting those findings were not sufficiently cogent under the Bradley test; it rejected the remaining challenges and concluded that the Government’s responses to findings 3, 6 and 10 and the Chadwick process were not irrational. The court therefore ordered further submissions on consequential relief.