Scottish Equitable ordered to pay £60m compensation for 'serious failings'

Life insurer Scottish Equitable has been fined £2.8m and ordered to pay £60m compensation to several hundred thousand policyholders after a catalogue of problems, some dating back to the 1990s, resulted in "significant consumer detriment".

The Financial Services Authority said today that the company was guilty of a string of "serious systems and controls failings" that had left customers out of pocket, ranging from incorrect calculations on pension payments to a failure to spot "systemic" errors. In all, 300 problems and errors were identified.

The Edinburgh-based firm, which trades under the Aegon brand, has already started to compensate customers who missed out on payments or benefits they were entitled to or were otherwise "disadvantaged" by its actions. By the end of this month the company will have paid "financial redress" totalling £30m to 181,500 customers, with the remaining £30m due to be paid out by the end of 2011.

The regulator said Scottish Equitable "did not act responsibly by allowing the situation to develop over 12 years... A number of customers who would have been due redress have passed away in the intervening years".

Margaret Cole, the FSA's managing director of enforcement and financial crime, said the case showed the importance of getting customer administrative procedures right and fixing them quickly when they go wrong: "By letting the issues build up over such a long period, Scottish Equitable made it even more difficult to fix the problems, and this led to delays in getting compensation to customers."

In 2009 the company told the FSA it had identified around 300 issues relating to problems in administering its policies, of which 35 were labelled high priority. Of these, the FSA investigated five, "which were most representative of the problems within the firm". These were:

Not issuing around 238,000 policyholder documents.

Incorrectly calculating "guaranteed minimum pension" payments and future benefits, "resulting in customer detriment for 774 customers of about £6m-£7m".

Failing to identify errors in calculating rebates to charges on pension policies for 25,000 policies, resulting in losses totalling £8.5m.

Not matching Department for Work and Pensions contributions to personal pensions for around 2,500 customers, leading to losses totalling around £6.7m.

Failing to trace 200,000 policyholders who had moved without informing the company of their new address. Efforts were made to find them, but these were often "sporadic and insufficiently effective," said the regulator. Steps have now been taken by the insurer to trace all affected customers, though "it is not clear whether this problem has resulted in any customer detriment".

The FSA said that when setting the fine, it took into account that the firm had committed substantial resources and time to correcting the problems. By June this year, the company's "legacy management programme" employed 300 full-time staff, and was allocated a budget for 2010 of £22m.

In a statement, Aegon/Scottish Equitable said: "We fully accept the FSA's findings... [and] sincerely regret that some of our customers have been affected. We put a programme in place to proactively address these issues and this is our top priority. Over the last 18 months, we've made significant progress. As we address each issue, we're identifying and contacting affected planholders where necessary."

It said some of the issues "have no material impact on customers, but where they do, our priority is to make sure customers are put back into the financial position they would have been in if an issue had not occurred – including paying redress if a customer has suffered financial detriment as a result".

It added: "We're also dealing with the causes of issues and strengthening our controls to make sure they don't re-occur. If you're a customer, you don't need to do anything. We'll contact you directly if any of your plans are affected. If you're an employer or a trustee, we'll let you know if people in your scheme are affected."