Standard Life Assurance Ltd v Ace European Group & Ors [2012] EWHC 104 (Comm) (01 February 2012)

Neutral Citation Number: [2012] EWHC 104 (Comm) Case No: 2010 FOLIO 421 IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT Royal Courts of Justice Strand, London, WC2A 2LL 01/02/2012 B e f o r e : MR JUSTICE EDER ____________________ Between: STANDARD LIFE ASSURANCE LIMITED Claimant - and - (1) ACE EUROPEAN GROUP (2) LIBERTY MUTUAL INSURANCE EUROPE LIMITED trading as Liberty International Underwriters (3) CATLIN INSURANCE COMPANY (UK) LIMITED (4) CHARTIS INSURANCE UK LIMITED (formerly AIG UK Limited) (5) TIMOTHY JOSEPH CARROLL, on his own behalf and on behalf of the underwriting members of syndicate 4444 for the 2008 year of account (6) JOHN DAVID NEAL, on his own behalf and on behalf of the underwriting members of syndicate 1886 for the 2008 year of account (7) ASPEN INSURANCE UK LIMITED (8) AXIS SPECIALITY EUROPE LIMITED trading as Axis Specialty London (9) HOUSTON CASUALTY COMPANY EUROPE SEGUROS Y REASEGUROS, S. A. (10) PHILIP THOMAS FOLEY, on his own behalf and on behalf of the underwriting members of syndicate 1218 for the 2008 year of account (11) ARCH INSURANCE COMPANY (EUROPE) LIMITED Defendants ____________________ George Leggatt QC and Simon Salzedo QC (instructed by Addleshaw Goddard) for the Claimant Alistair Schaff QC, Andrew Wales and Josephine Higgs (instructed by Mayer Brown International LLP) for the Defendants Hearing dates: 11, 12, 13, 17, 18, 24, October 1, 2 November 2011 ____________________ HTML VERSION OF JUDGMENT ____________________ Crown Copyright © Mr Justice Eder: A. Introduction This is an insurance claim by Standard Life Assurance Limited ("SLAL") which is a wholly-owned subsidiary of Standard Life Plc ("SL") and part of the Standard Life group of companies. The claim is brought against the defendants, SLAL's 2008/2009 professional indemnity insurers (the "Insurers"). It arises out of the operation of SLAL's Standard Life Pension Sterling Fund (the "Fund") which had been marketed as a temporary home for short term funds, with some literature referring to it as being invested in "cash" and even as being the equivalent of putting money on deposit. However, by 2007 the Fund's assets included a substantial proportion of asset backed securities ("ABS"). From 2007, as the credit crunch took hold, and especially after the collapse of Lehman Brothers in September 2008, ABS became increasingly illiquid making their valuation more and more subjective. The pricing sources upon which SLAL relied to value the ABS in the Fund became "stale" in the sense that there were no recent trades in particular securities upon which to base up to date prices. At this time, the total value of the Fund was in excess of £2 billion. With effect from 14 January 2009, SLAL took the decision to switch to a different source of prices. The result was a one-off one-day fall in value of units in the Fund of around 4.8%. This generated a mass of complaints and claims from customers and independent financial advisers ("IFAs") and severe pressure from the Financial Services Authority ("FSA") and the media. It is important to note that although the one-day fall on 14 January 2009 was about 4.8% of the value of the Fund (equivalent to approximately £100 million), the overall fall over the entire period of the Fund was about 9.8% of the value of the Fund (equivalent to about £190m). Between 14 January 2009 and 10 February 2009, SLAL intensively considered how best to respond to the issues raised both by customers and by the FSA. SLAL's research indicated that some 65% - subsequently reduced to 64% - (by value) of customers would have valid claims for compensation for such overall fall (essentially for "mis-selling" based on the literature – identified and referred to as B/C literature - produced by SLAL which misdescribed the Fund) equivalent to some £124m although importantly this assumed what was referred to as a "claim rate" or a "response rate" of 100% ie that 100% of such customers would in fact make a claim. (The figure of £124m is slightly confusing. It was originally arrived at by taking an estimated figure of 65% (not 64%) of £190m = £123.5m and rounding it up to £124m. Nevertheless, for present purposes and notwithstanding possible objections from mathematical purists, it was, as I understood, common ground that the figure of £124m was, in effect, to be treated as being based on the 64% figure. In this judgment, unless otherwise stated, I proceed on that basis.) Specifically, during this period, SLAL was considering two main options viz either set up a complaints process and invite claims ("Option 1") or restore the one-day 4.8% fall in the Fund and again set up a complaints process and invite claims ("Option 2"). Importantly, it was recognised at the time at least by some individuals that Option 2 would, in effect, provide a "windfall" to those customers (ie the remaining 36% by value) who were thought not to have any valid claim ie of the sum of approximately £100m which would be injected under Option 2, some £36m would be paid into the Fund for the benefit of customers who were thought (at least by some) not to have any valid claim. In the event, SLAL decided to adopt Option 2. The reasons for so doing lie at the heart of this dispute. Pursuant to that decision on 11 February 2009, SLAL announced that it would pay into the Fund and to customers who had left the Fund since the price reduction sufficient money to compensate customers in full for the 4.8% price fall. The amount paid into the Fund on 11 February 2009 was £81,999,935 and the amount paid to customers in respect of units sold between 14 January and 11 February 2009 was £19,862,113 making a total of £101,862,048 (the "Cash Injection"). Further payments have been made to customers who have pursued complaints for losses exceeding the 4.8% fall which totalled £4,785,256.89 as at 3 October 2011. I shall refer to all these payments, including the Cash Injection as the "Remediation Payments". SLAL now seeks to recover these Remediation Payments in whole or in part from the defendants, less its deductible and for such further payments as may be made arising from these events. There is no dispute as to the validity of the policy but only as to coverage. In summary, SLAL says that all or some of these Remediation Payments in excess of the deductible are covered under Section 1 of the Policy as "Mitigation Costs". This is denied by the Insurers. In addition, the Insurers say that any claim is in any event excluded by Clause 18(iii) or otherwise falls within the deductible. B. The Policy "The Policy" consists of (i) a primary policy covering up to £25 million ("any one claim and in the aggregate, including costs and expenses") above a self insured deductible of £10 million ("each and every claim/loss including costs and expenses") and (ii) 3 excess policies for a total of a further £75 million. The excess policies adopt the wording of the primary policy. The Policy covers SL and all its subsidiaries (together, or where specificity is not required, "Standard Life") including SLAL. The Policy contains a Schedule and three main sections. Section 1 is entitled "Professional Indemnity". The opening words state: "The indemnity provided by this Section of the Policy applies to the Assured's legal liability to third parties, all as more fully provided for herein." The Insuring Clause of Section 1 of the Policy states: "This Policy provides an indemnity to the Assured in respect of the Assured's Civil Liability for any third party claims made against an Assured during the Policy Period, provided such claims arise out of the provision of (or failure to provide) Financial Services by the Assured ... This Policy shall also indemnify the Assured for Mitigation Costs ." The term " Civil Liability " is defined to mean: "(a) a legally enforceable obligation to a third party for compensatory damages in accordance with an award of a court or tribunal by whose jurisdiction the Assured is bound; or (b) a legally enforceable obligation to a third party for compensatory damages acknowledged by an agreement made, with the consent of the Underwriters, such consent shall not be unreasonably withheld or delayed, between the Assured and third party in settlement of a claim; or (c) any compensatory damages pursuant to any award, directive, order, recommendation or similar act of a regulatory authority, self regulatory organisation or ombudsman or following arbitration or other alternative dispute resolution processes whose findings are binding upon the Assured. … Compensatory damages shall include civil compensation or damages, compensatory restitution, any other compensatory payment of money or delivery of property of any kind and any settlement agreed by the Underwriters." At the commencement of the trial, SLAL relied upon subparagraph (c). In particular, SLAL contended originally that the Remediation Payments were "compensatory damages" made pursuant to a "recommendation" of the FSA within the meaning of sub-paragraph (c) and recoverable on that basis. However, SLAL abandoned that part of its case after the close of the oral evidence and before closing submissions. In the event, SLAL advances its case simply on the basis that all or some of the Remediation Payments constituted "Mitigation Costs" which are defined in Clause 9 as follows: "…Mitigation Costs shall mean any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid a third party claim or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this Policy (notwithstanding any Deductible amount)." Condition 6 of the Policy in effect required SLAL to seek the Insurers' consent to any proposed payments. It provides in material part as follows: "The Assured must seek the consent of the Underwriters as soon as practicable if any proposed payment of Mitigation Costs exceeds the Deductible stated in the schedule. The Underwriters' consent to such payment shall not be unreasonably withheld or delayed. Pending consent, the Assured may proceed to incur Mitigation Costs but, the indemnity in relation to the amount of Mitigation Costs payable under this Policy will be reduced in amount to the extent that it has been incurred unreasonably." Originally, the Insurers relied upon that provision by way of defence on the basis that SLAL had failed to obtain the Insurers' consent. However, this point was abandoned by Insurers at the beginning of the trial. Notwithstanding, as appears later in this Judgment, the clause remains relevant in the context of a particular argument raised by SLAL as to the burden of proof. Clause 2 of the Policy (which deals with the deductible) states: "All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together, shall be considered to be a single third party claim for the purposes of the application of the Deductible" Clause 7 provides in material part as follows: "MEANING OF THIRD PARTY CLAIMS MADE AND NOTICE PROVISIONS This Policy applies only to third party claims first made against the Assured during the Policy Period. For the purposes of this Policy, a third party claim is considered to be first made against the Assured when the ERMC first: a) receives a written demand for damages of the type covered by this Policy, including the service of suit or institution of legal or arbitration proceedings; or b) becomes aware of the intention of any person to make such a demand against them; or c) becomes aware of any fact, circumstance or event which could reasonably be anticipated to give rise to such a demand (or to give rise to Mitigation Costs) at any future time. " For present purpose, sub-paragraph (c) is of particular importance. Clause 18 of the Policy contains the following exclusion: "18. Any legal liability involving or arising out of: (i) any actual or alleged late trading of shares of any investment company; (ii) any actual or alleged market timing of shares of any investment company; (iii) fair valuation or any actual or alleged failure to apply fair valuation to any portfolio securities held by any investment company; (iv) any actual or alleged selective disclosure of portfolio holdings of any investment company including but not limited to any claim involving or arising out of any actual or alleged misstatement, misleading statement or omission in any investment company's disclosure or other public statements, with respect to any of the foregoing." The Insurers rely, in particular, on sub-paragraph (iii). C. The Principal Areas of Dispute in relation to "Mitigation Costs" I have already summarised the main issues but before considering the factual evidence it is convenient to identify and to explain briefly the principal areas of dispute in relation to the proper construction of "Mitigation Costs". The main thrust of SLAL's case is relatively simple i.e. all or part of the Remediation Payments and, in particular, the Cash Injection were reasonably and necessarily incurred by SLAL in taking action to avoid or to reduce a third party claim of a type which would have been covered under the Policy and thereby constitute "Mitigation Costs". In broad terms the Insurers' response is as follows. They accept that SLAL may well have acted entirely reasonably in making such payments in an attempt to do what SLAL reasonably believed was the "right thing". However, the Insurers say that that is not sufficient to render them liable under the Policy. In particular, the Insurers say that all or some of the Remediation Payments were not incurred "in taking action to avoid….. or to reduce a third party claim" of a type which would have been recoverable under the Policy but, on the contrary, were, in truth, made for the purpose of avoiding or reducing potential "brand damage" (ie damage to SLAL's reputation and, in consequence, SLAL's own future business) which, they say, was estimated at some £300m and was not a claim of a type which would have been covered under the Policy. On that basis, the Insurers say that all or some of the Remediation Payments do not fall within the definition of "Mitigation Costs" and are thus irrecoverable in whole or in part. In considering the phrase "in taking action to avoid…or to reduce a third party claim" it is SLAL's case that this means action that is expected or intended to avoid or to reduce a third party claim. Thus, SLAL accepts and indeed positively asserts that the test is subjective in that in order to recover, SLAL must show that they believed that the action taken would have the effect either of avoiding claims altogether or reducing the size of the claims. The Insurers agree that the test is subjective but, in contrast, they argue for a different interpretation of these words which they say should be construed to mean action that is taken for the purpose, in the sense with the motive , of avoiding or reducing claims. This is a subtle but important – indeed crucial – difference in the present case. It will be necessary to consider these arguments later in this judgment but at this stage it is sufficient to note where the battlelines are drawn in order to understand the focus of the factual evidence. The Insurers raise a further important point in relation to the definition of "Mitigation Costs" viz even on the assumption that the Remediation Payments were reasonably incurred and regardless of all other points, they were (in whole or in part) not necessarily incurred to avoid or to reduce third party claims and, for that reason, fall outwith the definition of "Mitigation Costs". D. Roadmap to the Insurers' Case with regard to Mitigation Costs Thus, in summary and ignoring for present purposes any question of burden of proof, the Insurers advanced (in ascending order of quantum) the following alternative cases. Case 1: Insurers' Primary Case with regard to Mitigation Costs The Insurers' primary submission was that the Cash Injection was not made for the purpose of avoiding/reducing claims and/or was not necessarily made for that purpose. Rather, it was made for the (dominant) purpose of avoiding or reducing brand damage. On this basis, the Insurers submitted that SLAL's claim failed in its entirety. Case 2: Insurers' First Alternative Case with regard to Mitigation Costs Alternatively, on the assumption that at least a purpose of the Cash Injection was avoiding/reducing brand damage then there has to be an "apportionment" which, depending on the appropriate methodology, produces the following series of alternative cases advanced by the Insurers: i) Case 2A: If one assumes a likely response rate of 50% of customers, 64% of whom by value had a valid claim (based on the B/C literature), this is equivalent to 50% x 64% ie 32% of the Fund by value having and pursuing a valid claim ie 32% x £190m = £60.8m. [The reason this figure does not equal 50% of £124m is because, as stated above, the £124m figure was arrived at by taking 65%, not 64% of £190m = £123.5m and rounding it up to £124m.] Therefore, SLAL is to be assumed to have been taking mitigating action to avoid (at most) £60.8m of (insured) liabilities which would otherwise have been the subject of valid and pursued claims and £300m of uninsured brand damage and loss of business – i.e. in the proportion of 60.8/360.8 or 16.85% insured and 83.15% uninsured. These proportions have to be applied to 32% of the Cash Injection, i.e. to £32,529,773, because it is only that amount of the Cash Injection which is inuring to the benefit of the total number of claimants by value who had and who would have pursued valid claims and which is therefore being incurred for dual purposes. On this hypothesis, the balance of the Cash Injection is not being incurred for dual purposes, but only for the brand, and does not fall to be apportioned. This would lead to a recovery, subject to deductible(s), of 16.85% of £32,529,773 = £5,481,267. ii) Case 2B: Even on the assumption that SLAL is taken to have mitigated the full (ie 100%) amount of potential (insured) liabilities ie £124m, the maximum total limit of indemnity under the Policy is £100m. Thus, the maximum insured liabilities sought to be avoided are £100m and the correct apportionment is 100/424, giving an insured proportion of 23.58% and a recoverable amount of 23.58% x 50% x 64% x £190m = £15,372,205. iii) Case 2C: Even if the Court were persuaded that a purpose of the Cash Injection was to avoid £190m of perceived liabilities to those with A literature, as well as B/C literature, the £100m limit of indemnity means that this would only have the following effect on apportionment: 100/490, giving an insured proportion of 20.41% and – as applied to the whole of the £101,862,048 (ex hypothesi there being no perceived windfall element) – an insured apportionment and recoverable amount of £20,790,044. Case 3: Insurers' Second Alternative Case with regard to Mitigation Costs In the further alternative and in any event, the Insurers submitted that the maximum recovery in respect of the Cash Injection (subject to deductible) is: i) Case 3A: That proportion of the Cash Injection which was paid for the benefit of those customers who were reasonably expected to make valid claims. Assuming (i) the total figure for valid claims (based on the B/C literature) was 64% of the Cash Injection and (ii) a 50% customer response rate by value, this would produce a total figure of £32,595,855. (The figure based on a 75% and 25% response rate would be £48,893,783 and £16,297,783 respectively); alternatively ii) Case 3B: That proportion of the Cash Injection (64%) paid to 100% of those customers with B/C literature to whom SLAL assumed it was liable ie £65,191,711. Thus, the spectrum of the Insurers' various alternative cases produced, at one end, a zero liability and, at the other end, a maximum liability of £65,191,711. (I should mention that this last figure was advanced by SLAL in the alternative to its primary claim.) For the avoidance of doubt, this spectrum related solely to the questions arising in the context of the definition of "Mitigation Costs" and are all subject to the Insurers' other submissions – in particular with regard to Clause 18(iii) and the appropriate deductible, the latter depending on questions of "aggregation" but which (it is common ground) involve at least one £10m deductible. E. The Evidence SLAL served factual witness statements from the following individuals who were also called to give oral evidence and cross-examined on behalf of the Insurers:- a) Sir Sandy Crombie. He was Chief Executive Officer of SL from 2004 until 2009 and has now retired. Sir Sandy's witness statement set out his involvement in the important meetings in December 2008, January and February 2009, including his recollections of the considerations which led him to support the adoption of Option 2. b) Colin Ledlie was, and still is, Group Chief Risk Officer of SLAL. He was closely involved in the key discussions from October 2008. c) John Gill was and remains a Director of SLAL. At the time, he was the Managing Director of Customer Service. He explained the relevant events from the perspective of his responsibility for customers and their complaints. His supplemental statement responded to some of the points made by the Defendants' expert, Mr Storey, and confirmed the pleaded figures for the quantum of the payments made. d) Martin Wilson is Customer Relations Manager for SL. He gave evidence as to the volume and nature of complaints received in different periods and the costs incurred in paying claims. e) Desmond Doran. He was the head of a technical team in Standard Life and also Chairman of the Fair Value Pricing Committee (the "FVPC"). His evidence principally concerned the details of the pricing issue in respect of the Fund. His supplemental statement responded to some of the points made by the Defendants' expert, Mr Deacon. f) Brian Dennehy is an IFA who had some 40 clients in the Fund. He described his interactions with Standard Life in relation to the issues with the Fund. In addition, SLAL served witness statements from the following individuals. These were put in evidence without cross-examination: a) Robert Otter. He is an IFA who had customers with monies in the Fund. He gave evidence about his own reaction and that of the market to the events concerning the Fund. b) Norman Dowie. He was legal manager of Standard Life's Legal Pensions Services department. He explained the relevant parts of the corporate structure of the Group and identified which companies have responsibility in respect of the Fund. In addition, the parties adduced expert evidence in two fields: a) In relation to the practices of the FSA and the Financial Ombudsman Service ("FOS") by Mr Storey on behalf of the Insurers and by Mr Hopper on behalf of SLAL. Both served reports and gave oral evidence. b) In relation to valuation issues, by Mr Deacon for the Insurers and by Mr Hall for Standard Life. Both served reports although in the event the valuation issues became academic and these experts did not give oral evidence. F. Regulatory Framework The framework for the regulation of financial services in the UK is established by the Financial Services and Markets Act 2000 ("FSMA"). Under that Act, the Financial Services Authority ("FSA") is the body responsible for administering the regulatory system. To carry on an activity which is regulated under FSMA, a firm must (unless exempt) be authorised by the FSA: FSMA, s.19. It is a criminal offence to carry on a regulated activity without authorisation from the FSA: FSMA, s.23. A wide range of financial institutions are regulated under FSMA, including investment firms, banks and insurance companies. Within the Standard Life group, SLAL and its associate company, Standard Life Investment Funds Limited ("SLIF") were both authorised by the FSA to conduct insurance business. Under FSMA, the FSA is given wide powers to make rules applying to authorised persons: FSMA, s.138 and to give guidance " consisting of such information and advice as it considers appropriate ": FSMA, s.157. The rules and general guidance issued by the FSA are published in the FSA Handbook of Rules and Guidance (the "Handbook"). The Handbook is divided into various sections which are then subdivided into chapters. Alongside each provision in the Handbook appears either a "R" or a "G", indicating whether the provision is a rule or guidance. As well as the general guidance published in the Handbook and elsewhere, the FSA may give "individual guidance" to an authorised firm at the firm's request or at the FSA's initiative, addressing issues of individual relevance or concern to the firm: See FSA Supervision Manual 9.4. Guidance is not binding on a regulated person. However, the FSA will not take action against a person for behaviour that it considers to be in line with guidance: See FSA Decision Procedure and Penalties Manual, 6.2.1G(4). Guidance is also relevant where the FSA does take action in assessing whether a firm could reasonably have understood or predicted that conduct fell below the standards required by the FSA's Principles for Businesses: See FSA Enforcement Guide, 2.25. The FSA's Principles for Businesses (the "Principles") are rules of general application. The Principles are set out in a section of the Handbook called "PRIN". PRIN 1.1.2 states: "The Principles are a general statement of the fundamental obligations of firms under the regulatory system." PRIN 1.1.9 explains that some of the other rules and guidance in the Handbook deal with the bearing of the Principles upon particular circumstances; however, " the FSA's other rules and guidance should not be viewed as exhausting the implications of the Principles themselves ". The Principles include: (a) Principle 3 (Management and Control) – "a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems". (b) Principle 6 (Customers' Interests) – "a firm must pay due regard to the interests of its customers and treat them fairly". (c) Principle 7 (Communications with Clients) – "a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading". (d) Principle 11 (Relations with Regulators) – "a firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice." Principle 6 is the source of what is generally referred to as the obligation to treat customers fairly ("TCF"). A section of the Handbook entitled "Conduct of Business Sourcebook" ("COBS") applies to a firm with respect to (among other activities) long term insurance business: COBS 1.1.1. At all material times COBS 4.2.1R required a firm, when promoting a financial product to a customer, to ensure that any communication with that customer " is fair, clear and not misleading ". In addition, COBS 4.5.2R required a firm, when dealing with a retail client, to ensure that information: "(2) is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks; (3) is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received." In 2004, the FSA launched its "TCF Initiative". Between 2004 and 2009, the FSA published a considerable amount of material on the requirement to treat customers fairly, which the FSA described as a " core part of our retail regulatory approach ": "Treating Customers Fairly – Towards Fair Outcomes for Consumers", p.4 (heading). In 2006, the FSA set out six TCF "Outcomes" which firms would be expected to deliver: "Treating Customers Fairly – Towards Fair Outcomes for Consumers", Chapter 2. "Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly. Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances. Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect. Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint." As explained by the Insurers' expert, Mr Storey, "because of this focus on TCF, the FSA was, by the beginning of 2009, showing little tolerance of any behaviours by firms which were inconsistent with TCF. The supervisory teams were therefore referring many firms to Enforcement for breaches of TCF." Section 150 of FSMA creates a right of action for breach of statutory duty. S.150(1) provides: "A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention ..." Certain rules are excepted from this provision. These include the FSA's Principles for Businesses. Breach of a Principle, therefore, such as Principle 6 (TCF) does not by itself give rise to a cause of action in a court of law: see R (on the application of the British Bankers Association) v Financial Services Authority [2011] EWHC 999 (Admin) ("BBA") at para 71. Breach of a Principle nevertheless renders a firm liable to enforcement action by the FSA: See PRIN 1.1.7; and is a matter which the Ombudsman has a duty to take into account in determining a complaint: BBA at paras 76-77. The FSA has a wide range of supervisory and enforcement powers available to it in cases where it considers that a regulated firm has or may have contravened a rule or other requirement imposed by or under FSMA. One of the investigatory powers available to the FSA is the power conferred by s.166 of FSMA to require a firm to appoint a third party (often referred to as a "skilled person") to provide the FSA with a report on any matter. The FSA invoked this power to appoint Deloitte to provide a report to the FSA in the present case. The enforcement powers available to the FSA if it considers that a regulated firm has contravened a relevant requirement include: (1) public censure: FSMA, s.205 (2) the imposition of financial penalties: FSMA, s.206 and (3) suspending or imposing restrictions on the authorisation of the firm to carry on any regulated activity: FSMA, s.206A. The FSA may also seek from the court an injunction to prevent repetition of a contravention (FSMA, s.380) or a restitution order where someone has profited from a contravention or another has suffered loss in consequence: FSMA, ss.382, 384. As appears below, in the present case the FSA imposed a financial penalty on SLAL in the amount of £2,450,000 for breach of Principles 3 and 7 in failing to ensure that the marketing material issued in relation to the Fund was clear, fair and not misleading. The FSA's Dispute Resolution Rules require firms to have internal complaint handling procedures. As at 1 January 2009, DISP 1.3.1R stated: "Effective and transparent procedures for the reasonable and prompt handling of complaints must be established, implemented and maintained…". DISP 1.4.1R required a respondent, once a complaint was received, to: "(1) investigate the complaint competently, diligently and impartially; (2) assess fairly, consistently and promptly: (a) the subject matter of the complaint; (b) whether the complaint should be upheld; (c) what remedial action or redress (or both) may be appropriate ... taking into account all relevant factors; (3) offer redress or remedial action when it decides this is appropriate;" DISP 1.3.5G stated: "A firm should have regard to Principle 6 (Customers' interests) when it identifies problems, root causes or compliance failures and consider whether it ought to act on its own initiative with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by such factors, but who have not complained." DISP 1.6 specified time limits for dealing with complaints. Under these provisions it was expected that almost all complaints would be substantively addressed within eight weeks of their receipt: See DISP 1.6.2R and DISP 1.6.7G. An example of the FSA's approach to the requirements of Principle 6 in relation to complaint handling is provided by the FSA's decision in the case of Hastings Insurance Services Ltd (27/7/08). In short, although it knew that affected customers had suffered loss as a result of the cancellation of their car insurance policies, Hastings adopted a passive approach to compensation – paying compensation only to customers who made complaints and could demonstrate financial loss: see para 2.66(5)(b). This passive approach, relying on the customers to take the initiative, meant that some customers were treated more favourably than others such that only some customers were treated fairly: see para 2.66(5). A breach of Principle 6 was found in relation to (among other matters) this approach to handling complaints. Standard Life had the Hastings decision in mind when considering what remedial action to take in early 2009. In the alternative or in addition to making a complaint to the regulated firm, an aggrieved consumer may complain to the Financial Ombudsman Service ("FOS"). The FOS is established by Part XVI of FSMA. FOS has a compulsory and a voluntary jurisdiction. The complaints made to FOS in relation to the Fund fell under its compulsory jurisdiction, which includes acts and omissions relating to regulated activities. Pursuant to s.228(2) of FSMA, a complaint is to be determined by reference to " what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case ". DISP 3.6.1R also confirms the Ombudsman's statutory duty to " determine a complaint by reference to what is, in his opinion, fair and reasonable in all the circumstances of the case. " DISP 3.6.4R specifies matters to be taken into account by the Ombudsman in considering what is fair and reasonable, which include " regulators' rules, guidance and standards " and " good industry practice ". Pursuant to s.229(2)(a) of FSMA, where the complaint is determined in favour of the complainant, the determination may include: "an award against the respondent of such amount as the ombudsman considers fair compensation for loss or damage ... suffered by the complainant" (a "money award"). The effect of these provisions is that the Ombudsman is not bound to apply principles of law in relation to issues of liability or quantum. This was confirmed by the Court of Appeal in R (Heather Moor & Edgecomb) v Financial Ombudsman Service [2008] Bus LR 1486 . DISP 1.4.4R requires a firm, where a complaint against it is referred to FOS, to cooperate fully with FOS and comply promptly with any settlements or awards made against it. G. Outline of Relevant facts The Fund Up until 1996, SLAL maintained a Pension Cash Fund. The Pension Cash Fund guaranteed that its unit prices would not fall and it adopted a conservative strategy consonant with this guarantee. In 1996, the Pension Cash Fund was closed to new business and the new Fund (i.e. the Standard Life Pension Sterling Fund) was launched. From its launch, the Fund invested in cash instruments, including fixed deposits, certificates of deposit and commercial paper. It was also permitted to invest up to a maximum percentage in a wider range of other money market instruments, including gilts and all forms of floating rate notes ("FRNs"). Initially the Fund was permitted to invest up to 50% in this range of other money market investments, including FRNs. This was increased to 60% in July 2004. In March 2005, the Fund Specification was altered so as to permit up to 80% to be invested in FRNs and other money market instruments. The wide category of FRNs permitted investment in the sub-set of Asset-Backed FRNs, one form of ABS. From about 2005, there was an increase in the proportion of the Fund's assets which comprised FRNs, including ABS. There was a further increase to a peak in mid-2007, when around 80% of the Fund's assets were FRNs, including almost 70% ABS. The assets within the Fund were legally held by SLIF, whose legal relationship with SLAL took the form of a contract or contracts of reinsurance. The investment and the management of the assets which comprised the Fund were delegated by SLIF to Standard Life Investments Limited ("SLI") pursuant to an Investment Management Agreement dated 10 July 2006. In turn, SLI outsourced its responsibilities in relation to, amongst other matters, valuation and unit pricing to Citibank pursuant to an Investment Fund Services Agreement dated 31 October 2003. The Fund was valued daily for the purposes of publishing a single daily unit price, at which the customers would buy or sell units in the Fund. The daily valuation was performed by Citibank pursuant to its contract with SLI. It was one of the range of funds for which the valuation was conducted at the daily 2pm valuation point using a pre-determined hierarchy of sources of pricing data for the assets within the Fund. Mid 2007 onwards From the onset of the credit crisis in mid 2007, market prices of ABS, which had previously been very stable, began to fall and the spreads between bid and offer prices began to widen, reflecting the pricing in of "extension risk" and the abnormal illiquidity in the credit markets. During this period, there were some days on which units in the Fund fell very slightly in value, in some cases provoking queries from customers. In internal emails between various individuals in SLAL in September and October 2007, the question was raised as to whether the marketing literature relating to the Fund gave adequate disclosure of its nature or whether it could be misleading. Meanwhile, in about late July 2007, Mr Doran had recommended that the Fund should not buy any more ABS. This recommendation was accepted and the Fund Specification changed in October 2007 to reflect the change of policy agreed in July. From a peak of around 70% in July 2007, the proportion of ABS in the Fund reduced through late 2007 and early 2008. There was a substantial increase in the funds under management between August 2007 (£1.7bn) and February 2008 (£2.3bn). During this period, illiquidity in the market for FRNs and particularly ABS continued to be an issue and pricing of ABS became increasingly opaque and judgmental. By February 2008, there was a number of ABS holdings in the Fund for which the prices supplied by Citibank, which were derived from "market" sources, had not been updated for some time. This problem was resolved at the end of February 2008 by new prices being set for these ABS holdings by SLI's FVPC, which led to a fall in the value of the Fund's units of 0.20%. A report produced by Mr Doran, the Chairman of the FVPC, in March 2008 pointed out that there was considerable and increasing uncertainty over the valuation of ABS and that the lack of actual trades in the ABS market meant that there was no definite "correct" mid price for a given ABS on a particular day. At the end of February 2008, as the culmination of a project known as the "Investment Data Project", the pricing hierarchies used by Citibank to arrive at the prices for certain other funds, which were valued as at the end of the day (rather than at 2pm), were changed. As from the start of March 2008, Citibank began to use Financial Times Interactive Data ("FTID") to price ABS in the end of day valuations. It became apparent to Standard Life that the new end of day FTID prices being used for ABS were lower than the figures being used to price ABS in the Fund. Between May and July 2008, various meetings and calls took place between SLI, Citibank and FTID to understand the nature of FTID as a price source. As explained by Mr Doran, the FTID methodology used proprietary models to replicate the characteristics of ABS and then inputted "market" flavour, such as any data on actual market deals or bids and offers. He (Mr Doran) regarded the FTID prices as being biased towards "bid" prices, i.e. prices at which the ABS could be sold, whereas the Fund was priced on an "offer" basis at that stage, as it was continuing to expand. By mid 2008, FRNs represented approximately 50% of the value of the Fund, including around 40% of which were ABS. September 2008 (Lehmans collapse) to 14 January 2009 (re-valuation of Fund) On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. The Fund had a holding in Lehmans' FRNs which had to be impaired, resulting in a fall of 0.54% in the value of units. After the Lehmans bankruptcy, there were increased levels of redemptions from the Fund, with net outflows for the first time. In the first week of October 2008 there was an outflow of around 1% of the Fund's value, including about 0.5% on a single day on 7 October 2008. A conference call was held to discuss the situation. It was noted that under SLAL's normal basis setting rules a fund was generally switched to pricing on the bid basis if it had a net outflow of over 1% a month for three consecutive months. On 9 October 2008 there was a further outflow of 0.5%. In light of these developments, SLAL formed the Project Eyre Steering Committee ("PESC") to monitor the situation of the Fund. PESC held its first meeting on 15 October 2008. The pricing of the non-liquid assets was said to be very difficult as no trades were being processed in such assets and different valuations could vary by up to 15%. At this stage it was thought that if outflows continued and the Fund was re-based to bid prices, its value could fall by up to 3% and that this might cause customer reaction. Following this discussion, an initial inquiry into the Fund's marketing literature was carried out in late 2008. The question whether cash outflows justified a move to a bid basis was considered by PESC on 3 November 2008 and it was decided that they did not do so. Later in November, there was a further price fall of 0.6% following the FVPC's decision on 21 November 2008 to mark down the valuation of FRNs issued by Northern Rock's ABS vehicle, Granite Holdings. Outflows were continuing at around 1% per week. At the PESC meeting on 26 November 2008 a paper was considered which set out options for the Fund, including possible changes to the pricing basis. A revised version of the Options paper was considered at a meeting on 3 December 2008. In mid-December 2008, there were discussions of the likely need to reduce the values of other ABS in the Fund and to switch to a bid pricing basis if outflows continued. The potential consequences to the price of the Fund (a fall of up to 5%) were such that the Group Executive, including Sir Sandy Crombie, was made aware of the issues with the Fund on 14 December 2008 and discussed them on 15 December 2008. On 16 December 2008, an email was circulated in advance of a PESC meeting stating that it was now becoming clear that a reduction in the prices of ABS was needed to bring them in line with current market information. Mr Ledlie reported to Mr David Nish (Group Finance Director, Standard Life, and Board Member of SLAL) on 16 December 2008: "The project team met again today and is moving towards implementation of a single day price reduction in the region of 3 to 5 %. The likely implementation date is next Monday. The reputational and customer impact of such a change is clearly potentially very significant as most investors will have been expecting cash-like performance from their investment. I would expect us to come under intense scrutiny from the FSA regarding the representations we have made to customers." Also on 16 December 2008, Mr James Whyte (Unit Linked Pricing Manager, SLAL) called an urgent meeting of the Unit-Linked Fund Management Committee ("ULFMC") for the following day at 2pm to discuss and to approve proposed changes for Fund valuations and basis change. The FVPC met on 17 December 2008. It was agreed to recommend that the pricing sources used for ABS valuation at 14:00 should be amended broadly to those used for close of business valuations – i.e. FTID. It was recognised that these changes would have a significant impact on the Fund and it was decided to consult with SLAL. The paper produced by the FVPC for the ULFMC's consideration explained that "the sources used by this fund at the 14:00 valuation are no longer robust enough to cope with current market conditions" and recommended that the Fund move to the more robust end of day pricing sources, which would mean "a drop of around 4% in the total value of fund GS". A separate paper was produced by the Unit Linked Pricing and Governance team ("ULP&G") with a recommendation that the pricing basis of the Fund be changed from offer to mid. These recommendations were considered by the ULFMC which also met on 17 December 2008. In relation to the proposed change to pricing basis, the ULFMC concluded that it was appropriate for the Fund to move from an offer to a mid basis, since the only assets being traded were cash which did not have buying or selling costs, and gave draft approval to the proposal. In relation to the proposed change to pricing sources, the ULFMC decided to pass the FVPC's recommendation to change the pricing sources to the UKFS leadership team for their consideration. The issue was considered at the monthly meeting of the Group Executive on 18 December 2008 which was chaired by Sir Sandy Crombie. It was recognised that there could be serious ramifications for customers if and when the price fall was implemented and that the product literature could have been misleading. In the event, it was decided that careful consideration was needed and time was set aside for a further, special meeting, later that day, to be attended by relevant executives who had been directly involved in Project Eyre. After detailed consideration recorded in the minutes of that meeting, it was decided to adjourn and to reconvene the following morning. At the reconvened meeting of the Group Executive on 19 December 2008, it was resolved to move pricing to a bid (not mid) basis as soon as possible. As far as the proposed change to pricing sources was concerned, the Group Executive concluded that further consideration was necessary before a final decision was taken and that it might be necessary to give additional redress to any customers who were further disadvantaged by the delay. It was also decided that the issues should be taken forward by the SLAL General Purposes Committee (the "GPC"). By its standing constitution and terms of reference, the GPC was a committee of the executive directors of SLAL, comprising Sir Sandy Crombie and Mr Nish. Mr Gill, Mr Ledlie and Mr Jim Black (Marketing Director, Product Management and Development) were co-opted onto the GPC in relation to the issues with the Fund. From this point onwards, the GPC met almost daily until Friday 6 February 2009 in relation to Project Eyre, the working assumption being that at least some customers would have a valid complaint on the basis of the literature they had received and their resulting loss. This also raised TCF issues relating to wrong expectations being generated about the Fund. The GPC met on 22 December 2008. It was reported that the move to bid prices had been implemented over the weekend and had resulted in a price reduction of 0.37%. Sir Sandy Crombie raised the question whether the FSA had been informed of the issue with the Fund and the Committee recognised that consideration should be given to starting a discussion with the FSA. The Committee agreed that a properly documented analysis was required of how the Fund was described in all marketing literature. No final decision was taken on the proposed change to pricing sources but the GPC agreed to meet daily thereafter. Sir Sandy Crombie reported the issue with the Fund to the Board of SL on 23 December 2008. The SL Board agreed to defer implementation of the recommendations of the FVPC pending further investigations but acknowledged that there would have to be remediation in respect of any customers who entered or left the Fund at too high a price after this date. Also on 23 December 2008, the GPC approved a notification to insurers of circumstances that might give rise to a claim. The insurance notification which was sent that day stated: "Based on an initial review (which is continuing) it would appear that our marketing literature may not always have explained the nature of the Fund as clearly as it could have, such that some Investors may view it as a pure cash fund (or otherwise more secure than its actual profile) rather than a fund which includes cash and other short term sterling assets, reflective of industry practice and terminology". Between Christmas and New Year consideration continued of the correct approach to the pricing of the ABS assets within the Fund and, hence, the unit price. An internal legal review of the marketing literature was also underway, expected to be completed by 7 January 2009. In broad terms, senior executives felt that the recommendation of the FVPC to change the pricing basis and sources for the Fund should be tested and examined given the seriousness of its potential ramifications. By about this time ie the end of the year, Sir Sandy Crombie and others had explored a range of ideas but it had become clear that a fall of about 5% was inevitable. Standard Life did not have sufficient evidence that would justify taking supplemental action to negate the 5% fall, but nor was any other path forward identified. At a meeting on 30 December 2008, the GPC confirmed that its working assumption was that the recommendation of the FVPC (to change to, in the main, FTID prices) would be adopted. The GPC met again on 31 December 2008. The minutes record that the GPC approved a proposal from Mr Ledlie as to next steps. This proposal included acceptance that the FVPC's recommendations for pricing changes should be implemented as soon as possible. The earliest practical date for this was considered to be 9 January 2009 and it was confirmed that any customers who had lost out as result of the deferral of the implementation being delayed from 22 December 2008 should be compensated. The proposal also included the following: "we will determine if any other customers require to be compensated as a result of our pricing basis moving out of line with the market or as a result of inadequate customer communications." Mr Ledlie suggested that if the GPC was reaching a broad conclusion as to the solution, the FSA should be notified. The GPC accepted this recommendation. The next working day was 2 January 2009, when Mr Ledlie contacted Ms Sheila Smith of the FSA and informed her that a price fall was expected when the decision was implemented. It was agreed that the FSA should see the paper which would be going before the SL Board and provide input upon it. Later that day, Ms Smith raised by email several key questions about the issues with the Fund. On 2 January 2009, the GPC was told that the Chairman of SL had asked that the SL Board be involved before any significant decisions were taken and that the FSA had asked to be informed of the proposed approach before it was put to the SL Board. Meanwhile, Mr Dowie carried out a review of the literature which had been used by Standard Life to market the Fund. In summary, the analysis included a categorisation of the wording in different forms of literature into categories A, B and C (and graded numerically within each category). The basis of the categorisation was stated to be as between, at one end of the spectrum, literature which made it clear that the Fund included short-term sterling assets and that the value of the funds may fall (category A1) and, at the other end, literature which referred to the Fund being invested "wholly in cash" (category C4 and C5). On 5 January 2009, Mr Dowie's analysis was presented to the GPC meeting; and it was the subject of some discussion. As summarised in the minutes: "MJW [ie Mr Wood, Legal Counsel] explained that the analysis of literature had revealed that communications to advisers were unlikely to give cause for concern, but some communications to customers were of poor quality and might lead some direct customers to feel that they've been mislead [sic]. He went on to explain that it was difficult to quantify the risk without conducting a case by case analysis and in many instances, customers would not have asked to see a description of the fund. MJW suggested that there is a reasonably significant risk where customers have relied on fund descriptions, but was not in a position to quantify the size of potential claims." In evidence, Sir Sandy commented that this was the view of Mr Wood at that time seen from a lawyer's perspective which might not however accord with how the regulator or the Ombudsman might view things. At the meeting on 5 January 2009, the GPC also considered the component parts of a draft paper being prepared for the Boards of SLAL and SL regarding the pricing changes. There were discussions of various options including the possibility of an underpin or guarantee from the company as to the Fund's future value. The question of remediation for customers was raised and "the Committee agreed that remediation is changeable until a decision has been made as to how to proceed and therefore this matter was not considered further." An updated version of the review of the marketing literature was produced by Mr Dowie on 6 January 2009. The "Overall Summary of the Literature Review" in the literature review stated: "With some exceptions (of which SIPP and TIP/PPIP are the most important), the key pieces of customer-facing literature over the period 2004-2007 have not set a customer expectation that 'cash' includes short term sterling assets. (The documents available to their advisers that have [sic] however made it clear that the fund includes such assets.) On the other hand, there are no statements in the marketing literature that the unit price of a Sterling Fund will never fall. There is a risk that SLAL will receive complaints from customers based upon their expectation that the fund is a cash fund in a narrow sense and that the capital values are protected. Any such complaints will have to be dealt with on an individual basis as it is not possible to identify in advance which items of literature that a customer may have read before making their investment decision (and any other statements that may have been made in other communications) and therefore whether we may uphold individual complaints." The literature review also noted that the FSA was likely to have various concerns relating to the Fund and that it was likely that enforcement action would be taken by the FSA. It was also recognised at this time that the FSA would require a proactive approach from Standard Life. On 6 January 2009, the question was raised at the GPC meeting whether it was acceptable, both legally and morally, not to support the Fund through the coming 5% fall. The meeting recognised not only that there was " some evidence of the possibility of mis-selling owing to the quality of marketing literature ", but also that " if investment professionals couldn't have predicted that the Fund would perform in the way it had, ordinary investors couldn't have foreseen it ". However, no decision was taken at this stage for any action to support the Fund or to remediate customers generally. As explained by Sir Sandy Crombie in evidence, the key factor at this time was that the decision makers had no quantitative information about the extent of the problem. On 7 January 2009, Lord Blackwell (Director, SL) sent an email to Sir Sandy Crombie, copied to other Board members (including Mr Grimstone) stating: " The open question is about whether the performance of the fund given the proposed drop in value, and the investment strategy underlying that, is consistent with the expectations reasonably held by customers invested in the fund - and whether, in accordance with our Brand and TCF principles we did enough to ensure that customers were appropriately targeted and informed…. I take it as common ground that, as you said, the principal issue here is 'what is the right thing to do' rather than what our strict liability might be – and in particular the protection of our Brand and 'Trust' with customers and advisers. ". Lord Blackwell then set out that the answer to question of " what is the right thing to do? " could depend at least in part on how many customers and how much value fell into the different categories in terms of expectations. Although he made clear that he could see strong arguments in favour of shareholders making good the coming price fall, he certainly did not express that as a concluded view as Lord Blackwell made clear in his later email on 9 January 2009. A similar view was expressed succinctly by Mr Nish in an email on 8 January 2009: he told Sir Sandy Crombie that in a call with Lord Blackwell, Mr Nish had stressed that " we will do the right thing " but that " it would be imprudent to do so on the basis of poor quality data ." It is plain that at this stage, there was not sufficient evidence to justify deciding on that course of action. In evidence, Sir Sandy Crombie explained, with specific reference to Lord Blackwell's email on 7 January 2009, that "doing the right thing" was " something of a mantra of mine in the company: at all times seek to do the right thing ". Sir Sandy Crombie made clear that this was not a legal concept, but " a personal set of views and a set of views as a leader whenever I had a leadership opportunity I would advance. " As Sir Sandy Crombie agreed in evidence, this was not a reflection of perceived legal liability or a strictly legalistic view but a more broad brush approach focused on what he described as "the boundaries of normal expectations". On 7 January 2009, the GPC agreed that the price change would be implemented with effect from the 2pm valuation point on 12 January (rather than the 2pm valuation point on 9 January), affecting unit prices published on 13 January. A draft paper for the Board meeting which had now been scheduled for 9 January 2009 was reviewed and certain changes agreed. The draft Board paper was provided to Ms Smith of the FSA on 8 January. At the GPC meeting later that day, Mr Ledlie reported on the FSA reaction. The SL Board met at 8am on 9 January 2009 and considered two papers relating to the Fund. In summary, the approval of both Boards was sought to update the ABS pricing sources and thereby to recognise a reduction in the price of Fund units with effect from Tuesday 13 January. The merits of the proposals were debated against other possible options, specifically (i) providing a contribution from shareholders to the Fund or (ii) providing a means of supporting the value of the assets contained within the Fund. As recorded in the minutes, there was a detailed discussion during which: "…..it was agreed that the action agreed upon by the Board would have to take into account the various legal and regulatory duties which fell upon the Company and its subsidiaries, and their respective Directors, including considerations of TCF, the duty to act in the best interests of the Company and the importance of maintaining the reputation of the Company and the confidence of customers and shareholders." At this stage, the view of the Board was that: "A blanket compensation scheme which sought to provide redress to all customers who might have suffered loss would reach too widely and the Board was not satisfied that there was sufficient information available to enable such a scheme to operate fairly, taking into account the interests of customers and shareholders." The SL Board concluded that further evaluation of the various options was required. A new "Project Eyre Committee" of the SL Board (the "PEC") was set up to determine the actions to be taken, including in respect of customer remediation. The issues were also considered by the Board of SLAL on 9 January 2009. The minutes again show that TCF obligations were an important part of the considerations. It was reported by Mr Ledlie that " he thought that the FSA would take a hard line with the customer communication ." As the minutes also record: " There was a concern that it would be difficult to reconcile the content of the marketing material with some of the TCF outcomes and that as a result, the potential cost of FSA enforcement action and/or damage to the brand could outweigh the cost of compensation ." Underlying this was an understanding that some of the literature was " hopelessly inadequate in terms of describing what the Fund contained by way of instruments ." However, it remained the case, in Sir Sandy's view, that the Board lacked sufficient evidence as to the extent of misrepresentation and mis-selling to make a decision in favour of one form of remediation or another. This is reflected in a table , discussed on 9 January, which had been prepared by Mr David Hare (Chief Actuary, UK and Europe, for SLAL) and which stated that legal advice was expected to favour " Option 1 " " due to inadequate information available at this time and the irrevocable nature of a decision in respect of option 2b and 3. " Later on 9 January 2009, Sir Sandy Crombie and Mr Ledlie discussed the situation with Mr Riding of the FSA in a conversation in which the FSA indicated some further provisional views, including that Standard Life " would need to present good reasons for not making the Fund whole ." By this stage, an initial estimate had been made that the cost of " making whole " the Fund by reversing the 5% fall would be approximately 5% x £2 billion = £100 million. The GPC met later on 9 January 2009. Sir Sandy Crombie explained the SL Board's request for a further comparison of the various options which were set out in a table. The schedule of options before the GPC at the meeting on 9 January 2009 compared the rationale for what was then described as option 1 (unit price falls 5%, no shareholder support) and what was then described as option 2 (unit price unchanged, immediate capped shareholder support) in terms where option 2's rationale was that the " Fund performed as communicated but desire to support the fund to protect the brand (with a sunk cost to shareholders of £110m) ", whereas option 1's rationale was that " Fund performed as communicated so no need for shareholder support. Impact of brand damage less than cost of supporting the fund for the shareholder ". In evidence, Sir Sandy Crombie accepted, with reference to this schedule of options, that one of the most important pieces of missing information at this stage was that nobody yet appreciated how bad the brand damage would be if the company adopted the approach of a case by case compensation scheme; that, at this stage, there were no figures available on that subject; and that the senior executives and the Board had a duty to take account of the impact on the brand: " About that there is no argument: it was an important fact ". After discussion, the GPC concluded that the option of allowing the unit price to fall by 5% with no shareholder support was "the most workable option". The PEC met at 10am on 12 January 2009. The paper for the meeting (accompanied by a note of legal advice from Slaughter & May) put forward two options: (1) price fall with no immediate shareholder support; and (2) an immediate shareholder injection of funds so that the price would not fall on 14 January. After discussion, the PEC accepted Sir Sandy Crombie's recommendation to adopt the first option, with the price fall to be announced on 14 January 2009. It was recognised that there would be a reaction to the price fall announcement and it was decided to reconsider the question of redress to customers in the light of feedback received. The need for active engagement with the FSA was also noted. The FSA was invited to comment on a draft letter to customers and provided comments by email. The FSA was subsequently advised by SLAL that the Board had approved the first option and was provided with the papers considered by the PEC and a further revised draft of the letter to customers. The FSA responded that the draft letter should do more to highlight the availability of a complaints procedure but no change was in the event made to the letter. The GPC also met on 12 January 2009. The Committee was informed that the price change would be implemented from 2pm on 13 January 2009. The Committee was told by Mr Ledlie that the FSA had been informed of the Board's decision and that they had advised that the next steps would be to assess the adequacy of Standard Life's remedial action plan and the TCF approach. The change to the pricing sources was implemented at the 2pm valuation point on 13 January, so that ABS in the Fund (with a few exceptions) were valued at FTID prices. As a result, there was an overnight fall of about 4.8% in the value of units. Standard Life wrote to customers to inform them of the fall and also offered a new Managed Cash Fund as an alternative. 15 – 31 January 2009 The GPC met on 15 January 2009 and considered initial reactions to the price fall. Two formal complaints of misrepresentation had been received from advisers. Customer reaction was said to fall into three categories: anger, formal complaints and switching out of the Fund. Mr Ledlie reported that he would be meeting the FSA on 23 January and would report back thereafter on the FSA's concerns. The Board of SLAL met on 16 January 2009. Mr Gill reported that the press reaction had been "muted thus far" and Mr Paul Matthews (Managing Director of the Standard Life arm dealing with IFAs) said he was "very pleased with the reaction among intermediaries". Mr Nish said that the message from the FSA thus far was that they accepted the process that SLAL had set out for dealing with the matter. At about this time, Standard Life commissioned external researchers (Scott Porter) to gather feedback from customers. Customers who had registered a complaint were to be removed from the research sample. On 16 January 2009, the FSA sent written questions, ahead of a scheduled conference call on 23 January to discuss the current status of Project Eyre and whether residential mortgage backed securities should have been in the Fund. On the evening of 16 January 2009, the GPC discussed the forthcoming Mail on Sunday campaign, an interview on the Money Programme and a blog which was raising the issue of misrepresentation. On the morning of 17 January 2009, an email from Mr Matthews made clear that the sales personnel of Standard Life were under enormous pressure from customers and especially advisers. In particular, he noted that " There is no doubt we are going to lose business over the next few months as IFAs suspend dealing with us whilst this is resolved " and that " My guys are doing all they can and I would like some understanding of what pressure they are under. Business being stopped in the current climate has an immediate impact on the Account Managers income and jobs ". On the same day ie 17 January 2009, Mr Gill appeared on Radio 4's Money Box programme and was interviewed regarding the Fund. On Monday 19 January 2009 (the same day as it was reported internally that "… the mood has worsened and we now have substantial numbers of IFAs expressing real anger at the change "), Mr Brian Dennehy (an IFA) emailed Mr Matthews to express his own view and stressing the business consequences for SLAL of the issue: "My strong view is that the board has a small number of days to agree to fill the hole in the Sterling Fund, or the damage to the group's reputation, and consequent loss of business, will be totally disproportionate. If Standard Life can deal with this problem fast and wholesale, there is an opportunity here to reap the benefits of being seen as a company who got it wrong but were big enough to admit it and right the wrong." Sir Sandy Crombie agreed in cross-examination that there was a lot of commercial pressure at this time, including serious pressure from big corporate clients, from IFAs with whom Standard Life did a lot of business and who they hoped would give Standard Life more business, but who were threatening not to do so. On 19 January 2009, the GPC considered questions of customer expectations in the context of TCF and remediation and again on 20 January 2009. On 20 January, the Committee considered an analysis comparing the prices used for ABS in the Fund with prices from other sources over time, and concluded that it might be necessary to remediate back to a date prior to 23 December 2008. As regards mis-selling, Sir Sandy Crombie queried whether there was enough evidence of mis-selling to require financial support; the consensus was that it was too early to tell. The GPC also considered a draft Board paper providing an update to the Board. On 21 January 2009, the GPC again discussed whether remediation should be as from a date earlier than 23 December 2008. Mr Ledlie reported that the group considering this issue had formed a high conviction that the relevant date was 16 September 2008 (immediately after the collapse of Lehmans). There was also discussion of a complaint which centred on the description of "cash" in the product literature. Internal legal advice from Mr Peter Tyson (Associate General Counsel, SL) was that, on a balance of probabilities, it was unlikely that the customer would be successful in any claim brought in Court. However, Sir Sandy Crombie " was of the view that even though the product literature contained wording favourable to us, it was 'buried' in the key features document which the customer would be unlikely to read ." On 22 January 2009, Standard Life instructed leading counsel (John Brisby QC) to advise in relation to issues with the Fund. In particular, he was asked for his opinion on the proper process for dealing with complaints and for his views on the legal and regulatory issues arising, including the prospects of complaints being upheld by FOS or in litigation and any TCF issues, and as to whether the pricing of the Fund had been negligent. By that date, the GPC was told there had been 394 complaints (including 112 from IFAs) of which 40% alleged misrepresentation. An initial telephone consultation with leading and junior counsel, John Brisby QC and Jonathan Brettler, took place on 23 January 2009. A call with the FSA also took place as planned on 23 January 2009. Mr Ledlie reported to the FSA that 400-500 complaints had been received and that SLAL had started to categorise their nature; that case studies were being pulled together to form views on what valid claims for compensation might look like; and that at this stage SLAL was not contemplating a blanket payment. The FSA call was reported to the GPC in the following terms: "MCL [Mr Ledlie] confirmed that he had spoken to the FSA that day. The FSA are going to send an information request to us and we will have to reply by the end of the week. A s166 review may be instigated once they have reviewed our response, and they may also refer the matter to Enforcement to see if enforcement action is required. MCL discussed the general nature of the feedback received and the FSA advised that they have also received some calls from angry customers." There was a further telephone consultation with leading and junior counsel on 26 January 2009, at which the decision to remediate from 23 December 2008, mis-selling, complaints, claim handling procedures, the basis for calculating compensation and mis-pricing were discussed. Mr Brisby QC advised: "... we should make the decision tree up based on where we think we draw the line in the sand for the extent of our liability. It is likely that this will then change, when the Ombudsman re-draws the line in the sand closer to the customer's interests, bearing in mind that the Ombudsman is not bound by strict legal principles and can compensate through sympathy, and will not be sympathetic to small print." This was consistent with Standard Life's own experience. As Mr Wilson (Complaints Manager) had confirmed during the first consultation with Mr Brisby QC on 23 January 2009, in the company's experience any decision not to compensate was " very likely " to be overturned by the Ombudsman. By 26 January 2009, Standard Life had started to see a number of very similar complaints, suggesting that templates were now being used On 27 January 2009 the SL Board met at 11.30am. The Board was told that the outflow of funds from the Fund was running at a rate of about £30m per day; that assets other than cash were being sold, where opportunities to do so arose; that complaints to date numbered approximately 500 of which 70% were from customers and 30% from IFAs (either for themselves or on behalf of others); and that, of the complaints, 40% contained some allegation of misrepresentation and 60% conveyed general unhappiness. Outbound calling would start the next day to collect information on the views of customers and intermediaries. Three options were presented to the Board. These options were subsequently summarised by Mr Wood as follows:- a) Act as circumscribed by constraints of what can recover from insurers; b) Deal with complaints in measured/logical and fair fashion case by case in a manner to preserve reputation but perhaps not recover all from insurers; c) Throw money at the problem to make it go away. According to Mr Wood, the Board did not want (a) due to difficult pressures outwith recovering from insurers and did not want (c) as it was not measured so the Board was keen to adopt approach (b). However, it is plain that matters were, at this stage, very fluid. Analysis of the legal position was continuing. After discussion, it was agreed that further work to evaluate the situation was required. The FSA made an initial request for documents and information on 28 January 2009 which included all relevant marketing literature and other documentation. Also on 28 January 2009, SLAL made a second notification to insurers of a further circumstance that might give rise to a claim, concerning the delay in revaluation of the Fund. By about this time i.e. towards the end of January, the position being taken by some IFAs was hardening further. Mr Matthews was receiving numerous indications that the Standard Life brand was being damaged and that competitor companies were working to capitalise on Standard Life's difficulties. At least one IFA was seeking to have all its clients put back in the position they were in before the price drop. New business was being put at risk. The view of those dealing with this IFA was that Standard Life's relationship with the IFA was " on life support as a consequence ". The same was true of some large corporate clients who were threatening to remove their business. Mr Matthews was advised on 28 January 2009 that " We have some major clients very upset – e.g.[K] - and some schemes being threatened to be moved. " The question was then posed: "Whilst I appreciate there is review of literature and legal counsel being sought, our contacts are starting to lose patience. I believe even if we are legally ok with our literature, we may lose a great deal of good faith from the CBC community if we push back too hard on that basis." Similar reactions were becoming evident from many quarters. By way of example, an email from one IFA stated: "I do hope you realise the depth and degree of anger Standard Life of [sic] caused with the Sterling fund reduction etc.? The consequences will be far reaching for you regarding your status within our industry if you do not rectify this problem quickly. … I will not be proving [sic: providing] Standard Life with any further new business until I am satisfied with the outcome of my complaints and I will encourage Sesame [an organisation supporting IFAs] colleagues to do the same. I make no apology for this as I regard this as a very urgent matter." Another email made clear that until further notice the IFA was not going to use Standard Life for any new business because their " arrogance over the Sterling Fund beggars belief and I guess they will lose a lot of favour with other IFAs and so we should not feel embarrassed. " By 30 January 2009, SLAL had become aware that Skandia was specifically briefing its sales team on the Fund difficulties which Skandia saw as an opportunity to target SLAL's customers. This was in addition to the ongoing deterioration in its relationships with IFAs, which Mr Matthews summarised for the senior executive team in an email on 30 January 2009 as follows: "Adding up the accounts who have said we are blacklisted till we sort things out its looking like we could be over 25% down on business if they follow through. Many are our wrap or target wrap accounts I'm afraid. I usually look to send out good news Friday so sorry to finish on a negative" Mr Matthews reverted to the same theme in an email early the following morning, Saturday 31 January 2009, to Mr Nish and Mr Simon Gulliford (Chief Marketing Officer): "Not trying to be alarmist but factual on where we are We have segmented our accounts into red amber and green. Red being very upset and putting us on hold, green being okay and no impact. … we should expect to see a reduction of at least 25% on new business. Its our Sipp, corporate and wrap supporters who are most upset, our prime targets! …We are experiencing some real brand damage with many of the IFAs who support us on both Sipp and Wrap simply putting us on hold and in effect no longer recommending us for New Business. …We will continue to do all we can to turn our business partners round. My team are very clear what their job is and they will do it. But the sentiment and scale of anger is rising and I felt I should let you guys know. …At least two of our competitors are having campaigns against us and we know Skandia have briefed all their Account Managers this week on focussing on attacking us with IFAs. This will have the impact of turning some of the IFAs who were up to now okay." Meanwhile, on 29 January 2009, some draft decision trees for dealing with complaints were initially prepared and there was a further consultation with Counsel (John Brisby QC and Jonathan Brettler). By this date i.e. 29 January 2009, the number of complaints had risen to 934, of which 860 had been classified. Of these, 363 expressed unhappiness/disappointment and the other 497 alleged mis-selling/misleading documentation/misrepresentation. As the GPC was told that evening, complaints were still coming in and a full time central complaints unit had been established to handle them. A draft document structure for a paper on customer compensation was discussed by the GPC with a view to finalising it for a full Board meeting once all the necessary analysis was complete. On 30 January 2009, SLAL sent to the FSA a large quantity of information about the Fund issues in response to the FSA's requests. The information included a short chronological summary of the pricing issue. In early February, the marketing, sales and distribution pressure continued: two sales pitches to another significant IFA, Pope Anderson, involving £210m of new FUM (ie funds under management) business with an AMC (ie annual management charge) of £1.75m, as well as existing business, were now in jeopardy. 2 February 2009 The week beginning Monday 2 February was critical. Complaints continued to build while Standard Life investigated its options. One summary of the position on 2 February 2009 was: "Complaints continue to rise (c. 233 to date), with more expected as advisers find time to contact clients. There is a sense from the volume and nature of feedback that advisers are taking their cue from the media in a campaign to win blanket compensation. The majority of the complaints are coming from larger accounts with between £1m and £50m FUM [funds under management]. Distribution estimates that 14% of advisers are highly critical of our stance and plan to reduce significantly or cease writing new business. A further 34% are critical, but waiting to see what our next move is. It is a similar experience at key account level, with head offices making formal complaints and/or removing the fund from their panels (notably Sesame). The key issues raised are the perceived misleading description of the fund in literature, and the validity of holding ABS in the fund given its mandate and volatility rating. Account Managers are on average [spending] more than 50% of their time dealing with questions, concerns and complaints. ..." On the afternoon of 2 February 2009, there was a further telephone consultation with Mr Brisby QC and Mr Brettler. Mr Brisby QC had reviewed two individual complaints and his opinion was that the Ombudsman would find against SLAL in both of them. Having discussed some of the literature, Mr Brisby QC " stated that it is therefore not possible to draw arbitrary lines such as only compensating customers who took the policy out in certain years. This means that we can compensate across the board ...". Mr Wood said that the intention was to look at all cases on a case by case basis. Mr Brisby QC " said that the Ombudsman would not necessarily find against us due to a lack of documentation, but without supporting evidence it will be difficult to rebut a complaint from a customer who has managed to build up a case for an apparently valid claim ." Mr Brisby QC also said that Standard Life's suggested approach of compensating case by case rather than compensating everybody was within the requirement to treat customers fairly. This was on the basis that " [w]e are just accepting that people needed to read small print ". The note of the consultation records Mr Brisby QC as saying: "We are just accepting that the docs could have been better, but we did not mis-sell the product across the board, as if the customer/IFA read the small print and/or did reasonable diligence, then they would have realised the nature of the fund. JB said he presumes that Standard Life has PR people who will be able to spin this appropriately." The advice from Mr Brisby QC and the process of reaching a conclusion on numerous types of complaint was discussed further at the GPC meeting that evening. At that meeting, it was reported that there were 5 complaints from clients with £1.5bn FUM and an APE (ie annual premium equivalent) of £45m. 9 complaint categories had been identified which would form the "buckets" into which customers would be classified for the purposes of compensation decision trees. 3 February 2009 At the GPC meeting on 3 February 2009, the complaint categories and 3 complaint "case studies" were discussed, together with an analysis of customer groupings. It was recorded in the minutes that: "The outcome of the discussion was that the Committee agreed that there were two broad categories of options whose branches had to be mapped out. The first option is to consider whether to remediate all customers or only those who complain. The second option would assess whether, if a decision to compensate all was taken, to underpin the Pension Sterling fund in full, or on a contingent basis." At the same meeting, the initial analysis of the outbound customer research exercise commissioned in late January 2009 and conducted by Scott Porter was circulated and considered. The results related to some 550 calls which had been made to customers who had received SLAL's letter informing them of the 4.8% drop in the unit price but excluding any who had complained. 4 February 2009 There was another telephone consultation with counsel on 4 February 2009, this time involving counsel who had been asked to advise on the insurance position (George Leggatt QC) as well as Mr Brisby QC and Mr Brettler. It was stated by Mr Gavin Davis (Legal Adviser) that SLAL might not be able to take a reactive position of settling such complaints as were made, since it looked like SLAL could be liable for mis-selling in the case of 75% of policies sold. Accordingly, the Board were going to look at two options: viz (a) compensating all customers by making a payment into the Fund or (b) proactively notifying all customers that they might have a claim for mis-selling (and then addressing the claims subsequently made on a case by case basis). In short, the possibilities for remediation were narrowing to those which were shortly to become "Option 1" and "Option 2". At the GPC meeting on 4 February 2009, Mr Nish described the two alternatives as the "legal approach" and the "brand approach". Of those, the cash injection option was the brand approach. After discussion of the "decision trees" it was agreed that "the Board should be asked to make a decision as to whether remediation should be financed on a blanket or case by case basis." As recorded in the Minutes, the advantages and disadvantages of each basis of compensation was debated both in terms of cost and their impact on the Standard Life brand and brand principles. It was resolved that a Board decision was required as a matter of priority as to which of the two options should be chosen; and that the GPC would consider a draft Board paper on Friday 6 February presenting the two approaches with the intention that the Board paper should be completed that day and the PEC should meet in the early part of the week beginning Monday 9 February. The consolidated actions list maintained by Mr George Hunter (Senior Change Consultant, Standard Life) thereafter recorded that the GPC had agreed that the two proposals to be constructed should be (1) protecting and building the brand; and (2) the legal and financial approach – case by case remediation. Thereafter, the consolidated actions list also repeatedly recorded that the paper for the Board was addressing " Brand v. Case-by-Case ". Although the minutes did not say so, it seems that the GPC meeting concluded with a preference for the option of compensating all customers by making a payment into the Fund. The preference was summarised by Mr Tyson (who had attended the GPC meeting) in an email to Mr Wood at 20.41 on 4 February as follows: "The GPC tonight debated the Project Eyre options at some length. There are two alternatives under consideration: 1. Compensating on a case by case basis [redacted], together with (subject to the conclusions of the independent expert) revising prices back to 17 Sept 08, i.e. 'gliding' the prices to 23 Dec 08; or 2. Recompensing the fund for the 4.8% fall in unit price on 14 January 2009. Option 2 is currently favoured. The brand and reputational damage being incurred under option 1 is now believed to significantly outweigh the £100m or so cost of option 2. [redacted] but the brand and reputational damage incurred under option 1 is being put at £300m+. There is still a risk that there will be a run on the fund under option 2, but our contingency plan for the potential run following the 14 January 2009 announcement has yet to be used and, in any event, the cost of any run is thought to be around £80m. Put simply, the GPC were of the view that 'toughing it out' under option 1 is just not worth it in terms of the brand and reputational damage involved." Mr Tyson's assessment of the mood of the meeting is corroborated by an email Mr Ledlie sent that night to a colleague: " no firm conclusions tonight but feels like it is heading towards a £100m cost with the 4.8% fall being made good. " In evidence, Sir Sandy Crombie accepted, with reference to the GPC meeting on 4 February 2009, that in terms of the impact on SLAL's brand and brand principles, it was obvious that Option 2 was the right answer: " If there was no other issue to take it into account other than potential commercial damage to the brand and just generally upholding the brand principles, then option 2 would have been the route that, I think by that stage, we would have been for coming down, yes." In the context of this meeting on 4 February, Sir Sandy Crombie also accepted that in evaluating the relative costs of options 1 and 2, the debate was looking at costs in the wide sense and not simply in the narrow sense of evaluating the cost of compensation on an option 1 or an option 2 basis – in other words, the evaluation in terms of cost would take into account the cost of brand damage, as well as the cost of compensation and the likelihood of insurance recovery. Following the GPC meeting, Mr Matthews emailed Mr Gillespie (Managing Director, UKFS Marketing) to thank him for his help at the meeting. Mr Matthews said " our brand has been hit big time over this sterling and we needed to move quickly ". As had been agreed at that meeting, Mr Black and Mr Gillespie/Mr Gulliford prepared papers setting out the arguments in favour of each course of action - in the case of Mr Black's paper, for a case by case approach to remediation (described as the "financial case"); and, in the case of the Gillespie/Gulliford paper, to compensate all customers by making a payment into the Fund (described as the "commercial case"). Also on 4 February 2009, Mr Nish asked Mr Ledlie what he thought would be the likely outcome of the Eyre review and its cost. Mr Ledlie's response is revealing of the state of discussions at that stage. Mr Ledlie said: "Very difficult to call at the moment. The analysis is coming together during the course of today but there are a lot of areas where a judgment call is required. I think there are two broad options: - making everyone good: this would involve making good the 4.8% gap for everyone - there are arguments that the amount should be higher or that a form of contingent arrangement may be in our interests. I suspect we will conclude that simple 4.8% is best. This is around £100m cost. [Redaction] If we go down this route then we probably need to do it quickly. ... - case by case compensation. [Redaction]. Given the high percentage of cases where complaints are likely to be valid we would need to make sure customers were aware of their right to complain. In theory this route might lead to lower costs as only a proportion of customers would complain [Redaction]. There is a view however that once the success rate of complaints is known there will be a very high volume from IFAs and we will have extra admin and other costs. The brand damage with IFAs could be very significant. Clearly monies out would be spread over a longer period although we could probably expect most complaints to be lodged over the next 3 or 4 months and we would need to compensate within a month of receipt of complaint. As noted above much more data will arrive during the course of today which should help weigh the options." This email indicates that, even leaving aside brand damage, the view was beginning to emerge that the cost of compensation could end up being at least as great or even greater if a case by was approach was adopted than if the 4.8% fall was made good. 5-6 February 2009 On 5 February 2009, Mr Ledlie was made aware of the email chain from September 2007 which showed that Standard Life was aware by that date of the potential that the marketing literature concerning the Fund could be misleading customers. On the same day, in one of many contributions pressing for Option 2, Mr Matthews, who was in charge of sales and distribution, said in an email to (amongst others) Sir Sandy Crombie: "Its self explanatory if we want the best outcome on New Business and Brand then we strongly recommend that we should opt for a blanket re price back to the December price and avoid going down a case by case basis." On 6 February 2009, the GPC met at 8am and considered the draft Board paper and debated Option 1 (case by case remediation) and Option 2 (restoring the 4.8% fall). An early draft Board paper was available and discussed at the GPC meeting. This draft dealt with various matters including: i) It recorded that 1200 formal complaints had been received from customers, with the rate of new complaints decreasing from the peak levels reached on 25 January. It also set out the results of the Scott Porter customer research and the customer activity on the Fund since the 14 January price drop. ii) It explained the internal literature review and customer classification exercise which had been undertaken. It noted that 75% of the Fund customers had apparently received category C literature. iii) In setting out the rationale for Option 1 (i.e. case by case compensation), the draft contained the following bullet points which were to remain materially unaltered between this version and the final version: "Whilst significant numbers of customers received poor communications there is evidence that many customers understood the risks of the fund or were advised by a professional advisor. A blanket approach is therefore not necessary. The approach puts the company in control of the situation. Any approach to 'throw money' at the situation remains fraught with risk that further mis-selling allegations are made and that the mis-selling losses may be incurred on top of any money spent for brand reasons. " iv) The case by case basis was supported by a table, which suggested that the gross cost to the shareholders of £123m would be reduced by insurance recoveries to £88m. As the paper noted, " The case by case approach will allow a robust claim against the Heritage WP Fund and the PI insurer thereby demonstrating the Boards duty to shareholders ". (It should be noted that, at this stage, there were no detailed cost estimates for Option 2.) v) The "Key Marketing Facts" rationale which speaks for itself. vi) As an appendix, it contained the decision trees for complaints which SLAL was developing. All the decision trees proceeded on the assumption that that customers who had been exposed to A-grade only literature did not have a valid claim to compensation. At the meeting on 6 February, the draft Board paper was discussed. Mr Gill was asked to explain the case for Option 1 and Mr Gulliford to put forward the case for Option 2. In particular, Mr Gulliford advocated the cash injection option by highlighting "…the key marketing facts set out in the Board paper and in particular, that in his view the biggest brand risk was the damage to our relationship with IFA's and consulting actuaries, which was fast approaching the "tipping point".…" The options were then discussed at length. In evidence, Sir Sandy Crombie accepted that the two options were being debated against brand principles rather than against perceptions of extents of legal liabilities under the two options. It appears from the notes taken at the meeting that at this meeting Sir Sandy (for the first time) disclosed his own view that the company needed to take a principled approach and should recognise that they had let themselves down with the quality of the literature and should accept that a 5% fall on one day was outside the boundaries of expectations: the company should therefore make good the fall and then deal with those who were still unsatisfied individually. During the meeting a straw poll was taken in which there were 5 "votes" for Option 2 and 4 "votes" for Option 1. Mr Gill was at that point the only member of the committee (as opposed to other attendees) who was still favouring Option 1. However, Mr Gill explained that he came round to Option 2 after considering the views expressed. Although no decision was reached that Option 2 should be adopted and it was agreed that both options should be put to the Board, it was clear by the end of the meeting that opinion favoured Option 2. Mr Ledlie is recorded, in the final version of the minutes, as saying that he thought the FSA would prefer Option 2 and he would be speaking to them later that day. On the same day ie 6 February 2009, Mr Don Wild, who was responsible for IFA relationships, expressed the view that: "… Option 2 the 'major' initiative is the preferred route. Ultimately, this is about our 'brand' and without that we're 'buggered'…" ; and Mr Matthews sent an email to many of the senior executives saying (amongst other things) that "… as time goes on we are seeing more coverage which is damaging our brand … As time goes on our position is spreading and getting worse. I can't stress how important it is that we say something soon". On 6 February 2009, work was still being done to quantify the "brand costs" associated with each of the two options under consideration. This work was undertaken by Ms Jane Perkins (Regional Sales Actuary, SLAL, Northern Region) and the team of which she was a part. At 13.27, she emailed Mr Gulliford, Mr Gillespie and others with the calculations of " rough figures based on a three year brand recovery ". Her estimate for the cost of Option 1 was that the brand cost could equate to c. £240m of lost New Business Commissions (NBCs) plus £60m of brand spend to restore the brand. Mr Bold forwarded Jane Perkins' email to Mr Nish, highlighting the £300m figure as indicative of the scale of brand damage and noting that " this seems reasonable to me ". Mr Nish described the information as "eyewatering" . In evidence, Sir Sandy Crombie confirmed that he also felt that this figure of £300m plus was eye-watering. However, as he said in evidence, he regarded himself as "something of a sceptic" and expressed the view that what was being forecast might not unfold. Nevertheless, he accepted in evidence that it was, in effect, a reasonable assessment by those whose professionalism and judgment he trusted and that he had no reason to develop for himself some other view. In summary, he considered it was an honestly held view of those who had been asked to do the work (whom he trusted absolutely) and which should be made available to the Board. In the same email, Ms Perkins had attached a file called "Expected Costs tables.doc". It took the previous costs table prepared by Mr Black for Option 1 (set out on a basis gross and net of insurance recovery) and included a table in similar format for Option 2. The gross costs of Option 1 on the basis of paying compensation to "all customers with category B and C literature " were given as £124m (with £15m administration costs on top), as opposed to £130m, on the basis of 50% of B and C cases complaining (with £8m administration costs on top) for Option 2. In net terms, the table records Option 1 but not Option 2 as allowing for insurance recovery. The preamble noted that the tables were prepared on the assumption that " If a blanket approach is taken, the initial £100m to restore the fund cannot be reclaimed from either the insurer or the HWPF (awaiting legal confirmation). " Meanwhile, on 6 February 2009 Mr Ledlie spoke with Mr Riding and Mr Mott of the FSA. According to Standard Life's note of the call, Mr Riding explained that the FSA would be writing to Sir Sandy Crombie early the following week expressing " our usual concerns " about governance issues. He also explained that the key action would then be a fact finding visit in the next few weeks to assess the adequacy of Standard Life's response. Mr Riding indicated that, from an initial analysis, the FSA had serious concerns about the clarity of the customer documentation and was considering the appointment of a Section 166 skilled person to produce a report. In response to this, Mr Ledlie outlined the two options which were receiving consideration – namely, (1) writing to customers and making it easy for them to complain; or (2) making good the 4.8% fall in price that happened in January for all customers. Mr Riding is recorded as having responded: "Our initial response is that we would lean to proactive remediation – a very preliminary view – which fits with the latter option. My experience is that requiring customers to complain can cost tremendous amounts of management time and effort and have reputational impacts What you are saying is very positive: however it will be in neither of our interest if you do this too soon. The FSA should be involved in this as there is a risk that we could come back with a different view later." As a result of this conversation, Mr Ledlie provided suggested text for inclusion in the Board paper regarding the position of the FSA. Part of the text read as follows: "The range of possible solutions was discussed and the FSA indicated a clear preference for a solution that involved all customers being remediated. In my view we would not be able to reach a position quickly with the FSA that a case by case approach was appropriate and there would be a risk that the FSA would subsequently enforce a different and more comprehensive approach." The conversation with the FSA and other matters were discussed in a further consultation, or consultations, with Counsel, Mr Leggatt QC, Mr Brisby QC and Mr Brettler that day i.e. 6 February. In summary Mr Brisby QC advised that "if it is likely that only 75% of customers have defective literature, then this will produce a windfall for the remaining 25%". He also said that a 5% payment into the Fund would not prevent further claims and would not be sufficient to put customers back in the position they would have been in. Mr Brisby QC made the suggestion that "instead of paying the £100m into the fund, [SLAL] could earmark the £100m to deal with complaints, which could be good enough in terms of reputation and protect [SLAL's] position" and noted, with reference to the proposed payment into the Fund, that " On estimated figures supplied by Standard Life, this will provide a windfall to 25% of customers (those without a valid complaint ")". On Sunday 8 February, Mr Tyson circulated a paper setting out the external legal advice received in connection with Options 1 and 2. It is clear from the "Background" section that Mr Brisby QC had advised on (amongst other things) the prospect of claims based on a review of the product literature and certain sample cases; and Mr Leggatt QC had also been instructed to advise on the prospects of professional indemnity insurance recovery for Options 1 and 2. In relation to Option 2, Mr Brisby QC's advice was set out as follows: "Senior Counsel noted that, on the estimated figures we provided, this would provide a windfall to a significant number of customers who are unlikely, according to our analysis, to have a valid complaint. Further, the restoration of prices to the pre-23 December 2008 level would not, in itself, be sufficient to put all customers with well founded claims in the position they would have been in if it were not for mis-representations made in the product literature. Customers could therefore still bring complaints of mis-selling, and might well do so – particularly if there were further falls in the value of the FRN and ABS assets in the fund…." The advice of Mr Leggatt QC was summarised as follows: "It is difficult, if not impossible, to present a credible argument that the cost of restoring the prices to pre 23 December 2008 levels is necessary in order to avoid an even greater liability to pay compensation to claimants – as the restoration of prices would involve, in effect, compensating all customers who remain invested in the Fund whereas not all customers would be entitled to claim or would in practice claim compensation if a 'case by case' approach were adopted." Meanwhile, later on 6 February 2009, Standard Life told the FSA that the Board committee meeting was confirmed for the evening of Tuesday, 10 February and that the draft Board paper would be forwarded to the FSA as soon as possible. Work also continued in finalising the draft paper that would ultimately be submitted to the Board. Version 0.5 of the draft board paper, which was in circulation on 6 February 2009, in addressing TCF, was candid as to the consequences and rationale of Option 2: "In option 2, the £100m into the fund will mean customers without a complaint that would be upheld by a process review will also receive a payment. There is no disadvantage to other customers of doing this and the payment is goodwill to maintain the brand of standard life as a customer centric company." Version 0.6 of the draft Board paper included costs tables for Option 1 and Option 2 as set out below. The costs tables were based on a number of assumptions including the assumption that the cost of remediating all customers on a cash equivalent fund would be £190m i.e. approximately 9.8% of the total fund at the relevant time. Option 1 – Expected Costs of Case by Case Basis Costs Prior to Insurance Claim Costs net of Insurance The estimated costs of case by case compensation to all customers with category "B" and "C" literature. £124m £34m Potential cost met by WP Fund (60% of claims). [note this required QC opinion to validate this claim]. £74m £20m Potential Cost to Shareholder of mis-selling claims £50m £14m Costs of administering the mis-selling unit (based on equivalent size to Endownment mis-selling for 3 years). £15m £15m Brand Spend to rebuild franchise over 3 years. £60m £60m Total Shareholder costs £124m £89m Option 2 – Expected Costs of Blanket Approach [Wrongly, this was in fact also headed "Expected costs of Case by Case Basis"] Costs Prior to Insurance Claim Costs net of Insurance The estimated cost of blanket approach to pay money into the fund (up to 5%) to restore prices to pre 23/12 levels. £100m £100m Potential cost of additional complaints (if 50% of B and C cases complain). £30m £10m Potential cost met by WP Fund (60% of additional claims). [note this required QC opinion to validate the claim]. £18m £6m Potential Cost to Shareholder of blanket approach £112m £104m Costs of administering the mis-selling unit (based on equivalent size to Endownment mis-selling for 3 years and 50% of B and C complaining). £8m £8m Brand Spend to rebuild franchise over 2 years £15m £15m Total Shareholder costs £135m £127m In considering these tables, the following should be noted: a) The figure of £124m was the estimated cost of case by case compensation to all customers with category "B" and "C" literature. As stated above, on the basis of research carried out by SLAL the latter had been estimated as 65% (then 64%) of fund value. It assumed that all those who received "B" and "C" literature would respond and make claims i.e. there would be a 100% response rate of those who were estimated to be entitled to claim The Insurers disputed that this was a likely response rate. I revert to this further below. b) The Option 1 table does not take account of the estimated £240m loss of NBC if Option 1 were adopted. As to this, an attempt was made in another section of the draft paper to "put some context around the brand cost" . To this end, a calculation was done: "Starting with an APE comparable to that of 2008; if we were to 'lose' 30% APE over the first 12 months, 15% over the following 12 months and 5% over the final 12 months then this equates to c. £240m in NBC. Combining this with the estimated £60m spend on brand over this period results in a total brand costs in the region of £300m." c) The costs table for Option 2 provided for no insurance recovery to be made at all. The table was accompanied by a note which read: "The costs in the table above recognise that the insurers or HWPF are not likely to pay out in relation to the £100m injection into the fund as this will be viewed as a pro-active move by shareholders to protect the brand." d) The rationale for Option 2 was stated as follows: "The main rationale for adopting this approach is to protect and maintain the strength of the IFA franchise. Some key facts that set out the impact on brand are: …" e) In Option 2, the potential costs of additional complaints was estimated as £30m. This was on the assumption that after the Cash Injection only 50% of "B" and "C" cases would complain, the £30m being calculated as follows: Cost of remediating all customers on a cash equivalent fund basis £190m Less approx cash injection under option 2 £100m £90m Assumed percentage of customers who received "B" and "C" literature 65% x £90m 50% x £60m £30m The reasoning for the above was explained in an internal note as follows: "The total cost of potential compensation [i.e. after the Cash Injection of £100m] ranges from £0m to £90m. £30m is a reasonable provision within this range allowing uncertainty surrounding the number of customers that may complain. However, it was expressly recognised that this figure could be lower or higher. " f) At the end of the draft paper, under the heading " Recommendation for Approval ", two alternative recommendations were set out (each marked " TBC and delete as appropriate "). The draft conclusion recommending Option 2 put it in terms that: "[tbc and delete as appropriate Option 2 – This would be a big, simple statement. Though more expensive, it supports the brand, our "customer credentials" and our strategic objective to be a customer centric company. It will quickly change the sentiment towards the company as we "do the right thing" and results in a positive message.]" The two draft recommendations were carried over in the same form into subsequent drafts. However, in the final version of the Board Paper, prepared on 9 February 2009, they were replaced by a recommendation from management inviting the Board to approve Option 2. In this recommendation, the reference to Option 2 being more expensive was deleted. It was Mr Gill's evidence that by that time the statement no longer reflected the view of Standard Life's senior management. At about this time, Mr Hare prepared a memo as to the affordability of the proposed customer remediation. In particular, he considered the two options of (1) case by case compensation; and (2) paying money into the fund (up to 5%) to restore prices to pre 23 December 2008 levels. In considering the financial implications, he noted that the current working assumption was that the net cost of option 1 would be £30m (assuming that £100m of compensation claims in excess of the first £10m were met by the PI insurers and 60% of the residual cost was met by the Heritage With Profits Fund) and that the net cost of option 2 would be £112m (i.e. without any assumption of PI insurance recovery). The weekend of 7-8 February 2009 Over the weekend of 7 and 8 February, relevant executives continued to work on the papers for presentation to the Board and discussed their views on the matter. At the instigation of Mr Ledlie, the costs tables were removed from the Board paper, as he found the presentation unhelpful and because there was a "danger of spurious accuracy". On Sunday 8 February, Mr Matthews made a renewed push for Option 2 on the strength of the latest new business figures. In an email at 15.55, he informed the executive group that the sales figures for the previous week showed new business at only 60% of what it had been prior to the Fund issue. He predicted that matters would only get worse, as more IFAs hardened their position. His view was that " The stats would support the work carried out last week forecasting we could be looking at achieving 50% of target in 2009 ". Again, he expressed his position in favour of Option 2: "I continue to believe that if we select option 2 next week we can turn IFAs round over the next 4 weeks. If we go route 1 and we can not re assure IFAs we will be able to put their customers back to pre december price adjustment we won't see a turn round and the IFA pipe line will continue to drop." 9 February 2009 On Monday 9 February, further revisions were made to the draft Board paper leading to the production of a version 0.9 concluding with a clear recommendation by management to the Board of Option 2. "The message to customers, advisers and the market is that we admit our mistakes and do the right thing. In addition we are backing this up with a big, simple statement, of an immediate injection to the fund. Though more expensive, it supports the brand, our "customer credentials" and our strategic objective to be a customer centric company. It is expected to quickly change the sentiment towards the company as we "do the right thing" and results in a positive message." The draft Board paper was provided to the FSA. Mr Ledlie spoke to Mr Riding of the FSA at 1pm by which time Mr Riding had read the draft Board paper; and again at 5pm. In one of the conversations (probably at 1pm), Mr Ledlie asked Mr Riding to indicate where the FSA stood on Option 1: "CL You'll be firming up your views on the options; we are keen to understand where you stand on the two options in the board paper. Option 1 is dealing with each case on its merit, proactively mailing all customers and asking them to complain if they feel they have been misrepresented to. Is this within your range of acceptable options? SR Given the indicative level of customers who would have a case for complaining, we're leaning towards a more proactive approach. CL Option 2 is the blanket correction of the fund value, do you have any concerns with this SR We need to understand how you got to the 4.8% figure and is it representative of the losses. We are OK on the broad principle of blanket remediation. However if you are not going for a permanent fix i.e. fully underwriting the ABS holdings in the fund, we need to understand how you got to the calculation of any compensation and how well customers have been communicated on this actions and their status in the fund." According to Mr Riding's own email to Mr Ledlie after the second of their telephone conversations, Mr Riding indicated that the FSA wished to understand in detail why the plan to compensate all customers in an amount which would only raise the price to the level as at 23 December 2008 was reasonable, in circumstances where this amounted to only partial compensation. In particular, the question was why SLAL did not propose to compensate the Fund for the full fall in the value of the ABS, which Mr Ledlie had indicated was closer to £170m? By 7.30pm that evening, Mr Bold had prepared a brief paper to explain the rationale for the 4.8% blanket remediation to the FSA. One of the justifications included in the paper was that " Not all customers have defective literature so it is not clear that all would receive compensation. A blanket approach is the best outcome for customers and addresses the one off fall issue ". Meanwhile, also on 9 February 2009, a meeting was held at about 3pm between Standard Life's internal and external lawyers and broker, and Mayer Brown, solicitors then acting for the lead insurer on the Primary Policy. Standard Life explained that one option under consideration was to make-up the shortfall in the Fund to the level if would have been in if investments had not been made in ABS. In the evening of 9 February 2009, Mr Ledlie sent to Mr Riding of the FSA a draft of the press release and customer letter for Option 2. Mr Riding's initial thoughts, sent at 19:53, included: "There is no reference to the fact that this is an initial payment only and that you will need to carry out a more detailed review, in conjunction with the FSA, designed to ensure that, as far as possible, customers have been treated fairly." In preparation for the Board Standing Committee meeting set for 4pm on 10 February, papers were sent out to the Standing Committee members (and others) at 22:40 on 9 February, consisting of 3 papers, viz. a) A paper containing analysis and recommendation (entitled Update and Consideration of Next Steps); b) A legal advice paper; c) A note by Mr Ledlie on the Post Event Review. 10 February 2009 On 10 February 2009, the FSA was sent the final version of the main Board paper, a paper prepared in order to answer the FSA's question as to the adequacy of Option 2 and also Mr Ledlie's note on the Post Event Review. Thereafter, there was a telephone call between Mr Ledlie, Mr Nish and Mr McEwan (on behalf of Standard Life) and Mr Riding of the FSA. Mr Riding asked whether he was to assume that Standard Life was still minded to select Option 2, to which Mr Nish replied " yes ". A discussion followed about the terms of the draft press release and the need to avoid the impression that the cash injection would be the totality of Standard Life's response. To this, Mr Nish said that " We are clear on the customers' right to complain post payment "; and Mr Ledlie added that Standard Life would " also think about customers who have left the fund not just to the December date but to some other date to be determined ". In summarising the conversation before it concluded, Mr Ledlie said that: "We'll be feeding back to the Board where you are – that you favour option 2 but will look at it further from a TCF & investigative point of view. Many of your issues will be addressed by the payment of compensation for remaining and exited customers, clearly communicating that further complaint can be made if the customer feels they have lost out and communicating the nature of the fund". To this summary, Mr Riding replied: " Accepting that there is complexity in this area ". During the late morning on 10 February 2009, there was an exchange of emails between Lord Blackwell and Sir Sandy Crombie in advance of the meeting. Lord Blackwell said how pleased he was that Option 2 (which he fully endorsed) came with Sir Sandy Crombie's personal recommendation, since " it is obviously important in communicating this positively within the organisation that you are able to stress the overwhelming value that you set out when we first discussed this of 'doing the right thing by the customer' ", to which Sir Sandy Crombie replied: "Thanks Norman. I developed such a strong view in the end that I came close to cutting out the other option from the Board paperwork. However, I was persuaded by Malcolm that Directors would expect to see both options set out." The meeting of the Standing Committee of the Board of Directors of SL took place at 4pm. Three papers were presented: i) The final version of the Board paper (version 1.1) ii) The final version of the paper summarising the legal advice received (version 1.0). iii) A brief paper explaining the Project Eyre Post Event Review process, which it was proposed to conduct within the company. The Standing Committee met at Standard Life House at 4pm on 10 February. It was attended in person by Sir Sandy Crombie and two other members of the Committee (Mr Nish and Mr Skeoch). In addition, Mr Grimstone (Chairman), Mr Atkinson, Lord Blackwell, Mr Bucknall and Baroness McDonagh (all Members of the Committee) attended by telephone. Of these, only Sir Sandy Crombie gave evidence during the trial. Other attendees were Mr Wood, Mr Gulliford, Mr Ledlie, Mr Matthews, Mr Gill, Ms Gunther, Mr Parnaby and Mr Burns. As to what happened at the meeting, it will be necessary to consider the minutes as well as the evidence of those who attended (i.e. Sir Sandy Crombie, Mr Gill and Mr Ledlie) but at this stage it is sufficient to note that the minutes subsequently signed by the Chairman (Mr Grimstone) show that there was an extensive discussion which culminated in the Committee confirming approval of Option 2 for implementation at the earliest opportunity and authorised the Disclosure Committee to approve the final text of an announcement concerning Option 2 for release as soon as practicable. The announcement of the Cash Injection On 11 February 2009, Standard Life announced an immediate cash injection into the Fund to restore its pre-14 January 2009 value, together with equivalent payments to customers who had sold units in the Fund since 14 January 2009. Events subsequent to the Cash Injection The events after the Cash Injection are of secondary importance and can be summarised briefly. On 11 February 2009, SLAL wrote to Mayer Brown on behalf of the Insurers. The letter stated that SLAL believed that the proposed payments would have the effect of mitigating claims against SLAL in relation to the Fund. SLAL asked for the Insurers' consent under Clause 6 of Section 1 of the Policy to the payments referred to in the announcement. On 17 February 2009, Mayer Brown, wrote two letters to SLAL. One letter attached the Insurers' request for further documentation and information, further to the meeting on 9 February 2009. The other letter noted the action which had been announced and taken on 11 February 2009 and expressed various concerns. The letter stated that the Insurers were in no position to give consent pursuant to Clause 6 of the Policy and did not accept that the costs incurred amounted to Mitigation Costs. Between 12 and 15 February 2009, letters were sent to over 1,900 customers who had made complaints about the Fund, outlining the action taken to reverse the 4.8% fall, stating that Standard Life considered this action to have resolved their complaint and inviting customers to complain further if they had any further issues or cause for complaint. In the event, the vast majority of customers who received these letters did not pursue their complaint. A small number of customers who had raised specific complaints (which Standard Life considered would not have been resolved by the 4.8% injection) received a different letter informing them that their complaint would be investigated. In terms of the Cash Injection and what it entailed, a transfer of about £102m was made from the SLAL Shareholder Fund to the SLAL Non Profit Fund on 11 February 2009. Of that, about £82m was paid directly into the Fund. Subsequently, by a process known as "roll back roll forward", SLAL calculated the effect of the fall in value on transactions which had occurred between 14 January 2009 and 11 February 2009 and reversed those effects. This resulted in further payments amounting to about £20m. The exact total cost of these steps was £101,862,048.18. In a formal letter to Sir Sandy Crombie of 24 February 2009, Mr Riding of the FSA set out the FSA's concerns and the proposed regulatory response. The letter outlined a fact-finding visit; identified the matters which the FSA wished to discuss at this visit, indicated that a Section 166 – Skilled Person's review was likely; and stated that the matter had been referred to the Enforcement Division. The FSA fact-finding visit took place on 6 March 2009 and was attended by (amongst others) Sir Sandy Crombie, Mr Nish, Mr Ledlie and Mr Gill. During this visit, presentations were made to the FSA by reference to slides prepared for that purpose. On 25 March 2009, the FSA issued SLAL and SLI with written notice under Section 170(2) of FSMA of the appointment of investigators to investigate suspected contraventions of FSA regulatory rules and principles in relation to the Fund. As it had foreshadowed, the FSA also required a Section 166 review. On 6 April 2009, the FSA served a requirement notice under Section 166 of FSMA. This review was carried out by Deloitte as the Skilled Person. Meanwhile, prior to receipt of the Section 166 requirement notice Standard Life had, on 20 February 2009, appointed Deloitte to investigate the circumstances of the problems with the Fund as part of Standard Life's Project Eyre Post-Event Review. As a result of this investigation (which included interviews with Standard Life's personnel), Deloitte issued a "Project Eyre Investigation Report" on 21 April 2009. Following the completion of the initial report, Standard Life asked Deloitte to review their proposed approach to the handling of the remaining complaints in relation to the Fund (by reference to 10 sample complaint files). On 7 May 2009, the Eyre Governance Committee approved a draft paper on Standard Life's Approach to Customer Remediation, subject to certain amendments. The last version of the paper was ultimately finalised on 21 July 2009. Its purpose was twofold: (i) to document the actions which would be taken to ensure that all customers had been adequately and appropriately remediated; and (ii) to provide documentary evidence for Deloitte, as Skilled Person, that the requirements of Part 2.1(iii) of the FSA's Section 166 requirement notice had been adequately addressed. The approach to complaints was as set out in section 8 of the paper. A draft of Deloitte's Section 166 report was issued on 29 July 2009 and was subsequently discussed at meetings between Standard Life and Deloitte. The final draft of Deloitte's Section 166 report was discussed at a tri-partite meeting between Standard Life, Deloitte and the FSA on 21 August 2009. It was noted that the FSA had some outstanding questions. The main question related to the use of what was referred to as "Fund FQ" as comparator for compensation but it was agreed that Deloitte could issue the report without further changes. Deloitte issued its Section 166 report on 25 August 2009. On 26 August 2009, Standard Life provided a copy of Deloitte's Section 166 report to the FSA, together with answers to some of the questions raised by FSA at the meeting on 21 August 2009. On 7 September 2009, Standard Life wrote to FSA justifying the use of Fund FQ as a comparator and attaching Deloitte's letter confirming that nothing had come to Deloitte's attention to indicate that Fund FQ was not appropriate as comparator. On 27 October 2009, the FSA confirmed that the actions taken and proposed to be taken, including the use of Fund FQ as comparator, were not unreasonable. The letter indicated that the remediation process could and should proceed with regular updates to the FSA. Beginning on 19 August 2009, the proactive communication exercise referred to in the Approach to Customer Remediation commenced, involving writing to 112,500 customers who had been invested in the Fund at any point between November 2007 and June 2009. A customer response unit staffed by 25 Standard Life employees and 16 contracted complaints handlers had been set up to deal with the resulting complaints. By 22 September 2009, 303 complaints had been received (against 77,686 letters sent). The last mailings were sent out on 29 September 2009. According to Mr Wilson, some 1,701 complaints were received as a result of this mailing. The Claim under the Policy On 16 April 2009, Standard Life wrote to Mayer Brown seeking Insurers' consent, under the first paragraph of Clause 6 of the Policy, in relation to the claim of an individual customer, Mr Mo, to send a letter making an offer of settlement and, if Mr Mo accepted, to settle the claim on those terms. The letter also sought consent to respond in similar terms to other customers who had made similar complaints. On 29 April 2009, Mayer Brown responded to Standard Life (via its solicitors Addleshaw Goddard), agreeing to waive the requirement under the first paragraph of Clause 6 of the Policy requiring Standard Life to obtain Insurers' consent before settling Mr Mo's claim, but expressly reserving all Insurers' other rights. During May to July 2009, the parties corresponded about the terms on which the Insurers would waive the requirement for consent to be sought before Standard Life agreed to settle the claims of individual customers. On 6 July 2009, Mayer Brown wrote to Addleshaw Goddard confirming that, subject to certain pre-conditions, the Insurers were prepared to agree to waive the requirement to seek consent prior to entering into settlements with investors in the Fund. The agreement was subject to (i) a reservation of all other rights; (ii) a per investor settlement limit of £5000, above which an individual settlement needed to be specifically referred to the Insurers; (iii) an aggregate settlement limit of £250,000; and (iv) fortnightly bordereaux. Addleshaw Goddard agreed to the conditions of the waiver on 8 July 2009. With modifications (including as to the aggregate settlement limit), that arrangement continues to date. On 13 August 2009, Addleshaw Goddard informed Mayer Brown that Standard Life proposed to write to any customers who might have been affected by misrepresentation of the Fund prior to the 4.8% fall to invite complaints if they felt dissatisfied with the performance of the Fund in the light of the literature available to them. On 18 August 2009, Insurers (through their solicitors) formally rejected Standard Life's claim to be indemnified under the Policy in the sum of about £100m in respect of the Cash Injection into the Fund. FSA fine On 11 January 2010, the FSA issued a formal Warning Notice fining Standard Life £2.45 million in respect of the issues with the Fund. The fine was accepted by SLAL in full settlement of the FSA's investigation. It was confirmed by a Final Notice dated 20 January 2010. Subsequent claims and FOS decisions One investor, Mr Petrie, who was not satisfied with SLAL's response to his complaint about the Fund issued County Court proceedings. Standard Life took the view that he had not received misleading literature and that he had advice from an IFA who should have understood the nature of the Fund. Despite these arguments, Mr Petrie's claim was upheld on 4 December 2009. Deloitte reviewed a selection of the complaints received in response to the August 2009 right to complain mailing and issued a report in December 2009 in which it broadly approved Standard Life's approach to complaint handling. In May 2010, the FOS issued certain decisions in favour of complainants in relation to the Fund, in which (in broad summary) the essence of the complaints was that the Fund had been described as "secure", or that there was no reference to the Fund containing ABS or the level of the exposure to such assets, not that the complainants understood that the Fund was a cash fund. At a meeting with the FOS on 9 June 2010, SLAL took the position that it was justified in having declined customer complaints within the relevant category. As a result, SLAL decided to appeal the finding against it in the case of a Mrs G to the FOS Ombudsman (i.e. the appeal tier of the FOS complaints process). SLAL's response to the Adjudicator's first tier decision was submitted on 16 July 2010. On 24 September 2010, the FOS Ombudsman decided the matter in Mrs G's favour and against SLAL. In broad summary, the Ombudsman (Mr Roy Milne) concluded that the Fund description as "secure" made it reasonable for Mrs G to think she would not lose money. Further cases followed with similar results. At a Board meeting of SLAL on 26 November 2010, SLAL's directors decided that the arguments of the FOS were not a sufficient justification for changing the approach to remediation; that it did not agree with the FOS rationale and would say so; that SLAL would continue to settle cases upheld by the FOS on a case by case basis; but that SLAL would not review all declined cases (amounting to about 1400 cases). As at 3 October 2011, SLAL has made remediation payments to customers in connection with the issues affecting the Fund in the amount of about £4.7m. Commencement of the current proceedings On 6 April 2010, Addleshaw Goddard served the Claim Form in these proceedings on Mayer Brown on behalf of the Insurers. H. "Mitigation Costs" Having set out a summary of relevant events, I deal now with the parties' respective submissions. It is convenient to consider, first, the scope and effect of the definition of " Mitigation Costs " which has four main elements, namely (a) a payment of loss, costs or expenses; (b) reasonably and necessarily incurred by Standard Life; (c) in taking action to avoid or to reduce a third party claim/claims; (d) of a type that would have been covered under the Policy. ".….a payment of loss, costs and expenses…" As to (a) ("a payment of loss, costs and expenses"), SLAL submitted that the Remediation Payments were manifestly a "cost" incurred by SLAL; and also "payment of a loss" suffered by customers as a result of the fall in value of the Fund. This was denied by the Insurers. In essence, the Insurers accepted that these were wide words but submitted that these words in effect provide that only action of a certain character can qualify for coverage as "Mitigation Costs" and take their meaning not just from the words that follow but from the more general context in which Mitigation Costs cover is provided. That submission is no doubt correct and it will, of course, be necessary to consider carefully whether the other ingredients of the clause have been satisfied. Nevertheless, it seems to me that, as submitted by the Claimant, this first element is plainly met in the present case ie the Remediation Payments were a "cost" and/or a "payment of loss" falling within the definition of Mitigation Costs. "…reasonably and necessarily incurred…." As to (b) ("reasonably and necessarily incurred"), SLAL submitted that the requirement to act reasonably is a familiar one in the context of steps taken to mitigate loss. However, it was a central part of the Insurers' case that these words import two distinct qualitative requirements ie that the payments must be incurred both "reasonably" and "necessarily". In particular, the Insurers submitted as follows. First, the payments must have been reasonably incurred for the purpose of avoiding or reducing actual or potential third party claims. The requirement that the payments must be reasonably incurred in taking the relevant action is plain. That is what the clause states – and SLAL does not suggest otherwise. However, it seems to me that the introduction of the concept of "purpose" at this stage of the argument is confusing. That word does not appear in the definition of "Mitigation Costs" and, in my view, it is better to consider that aspect of the argument separately (see below). Second, the Insurers submitted that the question of what is "reasonable" is not to be viewed from the sole (commercial) perspective of the insured. The question, said the Insurers, arises in the context of action taken for the mutual benefit of insured and insurer in avoiding or reducing the third party claim(s) which the insured would otherwise have to face and the insurer would otherwise have to cover; and, in that context, the question is what is reasonable as between insured and insurer , having regard to the character (see above) and purpose (see below) of a mitigating costs payment. Again, it seems to me that this submission introduces a gloss which is, at the very least, confusing. Of course, the payments must be of the "character" (adopting the term used on behalf of the Insurers) stipulated in the definition; and they must also be reasonably and necessarily incurred in taking the stipulated action. Nothing less will do. In any particular case, it will no doubt be necessary to consider carefully whether the insured has acted "reasonably" which is, of course, an objective test. Again, I did not understand SLAL to suggest otherwise. However, it seems to me that there is no justification, whether as a matter of principle or by reference to the wording of the clause, to import any further requirement – particularly having regard to the additional words "and necessarily" which also appear in the clause. Third, the Insurers submitted that it is not enough that the payments for which policy indemnity is sought should have been reasonable: they must also have been necessarily incurred i.e. at the time when the payments were made, it must have been necessary to make payments of the type which were made to avoid or to reduce third party claims which the insured was seeking to mitigate; and the necessity test requires the insured to demonstrate why the step which was taken had to be taken when it was so as to avoid or to reduce actual or potential third party claims. In support of the foregoing, the Insurers relied upon Pabari v Sec of State for Work and Pensions [2005] 1 All ER 287 [39], where it was stated that the word 'necessarily' " does not mean reasonably or sensibly or justifiably. It is higher on the spectrum than that. Nor does it mean reasonably necessarily." It sets "a high threshold," albeit one which must have appropriate regard to the realities (ibid at [40]). On behalf of SLAL, Mr Leggatt QC submitted that what is added by the words " and necessarily " is "less clear" because the word " necessarily " is capable of a range of meanings or different positions on the " spectrum of exigency ", depending on its context: see Pabari v Sec of State for Work and Pensions [2005] 1 All ER 287 , 297-8 at [38] to [40]. Mr Leggatt QC also relied upon Travelers Casualty & Surety Co of Canada v Sun Life Assurance Co of Canada [2007] Lloyd's Rep IR 619 . In that case, the loss for which a Financial Institutions Professional Liability Policy provided an indemnity included costs " reasonably and necessarily incurred " in defence of any claim. In considering whether various expenses had been reasonably and necessarily incurred by the assured (at p.689f), Christopher Clarke J did not specifically discuss what was meant by the term " necessarily ". His approach, however, seems to have been to view the phrase " reasonably and necessarily " as a single test to be complied with rather than to seek to analyse it into component parts. Thus, Mr Leggatt QC submitted that from the way in which the Judge applied the test, it is implicit that he regarded the test as requiring a somewhat – but not greatly – higher standard of justification for the relevant expenditure than would the term " reasonably " if it had stood alone; and that, on this basis, if one has to identify separately the sense of the words " and necessarily " in the present context, it is that costs will not be recoverable to the extent that they could reasonably have been avoided in that there was another more appropriate and less expensive course of action available to the Assured to avoid or reduce the third party claim(s). I do not agree that this is the correct test. In my view, that formulation simply restates in somewhat more convoluted form the test of "reasonableness" and, in effect, ignores the express additional words "and necessarily" . In accordance with ordinary principles of construction, those additional words were presumably inserted for some purpose and, in my view, it is impermissible to ignore them. As to their meaning, I am content to adopt what was said in Pabari and to assume in favour of the Insurers that they set a "high threshold" albeit one which must have appropriate regard to the realities. There is a further important point with regard to the proper construction of these words viz the concept of what is "necessary" and the meaning of "necessarily incurred" must, in my view, depend upon the context in which those words are used. Here the context is that the payment must be necessarily incurred in taking action to avoid or to reduce a third party claim. Chopping up the definition into small chunks is all well and good – but it is important to read the definition as a whole. The fact that it may be "possible" or "open" to pursue either course A or course B does not, of itself, mean that course A is not "necessary" if the test of what is "necessary" is defined or identified. In such circumstances, the meaning of what is "necessary" will depend on its context. By way of analogy and ignoring the statute on seatbelts, it is, of course, "possible" or "open" for a passenger not to wear a seatbelt but this does not mean that it is not "necessary" to wear a seatbelt to avoid or to reduce the risk of injury in a car accident. Finally, in this context, I should mention one further submission made on behalf of SLAL arising out of the last sentence of the second paragraph of Condition 6 which I have already quoted in full but which provided in material part as follows: "Pending consent, the Assured may proceed to incur Mitigation Costs but, the indemnity in relation to the amount of Mitigation Costs payable under this Policy will be reduced in amount to the extent that it has been incurred unreasonably." Relying upon this wording, Mr Leggatt QC submitted in summary as follows: a) Where this clause applies (ie "pending consent" of the Insurers to the payment of Mitigation Costs), the Assured's position is improved in two respects. b) First, it provides for a reduction in the amount of Mitigation Costs payable under the Policy only to the extent that expenditure has been incurred " unreasonably ", and does not include the words " or unnecessarily ". Thus, a less stringent test – of reasonableness alone – applies in this situation. c) Second, the provision reverses the burden of proof. The way in which it is phrased indicates that, where costs are incurred by the Assured in taking action to avoid or to reduce third party claims, the amount of such costs is prima facie payable under the Policy subject to the ability of the Underwriters to prove that the whole or part of the amount has been incurred unreasonably so that the indemnity falls to be reduced to that extent. d) These variations of the test to the benefit of the Assured where costs are incurred " pending consent " make good sense given the function of the consent mechanism discussed above. If the Assured has not had the opportunity to discover before making a payment whether or not the insurers will consent to it, it is reasonable to apply a test for indemnity which is more favourable to the Assured. This rationale would have little force if the reason why the insurers' consent has not yet been given (or refused) when a payment is made is that the Assured has failed to seek such consent as soon as practicable. But this point can be addressed by interpreting the words " pending consent " as a shorthand which covers the situation where it has not yet been practicable to seek consent as well as circumstances where consent has been sought as soon as practicable but the insurers' response to the request has not yet been given. Mr Leggatt QC submitted that this gives a commercially sensible and not unduly strained construction to what on any view is an elliptical phrase. e) Thus, in summary, Mr Leggatt QC submitted that the effect of Condition 6 is as follows: i) If the Assured seeks the consent of the insurers to a proposed payment as soon as practicable and such consent is given, the Assured is entitled to an indemnity under the Policy and the insurers have waived their right to argue subsequently that the payment was not covered by the Policy. ii) If the Assured makes a payment without the consent of the insurers – having either failed to seek such consent as soon as practicable or having sought such consent which has been reasonably refused, the Assured will be entitled to an indemnity under the Policy only if it proves that the payment has been " reasonably and necessarily " incurred. iii) If the Assured makes a payment without the consent of the insurers in circumstances where it has not been practicable to seek or to obtain such consent, the Assured is entitled to an indemnity under the Policy for the amount incurred save to the extent that the insurers prove that it was incurred unreasonably. f) The present case falls into the last of these categories. It was not practicable to seek the Insurers' consent before making the Remediation Payments and Standard Life therefore had to take the decision to make them without knowing whether or not the Insurers were willing to consent to the payments. In these circumstances, provided that Standard Life is able to show that the other elements of the definition of Mitigation Costs are satisfied, the burden is on the Insurers to demonstrate that part or all of the costs incurred are not recoverable because they were incurred unreasonably. I do not accept the thrust of these submissions for the following reasons. First, I am not persuaded that it was not practicable to seek the Insurers' consent prior to the Cash Injection. However, and in any event, it seems to me that the Claimant's submission reads too much into the last part of Clause 6 and ignores its context. In effect, Clause 6 is the provision which constrains the Assured from admitting liability for or settling third party claims without consent. It also requires the Assured to seek the consent of the insurers if 'Mitigation Costs' payments are proposed to be made and it requires the Assured to do so " as soon as practicable ". For their part, the insurers' consent is not to be unreasonably withheld or delayed. The clause then continues as quoted above. As submitted by Mr Schaff QC on behalf of the Insurers, nothing in this clause operates as a second or additional basis for recovering so-called mitigating payments, separately and apart from the requirements of the insuring clause and the policy definition of Mitigation Costs. Clause 6 expressly refers to Mitigation Costs (as defined) and pre-supposes that the relevant ingredients of the definition have been established. Assuming that the relevant ingredients of the definition of Mitigation Costs are satisfied but that it has not yet been possible to obtain insurers' consent, the Assured may nonetheless proceed to incur the costs. The built-in assumption is that they are Mitigation Costs and that consent will be forthcoming but even so, the insured is at risk that the extent (or quantum) of recovery may subsequently be revisited insofar as incurred unreasonably. However, nothing in Clause 6 undermines or re-writes the primary definition of Mitigation Costs and in particular, the need to show necessity (as well as the other elements) on which the coverage depends. "…in taking action to avoid…or to reduce…" The proper construction of this phrase was a central and major issue. In essence, Mr Leggatt QC submitted that this phrase means action that is expected or intended to avoid or to reduce a third party claim; and that the test is subjective in so far as Standard Life must have believed that the action taken would have the effect either of avoiding claims altogether or reducing the size of such claims. The Insurers argued for a different interpretation of these words which they submitted should be construed to mean action that is taken for the purpose, in the sense of with the motive , of avoiding or reducing claims. A major plank of their case was that, in selecting Option 2 in preference to Option 1, SLAL was motivated principally by a desire to protect its commercial reputation and 'brand'. That, said the Insurers, was SLAL's "sole" or "dominant" purpose/motive or the "key factor" in making all (or at least some) of the Remediation Payments – in particular the Cash Injection. If this was so, then the Insurers submitted that it follows that the costs incurred in making at least the Cash Injection cannot be Mitigation Costs because it was not incurred for the sole or dominant purpose / motive of avoiding or reducing third party claims. Although SLAL accepts that the damage that would have been done to its business and reputation if prompt and appropriate action had not been taken (referred to generally as "brand damage") was certainly a factor in its internal discussions of the issue, it does not accept that the desire to minimise such damage was its main "motive" for adopting Option 2. I consider this aspect from a factual viewpoint further below. However, Mr Leggatt QC submitted that whether SLAL is entitled to an indemnity cannot rationally depend on the answer to this question. That is because Standard Life's motives for taking the action that it did are irrelevant from the point of view of the Insurers and could not sensibly or rationally have been regarded by the parties as an appropriate criterion for determining when an indemnity is payable. In support of such case and by way example, Mr Leggatt QC submitted that the point can be tested by comparing two hypothetical cases. In Case A the Assured faces third party claims which, unless action is taken to avert them, will result in a Civil Liability of £100m that is covered under the Policy. The Assured incurs costs of £60m in taking action which is expected and intended to avoid such claims and does indeed have that effect – its dominant motive being that it wishes to avoid the higher costs that would otherwise be incurred in paying the claims. Case B is exactly the same as Case A, except that in this case the Assured's main motive for taking the relevant action is not the desire to reduce its liability – though the Assured expects and intends that the action taken will have this result – but is a desire to prevent reputational damage. From the Insurers' point of view there is no relevant difference between the two cases. In each case the action taken will save the Assured and hence the Insurers £40m which would otherwise have been payable under the Policy. It would be wholly irrational if in Case A the Assured was entitled to recover the £60m spent as Mitigation Costs under the Policy and yet in Case B was entitled to recover nothing, merely on account of the motive from which it had taken the action which was expected to and did reduce its liability. I am unable to accept the Insurers' submissions on this point. This is so for at least three reasons. First, it seems to me that the language of the clause points clearly in favour of intended "effect" or "result" rather than "motive" ie the words used speak of payments being incurred in taking action . The focus of the language is the intended objective. Second, it seems to me that the example posed by Mr Leggatt QC highlights the potential irrationality – and indeed absurdity – of the construction advanced by the Insurers. A further example is the one I put to Mr Schaff QC in closing submissions. Take a simple case where an insured faces a certain legal liability of a type which is covered by the Policy and that, if the matter proceeds to trial, judgment will be entered for the claimant for the entire claim which amount will be recoverable from insurers under the Policy. The matter is shortly due to come to trial. The opportunity arises for the insured to settle the claim for 90% of the amount claimed. Assume that such settlement is reasonable and necessary and that (for whatever reason) it is impossible or impracticable to obtain insurers' consent in advance of settlement and payment to the third party. The insured settles the claim. In the ordinary course, the insurers would be liable. But could insurers avoid liability in such circumstances if it could be shown that the insured's motive for settling was to avoid a public judgment which would impact on its "brand" ? In my judgment, the answer is: No. Provided the settlement payment was made in taking action to avoid or to reduce the third party claim which was of a type that would have been covered under the Policy, the insured's motive in making the payment is extraneous and irrelevant. Third, it seems to me that as a matter of practicality it would be odd (to say the least) that an Assured's entitlement to recover under a professional indemnity policy should depend on 'motive'. An Assured like SLAL is a large organisation with a management structure and governed by a Board of Directors. How is 'motive' to be determined ? How is it to be proved ? And whose 'motive' is relevant ? Different individuals may have different 'motives'. In my judgment, these considerations point strongly against the Insurers' submissions. Apportionment ? As I have stated, it was the Insurers' case that in determining whether the relevant action was taken and the relevant cost incurred to avoid or to reduce third party claims, the principal enquiry should be directed towards identifying the insured's dominant purpose; and that in the present case the dominant purpose of making the Cash Injection was to avoid or to reduce brand damage which was not of a type covered by the Policy. Further, it was the Insurers' case that if one (uninsured) purpose was dominant, the insured should not be entitled to recover for Mitigation Costs by demonstrating that there was a secondary collateral effect in terms of avoiding or reducing actual or potential third party claims which SLAL perceived the making of the payment was likely to bring about, particularly where it was not necessary to make the payment to achieve that secondary collateral effect. However, the Insurers submitted (in the alternative) that if there were two genuine and equally efficacious or dominant purposes being pursued in taking the relevant action and incurring the relevant expense, one of which was the purpose of avoiding or reducing actual or potential third party claims and one of which was the preservation of uninsured interests (eg brand damage), then an apportionment of the relevant mitigating cost requires to be made between the respective insured and uninsured interests at risk and sought to be preserved by that expenditure. In summary, SLAL disputed that there was any scope for apportionment in a liability policy. In particular, Mr Leggatt QC submitted that if an insured buys cover for £100m and then incurs a liability of £200m, it is not open to the insurer to argue that the insured should recover only £50m on the ground that he has only insured half of his liability; and that this is because the principle of a liability policy is that it covers the first part of any loss up to the policy limit. So if the insured incurs a liability which is less than the policy limit, he will recover the full amount of the liability; and if the liability exceeds the policy limit, the insured will recover the full sum insured. Further, Mr Leggatt QC submitted that the same principle must therefore apply where the policy covers costs incurred to avoid a liability. In particular, Mr Leggatt QC submitted as follows: a) If an insured with cover of £100m spends £120m in successfully taking action to avoid liabilities of £200m, it is not open to insurers to say that the recovery should be only £60m on the basis that half the expenditure should be regarded as incurred for the purpose of averting liabilities which were uninsured. b) The position is a fortiori where expenditure is incurred for the purposes both of avoiding insured liabilities and of avoiding losses of a kind that are not even insurable under the relevant kind of policy. Damage to the insured's commercial reputation and brand is an instance of this. When claims are made against a company which result in findings of liability, it must often be the case that the publicity given to the insured's conduct will cause damage to its reputation and hence lost business. However, such losses are not recoverable under an ordinary policy of liability insurance. Given that the insurers cannot reduce the indemnity payable on the ground that the insured has not bought protection for all its liabilities, they certainly cannot do so on the ground that the insured does not have protection for losses which are not even insurable under a policy of the relevant kind. c) By the same token, if the insured incurs expenditure for the dual purpose of averting claims that would be covered by the policy and averting brand damage (which would not be covered), the latter fact is in principle irrelevant. One can test the point by supposing that Standard Life had chosen in the present case to adopt Option 1 and had therefore set up a scheme under which claims were paid without any finding of liability by a court or ombudsman. No doubt the damage to Standard Life's brand, if this option had been adopted, would have been substantially less than if Standard Life had taken no action at all to avoid liabilities and had disputed every customer's claim and lost. No doubt too one of the motivations for setting up a compensation scheme would have been to avoid the huge damage to Standard Life's business that would have been suffered if no action to avoid claims had been taken. The Insurers could not in those circumstances have argued that they should only pay a proportion of the costs of compensating customers on the basis that those costs were also incurred for the purpose of avoiding uninsured losses. There is no difference in principle where the action taken was Option 2. In support of their apportionment argument, the Insurers submitted (in summary) as follows: a) This is a principled approach which reflects the fact that a payment made for two purposes, one of which is for the common benefit of insured and insurer and one of which is for the sole benefit of the insured justifies a proportionate recovery and nothing more. b) There is no justification for loading the entire expense on the insurer and allowing the insured to preserve its uninsured interests at no cost to itself. c) The archetypal example is that of under-insurance. In that instance, any sue and labour expenditure is treated as incurred partly for the benefit of the insurers (to the extent of the indemnity they have agreed to provide expressed as a proportion of the value of the insured property at risk) and partly for the benefit of the insured (to the proportionate extent of the uninsured value of the property at risk) – cf. Cunard SS Co Ltd v. Marten [1902] 2 KB 624 , [1903] 2 KB 511 . Thus, if £100 is paid in sue and labour expenses to save from loss property valued at £400 but insured only for £100, 25% of the expenditure is attributable to the insurers' interest in the property and 75% is attributable to the insured's uninsured interest in the property. As Rix J. said in Royal Boskalis Westminster NV v. Mountain [1997] LRLR 523 at 602: "If a merchant chooses to insure only half the goods in a vessel, and then sues and labours to save his goods as a whole, he should receive only an apportioned share of his sue and labour expenses from his insurer." d) However, under-insurance is just one instance of the broader principle. Again, to quote Rix J in Royal Boskalis Westminster NV v. Mountain [1997] LRLR 523 at 602: "If a shipowner insures only one of his two vessels, and then sues and labours to save the pair of them, a similar apportionment should apply. It may be different if an uninsured loss is prevented only accidentally by sue and labour expenditure aimed at the protection of some other insured property; or if, again a somewhat different case, the assured's purposes were manifold, but one was subsidiary to another." e) In Kuwait Airways Corporation v. Kuwait Insurance Co [1996] 1 Lloyd's Rep. 664 at 697-8, Rix J confirmed that the principle that an apportionment should be made in accordance with the insured's and insurers' respective interests at stake applies equally in the context of non-marine insurance. f) Although sue and labour clauses do not generally appear in non-marine insurance policies (at least, outside the aviation market), in many respects the ancillary Mitigation Costs cover in the present case (with its focus on the purpose of the expense) is analogous to sue and labour, albeit (with its requirement of proving necessity) more restrictive in ambit. g) The statutory duty to sue and labour has been described (again by Rix J) as " akin to the duty to mitigate loss " – State of the Netherlands v. Youell [1997] 2 Lloyd's Rep. 440, 458 (cited with apparent approval by Phillips LJ [1998] 1 Lloyd's Rep. 236, 244). While the statutory duty is not applicable in the non-marine context and it has been held that no term to take steps to avert or to minimise a loss can be implied into a non-marine liability insurance policy – Yorkshire Water v. Sun Alliance [1997] 2 Lloyd's Rep. 21, the present policy contains an express term covering Mitigation Costs (as defined). The only difference is that there is nothing in the Policy to oblige SLAL to incur Mitigation Costs. Rather, the Policy provides indemnity where SLAL does so. h) In principle, and assuming (arguendo) that the Cash Injection was incurred for dual purposes, one insured and the other uninsured, apportionment principles should apply. Although there is no authority covering the issue of apportionment in a liability insurance containing an express 'Mitigation Costs' clause, it is hard to see why it should make any difference whether an insured who is incurring expenditure partly for his own uninsured commercial interests happens to incur the same expense to avoid insured property damage on the one hand or to avoid insured liabilities on the other hand. In both situations, the expenditure is being incurred, partly to benefit the insured alone and partly to benefit the insured and insurer jointly. Why should such expenditure fall on the insurer alone? These are powerful submissions. However, on balance, I am unable to accept them for the following reasons. First, the Insurers' apportionment argument is somewhat novel outside of the field of marine insurance and, more particularly, in the context of a liability policy. A similar point arose in Cunard v Marten [1902] 2 KB 624 , 630 (affirmed at [1903] 2 KB 511 ) which concerned a liability policy but the sue and labour clause in that case was held inapplicable as a matter of construction. In Enterprise v Strand [2006] 1 Lloyd's Rep. 500 at [56-7, 174-5], the issue of apportionment was raised but not decided. As submitted by the Insurers, in Kuwait Airways Corporation v. Kuwait Insurance Co [1996] 1 Lloyd's Rep. 664 at 697-8, Rix J extended the principle by analogy with the sue and labour principles developed in the marine context to an aviation war risks and allied perils policy. However, that was not a liability policy. The novelty of the point in the specific context of a non-marine liability policy and the absence of any direct authority suggests, at the very least, a need for caution. Second, it is important to note that the argument is at least largely derived from the field of under-insurance in the marine context which, of course, has a long history and is well established: see generally Arnould's Law of Marine Insurance and Average , 17 th Edition (2008), para 25-19. However, in the absence of agreement that the policy is subject to average, the principle of averaging does not apply in non-marine insurance at all. Under a non-marine property insurance, the insured can recover the whole amount of his loss up to the limit of sum insured even if the property is underinsured: see MacGillivray on Insurance Law , 11 th Edn, 2008, para 23-033. In effect, the Insurers are here seeking to export a principle from marine property insurance to non-marine non-property professional liability insurance. These are very different contexts which, at the very least, reinforce the need for caution. Third, so far as under-insurance is concerned, the starting point is the law as codified in section 81 of the Marine Insurance Act 1906 ie where property is underinsured the assured is treated as being his own insurer for the proportion of the value of the property which exceeds the insured amount and any recovery under the policy for loss or damage to the insured property will be reduced accordingly. The same principle applies to sue and labour expenses. Section 78(3) of the Marine Insurance Act provides: "Expenses incurred for the purpose of averting or diminishing any loss not covered by the policy are not recoverable under the suing and labouring clause." Thus, under the principle of averaging, an assured under a marine policy who insures his property only to the extent of half its value will recover only half of his loss if the property is damaged and, in the same way, will recover only half of any expenditure incurred to avert damage to the property if such expenditure is recoverable under a sue and labour clause. In Royal Boskalis v Mountain, Rix J explained the reasoning as follows: "….if half the goods must be treated as uninsured (the averaging point), then the sue and labour expenditure must be apportioned between the goods insured and uninsured. This, in my judgment, makes good sense. If a merchant chooses to insure only half the goods in a vessel, and then sues and labours to save his goods as a whole, he should receive only an apportioned share of his sue and labour expenses from his insurer. If a shipowner insures only one of his two vessels, and then sues and labours to save the pair of them, a similar apportionment should apply." In Royal Boskalis, Rix J in effect extended this principle to a situation in which expenses are incurred partly to protect insured property and partly to protect some other interest which is not insured under the relevant policy. In that case the plaintiff companies owned a dredging fleet which was engaged in a project in Iraq at the time of the Iraqi invasion of Kuwait in 1990. The defendants had insured the fleet against war risks. The United Nations imposed sanctions on Iraq; and Iraq promulgated a law that all assets of companies of countries taking part in sanctions were to be seized. The plaintiffs entered into negotiations with the Iraqi government and reached a "finalization agreement" under which the dredging fleet and its personnel were released in return for waivers of certain claims and for certain payments. The plaintiffs claimed the costs which they had incurred as a result of entering into the finalization agreement under the sue and labour clause in their policy. Rix J held that the costs were incurred for the dual purpose of saving the plaintiffs' dredging fleet (which was insured) and saving the lives of their personnel (which were uninsured) and should in principle be apportioned between these two purposes. He ascribed an equal value to the interests preserved by the two purposes and held that the plaintiffs should recover 50% of their costs. On appeal, the Court of Appeal held that no costs of entering into the finalization agreement were recoverable under the policy, so that the issue of apportionment did not arise for decision. However, as to the apportionment argument, Phillips LJ stated at p647: "I do not believe there to be any doubt that where ship or cargo is under-insured, sue and labour expenses will only be recoverable in the same proportion that insured value bears to actual value. In such circumstances, it is possible arithmetically to apportion the expenses and thus identify, with only a modest degree of artificiality, that portion of the expenses incurred for the benefit of the insured, as opposed to the uninsured, property. It is also true that lives can be the subject of insurance, and that it is possible to insure against liability to pay life salvage. Those who are interested in ship and cargo do not usually, however, have insurable interests in the lives of crew or passengers. It must frequently be the case that, just as in the case of salvage and general average, sue and labour expenses are incurred, in part, for the benefit of lives which are also at risk as a result of the insured peril. Salvors who save lives as well as property have their award against ship and cargo enhanced to reflect that fact, and Underwriters of ship and cargo between them bear the whole cost - The Bosworth No 3. [1962] I Lloyds Rep. 483. Never before has it been suggested that liability under the sue and labour clause should be reduced to reflect the fact that the exertions in question have been motivated in part by a desire to save lives. In such circumstances, as the Judge recognised, it is impossible to carry out an arithmetical apportionment between property and lives at risk. The reality is that the entirety of the expenditure is directed to two objectives which are different in kind. Preservation of life cannot be equated with preservation of property. Provided that the expenses can reasonably be said to have been incurred for the preservation of the property, it does not seem to me either sound in principle or desirable that the assured should be penalised if they were sufficiently concerned for lives at risk to have been concerned to save not only their property but those lives." For these reasons I consider that the Judge should have held the Joint Venture entitled to recover the full cost of entering into the Finalisation Agreement rather than only half that cost. As the Joint Venture failed to establish that there was any cost at all, the success of the Cross Appeal can do no more than rub salt in the wound." Given the decision of the Court of Appeal that no costs were recoverable, this part of the judgment of Phillips LJ was obiter . Nevertheless, the following may be noted. First, the general rule as to apportionment is expressed by specific reference to under-insurance. Second, contrary to the conclusion reached by Rix J, the view expressed by Phillips LJ was that although the reality was that the expenditure was directed to two objectives, nevertheless it was neither sound in principle nor desirable to penalise the assured by reducing the amount that would otherwise have been recoverable. In effect, it was sufficient that the expenditure was incurred for the preservation of property without reduction or apportionment regardless of the other uninsured objective. In my judgment, such approach is inconsistent with the Insurers' submissions on apportionment in the present case. It was submitted on behalf of the Insurers that this approach by Phillips LJ was taken for "policy reasons" and, as I understood, was distinguishable from the present case on that basis. I am not sure what was meant by "policy reasons". I presume that the point being advanced by the Insurers was that, as a matter of policy, the Courts should not penalise an insured for taking action whose object was (in part) the saving of lives. However, I do not read the passage from the judgment of Phillips LJ in that limited way. Fourth, although the decision of Walton J in Cunard v Marten turned on the conclusion that the sue and labour clause in that case was inapplicable and did not form part of the insurance contract, there are certain passages in the Judgment which, at the very least, highlight the difficulties of importing any general principle of apportionment into a liability policy. The Cunard case concerned a liability policy which insured a shipowner against liability to cargo owners up to £20,000 in relation to a cargo of mules, whose value was considerably greater than £20,000. The vessel ran aground and costs of £7,744 were expended in saving some mules and attempting to save others. The policy was written on the standard maritime form, including a sue and labour clause. Walton J said that " it is very difficult to apply the sue and labouring clause to such a contract ": [1902] 2 KB 624 at 629. He said that underinsurance causes no difficulty in principle in an insurance on goods containing a sue and labour clause, because the sue and labour costs are averaged in the proportion that the insured value of the goods bears to the entire value. This passage is the one quoted by Rix J in Royal Boskalis . However, that passage was immediately followed in the judgment of Walton J by these words: "But how can this be applied in the case of a contract of indemnity against liability to a limited amount such as is here sued upon?" Walton J then gave several reasons why the principle of apportionment which is applicable to a (marine) insurance on goods is not appropriate in the context of a liability policy. He concluded that the standard marine sue and labour clause was inapplicable and not part of the contract in that case. The Court of Appeal affirmed Walton J's decision, approving his reasoning in full. For all these reasons, I am, at the very least, very doubtful whether it can be said that there is any general principle of apportionment in a liability policy although I see much less objection in principle to the possible application of apportionment in the specific context of costs incurred by way of mitigation. However, whether or not, such mitigation costs can or should be apportioned in circumstances where they are directed at two objectives will, in my judgment, ultimately depend on a proper construction of the particular policy in any given case. Here, it seems to me that the wording points against any requirement of apportionment in such circumstances. Adapting the words of Phillips LJ in Royal Boskalis , provided it can be said that the relevant costs are reasonably and necessarily incurred in taking action to avoid or to reduce third party claims of the stipulated type then such expenditure will fall within the definition of Mitigation Costs; and it does not seem to me either sound in principle or desirable that the assured should be penalised if it might be said that those costs were also incurred to obtain some further or additional benefit. Nor do I consider that there is anything in the language of the clause to require such a conclusion. For example, the word "solely" or "exclusively" does not appear in the clause so it cannot, in my judgment, be said that the language of the clause requires the mitigation costs to be incurred solely or exclusively in taking action to avoid or to reduce third party claims of the stipulated type; and I see no justification for importing any such limitation into the wording. It seems to me that this conclusion is also supported by the authorities which address the question of the treatment of losses by a combination of causes in the insurance context including, most notably, the important decision in JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1985] 1 Lloyd's Rep 264 (Mustill J), [1987] 1 Lloyd's Rep 32 CA which is the modern locus classicus in this context: see Arnould para 22-18. That decision is authority for the general proposition that where there are two proximate causes of loss, one an insured peril and one outside the scope of the policy, the insured will be able to recover provided the latter is not expressly excluded. I recognise that The Miss Jay Jay was, of course, a marine property case and is not necessarily determinative of the problem which arises in the present context. Nevertheless, it seems to me a helpful analogy. For these reasons, I accept the two main submissions advanced by Mr Leggatt QC on behalf of SLAL with regard to this part of the definition of "Mitigation Costs". Thus, it is my conclusion that in order to succeed and so far as this part of the definition of Mitigation Costs is concerned, SLAL must show that the costs claimed were expected and intended to avoid or to reduce third party claims of the stipulated type; and SLAL will be entitled to recover in full even if such costs were also incurred for some other purpose. "…of a type that would have been covered under the Policy…" As to (d), ("…of a type…"), the type of claim covered by the Policy is described by the Insuring Clause (quoted earlier) which provides an indemnity in respect of third party claims made during the Policy Period arising out of the provision of (or failure to provide) Financial Services. The Insurers asserted that " a significant number " of claims were "of a type" that would not have been covered under the Policy for two reasons. First, they said that Standard Life was not " liable per se " for any fall in value of the Fund but would only have been liable to those customers to whom there had been mis-selling. Second, the Insurers alleged that any liability for delay in revaluing the Fund prior to 14 January 2009 would have been excluded from cover by Exclusion 18(iii). The latter is a discrete point which I deal with separately below. As to the first point, Mr Leggatt QC conceded that Standard Life would only have been liable to customers to whom there had been mis-selling. However, he submitted that the Board of Standard Life reasonably and properly formed the view that, given the way in which the Fund had been described and marketed, the fall of 4.8% was outside the reasonable expectations of any customers and there had at least to that extent been mis-selling for which Standard Life was liable to make redress. In support of that submission, Mr Leggatt QC relied in particular on the events following the announcement of the 4.8% fall in the price of units in the Fund on 14 January 2009. Further, Mr Leggatt QC submitted that by the time of the decision taken on 10 February 2009, Standard Life had already received a substantial volume of complaints regarding the Fund and faced the prospect of many more; that such complaints amounted to third party claims whether or not they contained an express demand for compensation as Standard Life was duty bound to investigate them and offer compensation where a complaint was upheld; that the vast majority of the complaints was concerned with the 4.8% fall and expressed shock, disappointment or anger that this could occur given the purported nature of the Fund; that those complaints which were successfully pursued by customers who were not satisfied by the February Remediation Payments were also directed at the nature and risk profile of the Fund as it had been represented by Standard Life; and that it is plain that such third party claims arose out of the provision of (or failure to provide) financial services and were of a type which would have been covered under the Policy. I confess that I found this part of the Claimant's submissions somewhat confusing. I accept that there is a risk of a too zealous syntactical analysis of the words used in the definition of "Mitigation Costs". However, in the context of the last part of the definition, it seems to me that the (subjective) view which the Board may have taken as to whether the claims were of a type which would have been covered under the Policy is irrelevant even if such a view was based on reasonable grounds. To be clear, it is my view that the burden is on the Assured to show that the third party claims are of the requisite type ie a type which would have been covered by the Policy. The foregoing is consistent with the general scope of the Policy which, as submitted by the Insurers, can be summarised as follows: a) Section 1 of the Policy provides professional indemnity cover. It is classic liability insurance, providing indemnity in respect of the Assured's Civil Liability (as defined) for any third party claims made during the Policy Period. The provision of indemnity for Mitigation Costs is ancillary to the primary scope of the cover and must be construed accordingly. b) Civil Liability is defined (Definition 8) at root as (i) a legally enforceable obligation to a third party created by a court or tribunal award whose jurisdiction binds the Assured; or (ii) a legally enforceable obligation to a third party acknowledged by a claim settlement agreement to which the Defendants have consented. To these standard forms of Civil Liability is added a further limb providing cover for any compensatory damages pursuant to any award, directive, order, recommendation or similar act of a regulatory authority or similar. This definition of 'Civil Liability', whilst tailored to the financial services context of a regulated entity which can be compelled or directed to act by those under whose regulatory or supervisory jurisdiction it comes, reflects the essence of liability insurance that indemnity is (special wording apart) only to be provided upon both the existence and amount of the third party liability having been established, and not before. This reflects the general principle that liability insurance provides an indemnity against actual established liability, as opposed to mere allegations – MDIS v. Swinbank [1999] Lloyd's Rep. I. R. 98; upheld at 516, as applied in Enterprise v Strand [ 2006] 1 Lloyd's Rep. 500 at [60] – [73]. c) Consistently with that principle, liability insurance does not (absent special wording) cover voluntary ex gratia payments, made in the absence of legal liability but for commercial reasons (however valid those commercial reasons may be) cf: Smit Tak v Youell [1992] 1 Lloyd's Rep. 154 There is nothing in the Policy which provides any such (unusual) cover. d) More particularly, the Policy was not there to protect the Standard Life group against damage sustained to its brand or reputation or for the costs incurred in preserving or restoring its brand or reputation, even where such damage to brand or reputation was itself occasioned by actions which could also give rise to, or had given rise to, liability to its customers. Nor, in my view, does the Policy protect Standard Life against third party claims which are of a type for which it has no liability. e) The absence of cover for ex gratia payments or payments made to prevent or repair damage to the brand reflects both the scope of the insured subject matter and risk, namely the liability of the insured for specified third party claims, and the fact that the ancillary Mitigation Costs cover exists for the mutual interest and mutual benefit of both insured and insurer with regard to that insured subject matter and risk in permitting and incentivising the necessary and reasonable incurring of costs insofar as incurred for the purposes of avoiding or reducing such third party claims. The Mitigation Costs cover is not intended to extend the scope of the insured subject matter and risk. For these reasons, I reject the Claimant's submission to the extent that it proceeds on the basis (if it does) that it is sufficient that "… the fall of 4.8% was outside the reasonable expectations of any customers" at least if such "reasonable expectations" were not the result of mis-selling by Standard Life. As I say, perhaps Mr Leggatt QC did not contend otherwise. In any event, it is my view that in order for the claims to be of a type that would have been covered by the Policy there must be some linkage to show that the fall of about 4.8% was outside the reasonable expectations of any customers because of some inadequacy in the marketing literature rendering SLAL potentially liable. To that extent, I accept the Insurers' submissions that the Claimant must, in effect, show that the third party claims were of a type that rendered SLAL potentially liable for mis-selling. Despite this conclusion, I should emphasise what I consider to be an important and perhaps crucial point when standing back and considering the overall scope of the definition of "Mitigation Costs" viz that, in order to qualify as "Mitigation Costs", the relevant "payment" does not have to be made to discharge a particular liability to a particular third party claimant. In my view, as stipulated in the definition, the requirement is simply that the payment is reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims of the relevant type. I. The Insurers' case and submissions on the facts In broad terms, the Insurers submitted that the reality is that the case advanced by SLAL in these proceedings is contrary to and inconsistent with what it clearly believed at the time, with the assistance of advice, viz. that no such claim would lie and yet it still made the commercial decision to select Option 2 (Cash Injection) over Option 1 (case by case compensation). In particular, the Insurers' case on the facts had two main prongs viz (a) that the Cash Injection was made with the "dominant" purpose of avoiding or reducing "brand damage"; and (b) that such Cash Injection was not "necessary" to avoid or to reduce third party claims when considering the definition of "Mitigation Costs". These two prongs overlapped to a large extent and were addressed at some considerable length in the Insurers' written submissions including a detailed appendix to those submissions. For present purposes, it is I believe sufficient to summarise the case as advanced by the Insurers as follows. Comments/Views expressed during January and early February 2009 ie prior to the meeting on 10 February 2009 I have already summarised the most important comments and views expressed during this period in the earlier part of this Judgment and do not propose to repeat them here save to note that the Insurers placed particular reliance on various comments by Mr Nish and Lord Blackwell, viz: i) As to Mr Nish, his description of the likely scale of brand damage which would be incurred under Option 1 as " eyewatering " and his description of Options 1 and 2 at the GPC on 4 February as the "legal approach" and the "brand" approach; on 5 February, his email to Mr Matthews (who was expressing serious concerns about lost business and the need to act fast) stating that " it is for that reason that I pushed the direction of the meeting last night – we will make progress "; on 7 February 2009, his comment on the draft board paper that " we should highlight more strongly the key weakness of 2 against 1 ie it is judgement that a blanket approach is a fairer approach to all and that some individuals who clearly understood the fund are benefitting "; on 9 February 2009 his statement to the FSA that " the blanket approach gives you winners and losers, but is a broadly fair one " (In evidence, Mr Ledlie confirmed that he understood Mr Nish to mean that "winners" were those without a valid claim which would be accepted by the FOS who would benefit when they had no legal entitlement to do so). ii) As to Lord Blackwell, his identification as early as 7 January 2009 that "the principal issue here is 'what is the right thing to do' rather than what our strict liability might be – and in particular the protection of our Brand and 'Trust' with customers and advisers" ; his ongoing concerns in the contemporaneous documents about letting the price drop fall without any upfront financial support to customers; his identification on 11 January 2009 that it was wrong for the Board to approach the matter legalistically in terms of whether mis-selling had or had not been established: "The judgement question is therefore whether the total shareholder cost, including damage to the customer franchise, is likely to be higher or lower if we announce the fall and then respond to complaints versus address the expectations shortfall upfront and reduce the risk of customer complaints and potential enforcement action" ; immediately after management had taken the decision to recommend Option 2, his statement to Sir Sandy Crombie as to how important it was in communicating the decision positively within the company "that you are able to stress the overwhelming value that you set out when we first discussed this of doing the right thing by the customer" and his expression of the view that the communications message in relation to the Cash Injection should be that the company had "decided to keep faith with our customers" The Board paper Second, the Insurers relied upon the fact that when the Standing Committee of the Board took the decision on 10 February 2009 to make the Cash Injection, it did so with the benefit of a thorough and carefully drafted Board paper and a careful written summary of the external legal advice which had been given to the company; that the Board paper, which had passed through at least 9 versions and had received scrutiny from Mr Wood and Mr Tyson in SLAL's in-house legal department, stated in terms that, because there was evidence that many customers understood the risks of the Fund or were advised by a professional advisor on their investment, " a blanket approach to put up to, circa £100m, into the fund is therefore not necessary "; and that in the final version of the Board paper, the emphasis on brand damage as the critical reason for taking the decision is undeniable. Thus: a) The Board paper included the following bullet point rationale of Option 2: "The key reason to make an injection to the fund is that we will quickly re-establish goodwill with customers, IFAs and key players in the Corporate market; and will do so quickly to allow us to get onto the front foot in 2009." b) The Board paper made plain that the rationale for not choosing Option 1 was brand related: "However, there would be substantial brand damage as a result of following this approach." c) There were 5 bullet points by way of 'comparison' of Options 1 and 2. All 5 bullet points were cast in terms of the brand and SLAL's commercial position in the market. None of the bullet points compared the two options in terms of an assessment of the extent to which third party claims would be pursued or the extent to which compensation would be recovered. Taking the bullet points in order, they justified Option 2 over against Option 1 with reference to (i) " customer warmth "; (ii) " IFA sentiment "; (iii) " sales targets "; (iv) " brand damage "; and (v) " meaningful recovery " in the " IFA's propensity to recommend Standard Life ". d) The only monetary figures given were for brand damage (£60m) and loss of NBC (£240m). e) In making clear that both options were consistent with TCF, the Board paper again emphasised that the Cash Injection "… supports the brand of Standard Life as a customer centric company ". f) In setting out the issues, in light of which the management recommendation was made, the Board paper referred to (i) legal opinion from Counsel (which endorsed Option 1 rather than Option 2); (ii) TCF (which was a neutral factor); (iii) brand values and impact on them (conclusively in favour of Option 2); and (iv) cost to the shareholder (which favoured Option 2 viewing cost, as Sir Sandy Crombie did, in its widest sense). g) In further setting out the recommendation for approval, the board paper stated that: "A material part of the rationale for recommending Option 2 is the belief that the implementation would, as well as benefiting customers, have an important beneficial effect on the brand." h) In response to the question in the appendix as to statutory responsibilities "In what ways does the proposal alter the risk exposure of the Company?", the answer was given "It is intended to reduce the risk of continuing brand damage" – Appendix A to Board Paper. i) In light of the board paper's obvious emphasis upon the protection of the brand and the prevention of brand damage, it is unsurprising that Sir Sandy Crombie accepted in evidence that this was "a key factor to take into account". The Legal Advice Paper Third, the Insurers relied upon the legal advice paper presented to the Standing Committee which summarised the advice given by Mr Brisby QC that (on SLAL's estimated figures) Option 2 "would provide a windfall to a significant number of customers who are unlikely, according to our analysis, to have a valid complaint"; and also included the following statement (unattributed but set out in a section dealing with Mr Leggatt QC's advice given with reference to the prospects of professional indemnity insurance recovery) which, said the Insurers, could hardly have been clearer: "It is difficult, if not impossible, to present a credible argument that the cost of restoring the prices to pre 23 December 2008 levels is necessary in order to avoid an even greater liability to pay compensation to claimants – as the restoration of prices would involve, in effect, compensating all customers who remain invested in the Fund whereas not all customers would be entitled to claim or would in practice claim compensation if a 'case by case' approach were adopted." In the face of that advice, the Insurers submitted that it is hardly surprising that Mr Wood told the standing committee meeting on 10 February 2009 that (according to the minutes): "… in deciding whether to adopt Option 2 the Committee should make the assumption that any payment will not be recoverable from our PI insurers." The minutes of the meeting on 10 February 2009 record no such assumption having been made or recommended in connection with Option 1. But there are very many documents in which the contrast between the assumed likelihood of recovery under Option 1 and the assumed unlikelihood of recovery under Option 2 are highlighted. The comparative cost tables in the early versions of the Board paper and the figures in the report by Mr Hare are just two examples. Insurance Recovery Fourth, the Insurers submitted that Option 2 was regarded by SLAL as having protection of the brand as its purpose as is clear from the fact that they did not consider they would be able to recover under the Policy in respect of any Cash Injection for precisely this reason. Thus, the minute of the SLAL board meeting on 9 January 2009 recorded that "… from an insurance perspective, the company's professional indemnity insurance cover may cover compensation payments which were made as a result of a customer complaint, but would not cover ex gratia payments." Sir Sandy Crombie accepted in cross-examination that the only ex gratia payment which would have been discussed at the meeting was a payment made for the purpose of protecting the brand rather than in relation to legal liabilities. This is consistent with the minute of the GPC meeting on 9 January 2009, where "He [i.e. Sir Sandy Crombie] drew the Committee's attention to the fact that one of the points that had been raised during the Board meeting was that the company's PI insurance cover may cover mis-selling claims but would not cover a payment whose [sic] was primarily to protect the brand." In evidence, Sir Sandy Crombie frankly accepted that if this was the purpose of the payment, there would be no insurance coverage as a result. The draft board paper considered by the GPC on 6 February 2009 made the point in clear terms. A table comparing the various options recorded that, for Option 2 (described as "Recompense fund 5%"), the " Reputation effect " was " Restores Brand image " and the PI Insurance claim comment was " PI unlikely to pay for "Brand Payment" Claims above this recoverable ." Option 2 not "necessary" Fifth, the Insurers made detailed – and lengthy – submissions as to why they said Option 2 was not "necessary". These submissions were made under 9 broad heads which were to some extent repetitive or at least overlapping and which I can summarise as follows. First, the Insurers submitted that the question is whether the Cash Injection was reasonably and necessarily incurred in taking action to avoid or reduce third party claims, not whether it was reasonably and necessarily incurred from any wider commercial perspective. When asked in re-examination about the bullet points set out in the final version of the board paper giving the rationale for Option 1, Sir Sandy Crombie candidly agreed with the declared rationale for Option 1 that it was not 'necessary' to make the Cash Injection but rather that it was " the right thing to do ": "Q. 197 I think and 198 to 9. I don't want you to go through them point by point, but just to have a look at them and say whether they are all necessarily things you believed or things that other people believed, or what they were from your point of view. A. I mean I could pick out points obviously from option 1 and say where it says "The injection of circa 100 million to the fund is therefore not necessary", as I have set out previously it was my conclusion that it was necessary -- while not necessary, was the right thing to do." Thus, the Insurers submitted that it is clear that SLAL considered that it was necessary to act as it did to avoid brand and business damage and to reflect general brand principles which is obviously not sufficient for present purposes. Second, the Cash Injection could only have been necessarily incurred in taking action to avoid or reduce third party claims if Option 1 had not been reasonably open to SLAL and if Option 1 could not reasonably have been chosen. This was not the case. Reliance was placed on the advice given by Mr Leggatt QC at the time that I have already quoted above. Third, Option 1 was, and was perceived by SLAL at the time to be, and was advised at the time to be, a perfectly reasonable course of action to adopt. Fourth, Option 1 was, and was perceived at the time to be, and was advised at the time to be, perfectly acceptable from the perspective of the FSA principle of 'Treating Customers Fairly'. Thus, the final version of the Board paper specifically recognised that Option 1 would meet the TCF standard and ensure that customers were treated fairly (§3.6 TCF: " Both options meet standards that ensure customers are treated fairly " ); included, as part of the stated rationale for Option 1, the proposition that " Decisions will be taken on a case by case basis and will directly address the mis-leading literature claim. It will ensure all customers are treated fairly "; and stated, in relation to Option 1 – case by case compensation - that " … Senior Counsel advised that compensating only customers who submitted a complaint would not necessarily be inconsistent with TCF (especially if we write to all customers explaining how they could submit a complaint) as we would be paying compensation on the basis that our documentation could have been clearer, but not on the basis that we are admitting systemic mis-selling of the fund ". This was also accepted by both Sir Sandy Crombie and Mr Ledlie in evidence. Moreover, Sir Sandy also accepted in evidence that it is not the case that SLAL considered that the FSA had vetoed Option 1. However, if SLAL itself had not proposed to make the Cash Injection, the FSA would not have insisted upon Option 2, in preference to a proactive and first class complaints handling and compensation scheme. The experts were agreed that Option 1 would not only have met the FSA's TCF expectations but accorded with mis-selling experience generally; and that the FSA would not have been expected to have imposed an Option 2 scheme on SLAL since it would not require a regulated company to compensate a significant constituency of customers who were not entitled to it. Fifth, the Insurers submitted that SLAL's perception at the time was that Option 1 was the only reasonable option to take in terms of addressing actual or potential third party claims – although the Insurers made plain that they did not need to put the case so high. In this context, the Insurers relied, in particular, on the advice given by Mr Brisby QC which I have already summarised above; and the evidence of Sir Sandy Crombie with reference to Mr Brisby's advice on 4 February that he (ie Sir Sandy) " felt he [Mr Brisby QC] was telling us we did not have a legal obligation on the basis of his analysis at that time to top-up the fund. That was my interpretation of what I was hearing at the time ". In fact, Mr Brisby QC was plainly advising not only that there was no legal necessity to top up the fund (a conclusion which never changed), but also that a case by case compensation approach was, from the point of view of customer claims, the correct approach for SLAL to adopt. Option 1 was perceived to be the only reasonable option for identifying which customers had been misled and which had not. However, the flaw in Option 1 was perceived to lie, not in its reasonableness from a legal perspective, but in the " brand and reputational damage incurred under option 1 ". The choice between the two options was, from 4 February 2009, cast in terms of a choice between " Protecting and Building the Brand " or " The Legal and Financial Approach – Case by Case Remediation " Or, for short, "Brand v Case-by-Case ". In the final version of the board paper, the comparison of Option 1 and Option 2 was cast wholly in terms of 5 bullet points, the focus of all of which was brand or brand-related considerations: (i) customer warmth; (ii) IFA sentiment; (iii) sales targets; (iv) brand damage; and (v) recovery in IFA propensity to recommend Standard Life. The final version of the board paper was explicit in stating that "… there would be substantial brand damage as a result of following " the Option 1 approach. The perceived urgency in the situation, as of February 2009, was the necessity to avoid or reduce actual or potential brand damage, not any necessity in relation to avoiding or reducing actual or potential third party claims. Sixth, the Insurers submitted that it was the positive perception of SLAL at the time that it was not necessary to choose Option 2 and to make the Cash Injection to avoid or reduce third party claims: this was made explicit in the board papers. I have already identified the important parts of the Board papers but, at the risk of repetition, the Insurers placed particular reliance on the final version of the Board paper (and indeed all earlier versions going back to Mr Black's paper advocating the case by case approach – i.e. Option 1) which reiterated the legal advice that had been received and specifically recorded that: "Whilst significant numbers of customers received poor communications there is evidence that many customers understood the risks of the fund or were advised by a professional adviser on their investment. A blanket approach to put up to, circa £100m, into the fund is therefore not necessary." Thus, the Insurers submitted that far from being regarded as necessary, the Cash Injection was essentially regarded as an ex gratia (i.e. voluntary) payment which consequently would not justify an insurance recovery. Seventh, the Insurers submitted that as regards the anticipated costs of the two options, it was not thought at the time that the Cash Injection would give rise to any saving of compensation at all, let alone that Option 2 was necessary to achieve any such possible saving. In this context, the Insurers' primary submission was that the standing committee was given no information to evaluate the comparative costs of the two options in terms of the amount of compensation payable under each option; and the standing committee gave no consideration to the question of the comparative costs of the two options in terms of the amount of compensation payable to customers at all. However, the Insurers submitted that assuming (arguendo) that some consideration was given to the comparative costs of the two options, the only contemporaneous comparison attempted was that contained in the "expected costs tables" – which the executive (but not the non-executive) directors had seen. On the basis of those figures, it could not conceivably have been considered necessary to make the Cash Injection to achieve any saving in compensation. As to these costs tables, the Insurers submitted, in summary as follows: i) The "expected costs tables" sought to assess the estimated cost of compensation in gross and net terms, by reference to assumptions that 100% of the customers who had relied on B and C grade literature would bring a complaint under Option 1 and 50% of the customers who had relied on B and C grade literature would bring a complaint under Option 2. The Insurers submitted that these assumptions were internally inconsistent. ii) Just viewed in terms of amounts paid to customers, the "expected costs tables" showed £124m for Option 1 and £100m + £30m = £130m for Option 2. On that measure, Option 2 was more expensive. iii) If the costs of administering the mis-selling unit are brought into account under each Option, the perceived likely cost of Option 1 was £139m and of Option 2 was £138m – these two figures were regarded as the same. iv) As compiled, the "expected costs tables" did not limit the comparison of 'cost' to a narrow enquiry into the amount of compensation payable under either option; they introduced other costs and credits as well, specifically brand spend under each option and HWPF and insurance recoveries. They are consistent with a focus on the 'bottom line'. v) If one ignores the column for costs net of insurance, Option 1 was, when the table was drawn up, perceived to be less expensive than Option 2, when allowance was made for a potential recovery from the HWPF of 60% of claims under Option 1 and 60% of additional claims under Option 2. On that basis, the "expected costs tables" showed the "Potential Cost to Shareholder of mis-selling claims" (ie ignoring administration costs and brand spend) as £50m under Option 1 and £112m under Option 2. vi) If one assumes that these figures were still in the executive directors' minds as at 10 February 2009, it is common ground that by that date, it was concluded that the prospect of any recovery from the HWPF had to be discounted. On that basis, the "Potential Cost to Shareholder of mis-selling claims" without any HWPF recovery would have replicated the headline figures of £124m (or £139m, with administration costs) for Option 1 and £130m (or £138m) for Option 2. The excising of the HWPF element does not render Option 1 more expensive than Option 2. vii) If anything, the conclusion which was reached on 9 February 2009 that the prospects of an HWPF recovery were " unlikely" because of what was known about potential mis-selling issues in 2007 would have been a further 'nail in the coffin' of Option 1 because (as Sir Sandy Crombie accepted) it removed from the equation an element which had hitherto been in favour of Option 1. viii) It is only if brand/business is brought into account that Option 1 could conceivably have appeared more expensive than Option 2. First, ignoring insurance and HWPF, the inclusion of £60m brand spend under Option 1 as opposed to £15m brand spend under Option 2 increases the cost to the shareholder of Option 1 to £199m as compared with the cost of Option 2, which would stand at £153m. Secondly, the inclusion of the 'eye-watering' £240m figure for lost future business renders Option 1 overwhelmingly more expensive. This figure was included in the board paper and Sir Sandy Crombie confirmed that it was very much in mind at the meeting of 10 February 2009. The assumption underlying the figures for Option 1 was that there would be an insurance recovery of £90m, whereas Option 2 would only generate an insurance recovery of £20m in respect of the additional compensation payments there under. Sir Sandy Crombie confirmed that whatever his private doubts on the matter, the meeting on 10 February 2009 took place on the basis of legal advice that Option 1 would provide some chance of an insurance recovery. ix) On no view whatsoever do the "expected costs tables" support the suggestions made in the written statements or the oral evidence, such as it was, that it was considered at the time that Option 1 was likely to have proved more expensive (in terms of the cost of compensating customers) than Option 2 and that this was part of its rationale for choosing Option 2. It is only when one considers the costs in the broader sense which Sir Sandy Crombie described, and which the tables sought (at least in part) to convey, that Option 1 could be seen as materially more expensive than Option 2. x) Nothing in the production of the "expected costs tables" changed the position as perceived by the GPC on 4 February 2009 and summarised by Mr Tyson to Mr Wood in the following terms: "Option 2 is currently favoured. The brand and reputational damage being incurred under option 1 is now believed to significantly outweigh the £100m or so cost of option 2. [redaction] but the brand and reputational damage incurred under option 1 is being put at £300m+ … Put simply, the GPC were of the view that 'toughing it out' under option 1 is just not worth it in terms of the brand and reputational damage involved." Eighth, by way of response to a pleaded allegation by SLAL, the Insurers submitted that it could not be said that the Cash Injection was reasonably and necessarily incurred in taking action to avoid or reduce third party claims because SLAL perceived that it was liable to all customers for the 4.8% price fall because the price fall was beyond the expectations of all customers. In particular, the Insurers submitted that there was no contemporaneous perception that the one day fall was beyond the subjective expectations of all customers; that there was no contemporaneous perception that SLAL was liable to all customers for the 4.8% price fall; that the Cash Injection was not made for the purpose of meeting any such perceived liability; that the Cash Injection was not necessarily incurred for that purpose; and that the true position is that SLAL took the view that the 4.8% fall should be viewed as beyond the reasonable expectations of all its customers for the purposes of justifying a blanket injection for the benefit of all, including a sizeable constituency of customers who SLAL believed understood the Fund and would not have qualified for case by case compensation. This was an entirely commendable exercise in 'doing the right thing' but was not reflective of any perceived legal liability to all its customers for the fall in value. Ninth (and finally), the Insurers submitted that even if the questions of necessity and reasonableness are to be judged by reference to what SLAL should reasonably have perceived, rather than did actually perceive the (avoided) cost of any alternative Option 1 compensation scheme (had it been applied) to have entailed, this would still not validate the necessity and reasonableness of the Cash Injection. J. Discussion In considering these lengthy submissions made by the Insurers, it is obviously important to bear in mind that the burden lies throughout on SLAL to establish its claim within the terms of coverage provided by the Policy. In that context, it is necessary to deal at the outset with two main threads which ran through the evidence and SLAL's submissions. First, there was the general desire within SLAL to do the "right thing". This was emphasised by, in particular, Sir Sandy Crombie. However, in my view, the Insurers are plainly right in their general submission that action taken by SLAL in pursuit of such general desire, however laudable, is not of itself sufficient to satisfy the requirements of the definition of "Mitigation Costs". Second, it was SLAL's submission that "…between 6 and 10 February 2009, a clear view crystallised in Standard Life that the near 5% fall was beyond the reasonable expectations of substantially all customers….". There is no doubt that this was reflected in various contemporaneous documents in particular successive drafts including the final version of the Board paper and also supported by the evidence of Sir Sandy Crombie, Mr Gill and Mr Ledlie. It was also corroborated by the evidence of Mr Dennehy and Mr Otter. However, in my view, such fact does not of itself enable SLAL to bring itself with the definition of "Mitigation Costs" and, in particular, to recover the Cash Injection under the Policy. This is so for at least three reasons. First, there is the reason that I have already given above in the context of discussing the proper construction of the wording of that definition. Second, the word "substantially" (as appears in the formulation of SLAL's submission) is critical. Even Mr Gill accepted that it was not his view that such fall was beyond the expectation of 100% of customers. And if so, the burning question remains: what proportion of customers had such expectation ? Third, for the purposes of the definition of "Mitigation Costs", it would be necessary to show that such expectation was in some way or other based upon the marketing literature in order to satisfy the requirement that any claims advanced on that basis were of a type that would be covered under the Policy. As to the Insurers' submissions, I recognise and accept that, as summarised in the earlier part of this Judgment and as submitted on their behalf, there is a considerable body of evidence in the course of January and early February 2009 reflecting and supporting the Insurers' twin submissions viz that the payment of the Cash Injection was viewed by some at least as not "necessary" (at least in any legal sense) and was, in truth, to protect the Standard Life brand. However, it seems to me that this body of evidence needs to be approached with considerable caution in the context of the present claim for the following reasons. First, it is, in my view, important to recognise that this was a period of intense – almost frenzied - activity with considerable pressure from IFAs, individual customers, the FSA and, of course, the media. Second, as appears from my earlier summary of relevant events, once the decision was made to announce the price fall, a large number of people both within and outside Standard Life were all working (sometimes at fever pitch) to assess the consequences of that decision. On any view, the sums involved were very large – both in terms of potential liabilities and brand. In that context, it is unsurprising that different individuals would have different perspectives and express different views. For example, the sales team and those individuals concerned with the business strategy of SLAL's operations or directly involved in contact with IFAs (eg Mr Gillespie, Mr Gulliford, Mr Bold, Mr Matthews or Mr Wild) would obviously be primarily concerned with the level of future business and doing everything to protect the Standard Life brand. Equally, the internal and external lawyers would be focussing on potential legal liabilities. Third, during this period, relevant information with regard to an assessment of potential liabilities was being obtained, collated, analysed and evaluated. This was no easy task; and it emerged only gradually. For example, the first draft of the expected costs tables only became available in the course of 6 February. It involved an assessment of the different categories of literature used to market the Fund over a period of time, the number and value of potential customers who might have valid claims and the proportion of such customers who might seek to pursue a claim in different scenarios. It also involved an element of judgment based upon experience as to which it would seem probable – perhaps inevitable – that there would be different views. Further, pin-point accuracy was virtually impossible as was, in effect, expressly recognised by Mr Ledlie when, as referred to above, the costs tables were removed from one of the earlier drafts of the Board paper at the instigation of Mr Ledlie as he found the presentation unhelpful and because there was a "danger of spurious accuracy". Fourth, as a result of one or more of the above, the views expressed by various individuals at any point in time did not necessarily remain static. The discussions which culminated in the decision to make the Cash Injection were part of a developing iterative process which was extremely fluid. There is no doubt that over the period, a clear view in favour of Option 2 emerged. However, in identifying the reason why the Standing Committee of the Board ultimately chose that option on 10 February 2009, it would, in my view, be potentially misleading to place too much reliance on views expressed (however forcefully) in the course of the iterative process by certain individuals prior to that meeting particularly where, for example, such individuals were not Board members and did not have all relevant information. On the contrary, as submitted by SLAL, it seems to me that there was a healthy management culture at Standard Life in which directors saw it as their duty to challenge recommendations from executives and to test the relevant arrangements – and did so. Papers were produced to make the case for the different options for a major decision and to present relevant analysis that had been done; and not necessarily to put forward the views of the senior executive sponsoring the paper. Meetings (including Board meetings) were far from rubber stamping exercises, as all the minutes make clear. Sir Sandy generally withheld his own views on an issue, until the point arrived for a decision to be made, so that others did not form their views based on his and so that all options were properly explored; and, as Sir Sandy said in evidence, it would be unusual for a board meeting to be over in as little as an hour and a half. Fifth, it seems to me that statements like the one in the Board paper that a blanket approach was "not necessary" are, when read fairly in context, concerned with legal liability ie the blanket approach which was the basis of Option 2 was not legally necessary because SLAL would, in effect, be making payments for the benefit of at least some individuals to whom SLAL had no legal liability. This is a central plank of the case advanced by the Insurers. It is, in effect, the same - or at least a similar - point which the Insurers make in relation to the note of the advice given by Mr Leggatt QC on 6 February which I have quoted above. On its face, this advice was to the effect that a single payment to restore the fund to pre 23 December 2008 levels was not necessary and would not be recoverable from Insurers. This is of course, exactly what the Insurers now say. Unsurprisingly perhaps, Mr Schaff QC relied heavily on this note of Mr Leggatt QC's advice although he expressly disavowed any reliance on the advice itself which he accepted was legally irrelevant for present purposes. However, Mr Schaff QC did rely on this note not for the advice given by Mr Leggatt QC but to show that at that time the Cash Injection was not regarded by SLAL as "necessary" in order to avoid an even greater liability to pay compensation to third-party claimants. Again, that is exactly what the Insurers now say in support of their case that the Cash Injection does not fall within the definition of "Mitigation Costs". Thus, the Insurers say that even if one assumes that SLAL had legal liabilities to those customers who received the B/C literature amounting to a total of £124m, the Cash Injection of approximately £100m under Option 2 did not go solely to discharge those liabilities; and that under Option 2, that Cash Injection in effect benefited in part a substantial proportion of customers (approximately 35% by value) who had not received the B/C literature and who had no claims at all. I consider further below these figures. But, for present purposes, I assume that they are correct and on that basis I agree that a proportion of the customers would, in effect, have received a "windfall". I also agree that, as submitted by the Insurers, it was not necessary from a legal point of view ie as a matter of legal necessity, for SLAL to make the Cash Injection. However, in my view, it does not follow that such Cash Injection falls outwith the definition of "Mitigation Costs". As stated above, as a matter of construction of the definition of that phrase as it appears in the Policy, in order to qualify as "Mitigation Costs", the relevant "payment" does not, in my view, have to be made to discharge a particular liability of a particular third party claimant. In other words, there does not have to be a coincidence between any particular payment and any particular liability. It is sufficient that the relevant payment is reasonably and necessarily incurred in taking action with the stipulated intended objective. As I have already concluded, I proceed on the basis that the requirement that the payment is incurred not only "reasonably" but also "necessarily" sets a "high threshold" albeit one which must have regard to the realities. To take a simple example, if A has a legal liability to B, it is my view that a payment by A to C may well fall within the definition of "Mitigation Costs" even if (i) A has no liability to C and (ii) such payment does not in fact discharge the liability to B. However, whether or not such payment does in fact fall within the definition will, of course, depend on A showing, on a balance of probabilities, that it was reasonably and necessarily incurred in taking action with the stipulated intended objective. The meeting on 10 February 2009 In the event, both parties appeared to accept that in considering the principal issue in the context of the definition of "Mitigation Costs", the main (or at least initial) focus is and has to be the subjective view of the Board members who participated in the meeting on 10 February 2009 when the decision was taken to adopt Option 2. However, as thus formulated, this presents a number of difficulties. In particular, it is important to recognise that this is a subjective enquiry which, as submitted by the Insurers, involves the Court in seeking to adopt the standpoint and mindset of the Board members. Moreover, although the Insurers submitted that what ultimately matters must be what they described as the "collective basis" of the decision, the only executive directors participating in the making of the decision who had detailed knowledge of Project Eyre were Sir Sandy Crombie and Mr Nish. Although some of those individuals were involved in various email exchanges, the non-executive directors must have had a much more limited knowledge of the detail than these two individuals: they participated in none of the GPC meetings and saw none of the drafts of the board papers as they were being prepared and scrutinised. Sir Sandy Crombie said in evidence that he was not in a position to say what was in the mind of his fellow directors. Further, Mr Nish was not called to give evidence even though he is currently the Group CEO; nor were the Chairman or any of the non-executive directors of SL who participated in the meeting on 10 February 2009 called to give evidence, even though all of them remain in office. In those circumstances, the Court had oral evidence from only two (ie Sir Sandy Crombie and Mr Gill)) of the 8 people who actually took the decision and were responsible for it. As submitted by the Insurers, I agree that this was far from satisfactory – although it is to be noted that Mr Ledlie also gave oral evidence and that, despite the fact that he was not a director, he was (like Sir Sandy Crombie and Mr Gill) heavily involved in the relevant events and discussions leading up to that meeting and attended the Board meeting on 10 February. With these considerations in mind, I turn to consider the meeting on 10 February. As submitted by the Insurers, what is indisputable is that avoiding or reducing damage to the brand was at least a fundamental purpose of the decision taken at that meeting to adopt Option 2 and to make the Cash Injection. Indeed, Sir Sandy Crombie expressly agreed in evidence that the brand damage and lost business that would occur if Standard Life proceeded along the Option 1 route was a "fundamental aspect" of the balancing exercise that people were being asked to take into account. In his own words: "It was a key factor to take into account" . So much is, in my view, absolutely clear. Indeed, I did not understand that SLAL suggested to the contrary. However, contrary to the Insurers' submissions, it seems equally clear to me that, irrespective of brand damage, the decision was taken at the meeting on 10 February and the payment of the Cash Injection was made in order to avoid or to reduce third party claims of a type which would have been covered under the Policy within the meaning of "Mitigation Costs" as defined in the Policy. My reasons for reaching this conclusion are as follows. The starting point is the signed minutes from which it appears that Sir Sandy Crombie referred initially to the three papers which had been circulated. He then advised the Committee that SLAL had received a considerable number of complaints ie around 1500 in total which figure included some collective complaints on behalf of a number of policy holders; and that there was also an adverse reaction building up amongst intermediaries although outflows from the Fund were not currently causing difficulties. Sir Sandy Crombie then outlined the position with regard to Option 1 and Option 2 as follows: "It was the considered view of management that case by case remediation outlined under Option 1 would be very difficult for the business to administer and we would be involved in a very expensive damage limitation exercise over an extended period of time. Option 2 proposed a spend of the order of £100m to remove the 4.8% price fall in the fund on 14 January 2009. There would still exist a need to address individual complaints, for example where a policyholder expected a cash return based on the literature he received and did not achieve such a return, but implementation of Option 2 could be expected to mitigate the cost to the Company of compensating policyholders and generally reduce the levels of indignation which had built up amongst policyholders and their advisers. Management was of the view that Option 2 achieved a good balance between taking a significant initial step which showed good faith and remediating cases to the point where liabilities are satisfied." Plainly, this was an important part of the discussion and it is perhaps unsurprising that much time was spent during cross-examination and in argument analysing the words which I have quoted above - in particular, the phrase ".... but implementation of Option 2 could be expected to mitigate the cost to the Company of compensating policyholders and to generally reduce the levels of indignation which had built up amongst policyholders and their advisors." On behalf of the Insurers, Mr Schaff QC submitted that these words were consistent with Insurers' case that Option 2 was adopted to protect or at least to limit brand damage. I recognise that these minutes are not a verbatim record of what was said nor a statute; and that there is again a very real danger of a too zealous syntactical analysis of the words used in the minutes. However, in my view, Mr Schaff QC's submission is not a fair reading of the words used. Rather, it seems to me that the first part ( "...implementation of Option 2 could be expected to mitigate the cost to the Company of compensating policyholders..." ) is more consistent with the Claimant's case. I accept that the latter part, referring to a reduction in the "levels of indignation" could be a reference to a reduction in brand damage but, in context, it seems to me at least equally if not more consistent with the Claimant's case bearing in my mind (a) what is stated in the first sentence in the above quote and (b) that a reduction in levels of indignation would be likely to reduce the number and value of claimants seeking redress. The minutes continued by noting that Sir Sandy Crombie added that the strong recommendation from management was to proceed with Option 2; and then a reference to the advice from Mr Wood viz that the prospect of any recovery from the Heritage With Profits Fund was negligible and that in deciding whether to adopt Option 2 the Committee should make the assumption that any payment will not be recoverable from the professional indemnity insurers. According to the minutes, Mr Ledlie then updated the Committee with regard to the meetings with the FSA. At a later stage, in the context of responding to a question from Mr Grimstone, Sir Sandy Crombie said that "any additional cost beyond the initial £100m may be limited to single digit millions of pounds." There then followed a discussion as to the impact on shareholders, the tax position, liquidity and various other aspects including the precise formulation of the public announcement that would be made. That the view had been reached by 10 February 2009 that Option 1 was likely to be more expensive than Option 2 even ignoring brand damage is also supported by the evidence adduced by the Claimant during the trial. Thus, Sir Sandy Crombie was clear that his belief was that Option 1 would cost more than Option 2. He said so in his witness statement and confirmed this at several points in his oral evidence. For example, he confirmed: "It forms part of my memory of the time that it was in my mind that ultimately Option 2 in cost terms would be less than Option 1, ignoring the brand..."; "My opinion was, as I have stated, ultimately, Option 1 would cost more than Option 2." and: " My view about option 1, given the concentration of monies in the fund with a relatively small proportion of people in the fund, and given the financial incentive to claim, I would say my view of option 1 was that the rate of claim among those who would benefit most would be higher. That is a personal view. As I said earlier, 4 per cent by number of the customers had 50 per cent of the fund. 30 per cent by number had 90 per cent of the fund. So in my mind, based on my experience, given the prompting that customers would be given from intermediaries of various sorts, from the media and potentially from claims management companies, I thought the figure would be much higher. In relation to option 2, as is recorded in the minutes of the relevant board meeting -- sorry, the standing committee of the board, I thought the 30 million estimate under the blanket approach was too high and I thought a crystallised view was that it would cost single digit millions. If it did then the cost of administration shown here was too high, and if I was right in relation to option 1, the cost of administration shown was too low. So all in all I thought the gross cost of these two estimates would have been further apart, with option 1 being significantly the higher." In my view, this evidence is entirely consistent with the passage from the minutes which I have quoted above, in particular the important part of the minutes which states: "….. implementation of Option 2 could be expected to mitigate the cost to the Company of compensating policyholders ...". Mr Schaff QC submitted that Sir Sandy had agreed in cross-examination (Day 3 pp112-115) that this was "likely" to have been a discussion about cost in the broadest sense taking into account brand and business damage and insurance. However, it does not seem to me that Mr Schaff QC can properly extract much, if any, assistance from this part of Sir Sandy's cross-examination. It is true that Sir Sandy accepted (amongst other things) that it would have been in everyone's mind to take everything into account. However, Sir Sandy could not specifically remember the totality of the conversation at the meeting on 10 February as he emphasised a number of times; and Mr Schaff QC's submission is, in my view, inconsistent with the evidence of Sir Sandy Crombie as set out above (which I accept) as well as the further evidence of Mr Gill as referred to below (which I also accept). As to Mr Ledlie, his email dated 4 February indicates that, even leaving aside brand damage, the view was beginning to emerge that the cost of compensation could end up being at least as great or even greater if a case by case approach was adopted than if the 4.8% fall was made good. Further, I have already noted Mr Ledlie's view recorded at the time that the tables of figures gave rise to a " danger of spurious accuracy " and for this reason suggested that they be removed from the draft Board paper. His belief was that there were numerous uncertainties in the estimates of the likely costs of the two options and that it was not appropriate to place too much weight on the comparison between the predicted final outcomes of each option in terms of expense. As he stated in evidence, he felt that there were so many uncertainties in the available data that the costs of each Option should be seen as being " not massively different " or " in the same ballpark ". These statements were concerned with overall costs, including brand spend. It follows that, if brand spend were excluded from consideration, then Mr Ledlie too would have concluded that Option 2 was the cheaper of the two. As to Mr Gill, the view which he expressed in his witness statement was: "A major disadvantage of Option 1…was that we considered that it would end up by being far the more expensive option." Mr Gill's thinking on the matter was explored at some length in cross-examination. Indeed, he came under considerable attack by Mr Schaff QC. However, Mr Gill was very clear that in the last few days approaching 10 February, he concluded that the headline cost of Option 1 in terms of claims that would end up being satisfied was likely to prove greater than the £100 million cost of Option 2. He did not consider that the £124 million was necessarily an accurate estimate for Option 1 costs, but he did consider that it was a reasonable reference point for the range of likely outcomes relative to the £100 million cost of Option 2. When the issue was re-visited in the course of further cross-examination, he accepted that " no one could say with any certainty which option would be more expensive ", but said that " people could reasonably express views, as I did, that the Option 1 would be more expensive ." This was a somewhat watered-down version of what he originally said in his witness statement although he confirmed again that his own thinking was " very much dominated by the top line figures: the 124 versus the 100 was what was very much in my mind at the time ." I accept that evidence as well as the evidence of Mr Gill that the point made at the meeting (he thought by Sir Sandy but he could not be absolutely sure) was that "..there was a high risk that the cost of claims [under Option 1] could significantly exceed £100m." On behalf of the Insurers, Mr Schaff QC submitted in effect that I should place no reliance on this evidence of these three individuals in particular because it was self-serving and inconsistent with, or at least, unsupported by the contemporaneous evidence. Further, Mr Schaff QC submitted that, as Sir Sandy Crombie accepted, he had no specific recollection of the discussion of the meeting on 10 February 2009; and, so far as Mr Gill and Mr Ledlie are concerned, they were not directors of SL or SLAL and therefore their views were irrelevant. I do not accept these criticisms. Although there were certain parts of the evidence of Mr Ledlie and Mr Gill which I did not find satisfactory, I regarded all three witnesses as patently honest who were doing their best to assist the Court. In particular, I accept their evidence as summarised above. As I have already noted, I agree that in the course of January and early February ie before the meeting there are various internal documents (mainly from members of the sales team) which support the Insurers' case but, again as I have already noted, these were, in my view, part of an iterative process and not necessarily reflective of the intended objective by those concerned when Option 2 was ultimately adopted on 10 February. In my view, this is supported not only by the minutes but also, for example, by the fact that, again as already noted, although initial drafts of the Board paper included a statement with regard to a recommendation for Option 2 that " Though more expensive, it supports the brand", this reference to Option 2 being more expensive was subsequently deleted in the later and final version of the Board paper. According to Mr Gill (who was director of SLAL) by that time the original statement no longer reflected the view of Standard Life's senior management. I accept that evidence. Further, it is plain that Mr Gill worked closely with Sir Sandy Crombie. If (as I accept) that was indeed the view of Mr Gill, it seems highly unlikely that when Sir Sandy Crombie told the meeting on 10 February that, as recorded in the minutes, the strong recommendation from management was to proceed with Option 2, he (ie Sir Sandy) did not have Mr Gill's views well in mind. The Board Paper As noted above, the Insurers placed considerable reliance upon certain passages in the Board paper which I have quoted above. As to these passages, I would make the following comments. First, it is important to recognise that the Board paper was organised in sections - with different sections arguing the case or setting out the "rationale" from different perspectives. As Sir Sandy explained, the purpose of this format was in effect to present all the arguments to the Board. Second, although it is undeniable that, as presented in the Board paper, there was an obvious argument that a rationale for not choosing Option 1 and instead adopting Option 2 was brand related, this is no different in substance from what Sir Sandy accepted in evidence (and which the Claimant did not, as I understand, dispute) viz that brand damage was a "key factor" to take into account. Third, as to the reliance placed by the Insurers on the passage in the Board paper which stated that a blanket approach was "not necessary", I have already addressed this above. The Expected Costs Tables As set out above, it was an important part of the Insurers' case that the view that Option 1 would be more expensive than Option 2 was not supported by and indeed inconsistent with the "expected costs tables" that had been produced and at least initially included in earlier versions of the draft Board paper although subsequently excised. In particular, the Insurers submitted that there were what they described as two "fundamental points" which had to be addressed viz (a) Option 1 would not reasonably have been perceived as entailing the likely payment of compensation on the basis of a "response rate" 100% of the B and C grade customers; and (b) 36% of the Cash Injection was paid to customers with A literature who were (reasonably) perceived at the time to have no entitlement to compensation. I deal with each of these points in turn. Response Rate As to the first point, the main focus of Insurers' submissions was that the figure of £124m under Option 1 was in effect unreasonable ie too high because it was based on a 100% claim (or response) rate of the customers who had received the B/C literature. This was, submitted the Insurers, unrealistic and, at most, a "worst case scenario". Rather, the Insurers submitted that SLAL, like other companies in the market, had considerable experience of case by case compensation schemes in the past, including SERPS, pension review and mortgage endowment complaints ("MEC"); and that such experience indicated a much lower claim rate - in the case of MEC a claim rate of around 50%. In this context, the Insurers relied upon the evidence of their expert (Mr Storey) who carried out a detailed analysis based largely on SLAL's own experience in particular with regard to MEC. Based on that analysis, it was Mr Storey's evidence that the Option 1 scheme would have elicited a "response rate" materially lower than " the 50% experienced in SL's endowment review ". Although it is plain that the exercise carried out by Mr Storey must have involved considerable work on his part, I did not consider that it was of any real assistance at the end of the day for the following reasons. First, I was unpersuaded that SLAL's own experience in relation to MEC was necessarily comparable with the problems facing SLAL with regard to the Fund. In particular, the problems with the MEC had rumbled on over a considerable period of time; the nature of MEC claims was, by comparison with potential claims in relation to the Fund, more diffuse and uncertain depending on discussions between advisers and customers; and the identification of losses to any particular customer was more difficult to assess. In this context, I accept the evidence of Mr Gill that it would have been very straightforward for customers to formulate a claim in relation to the Fund. I recognise that the experts agreed that for longer standing customers (ie those who invested before any pricing error impacted the Fund on 23 December 2008), the 4.8% price adjustment was unlikely to form a logical basis for calculating a FOS award but, in my view, it had a simplistic attraction. Second, it seems to me that, as submitted by Mr Leggatt QC, Mr Storey's own approach was not properly thought through, even as to the sense in which he was using the term " response rate ". To my mind, his report was confused as to whether he (ie Mr Storey) was intending to refer to percentages of customers by number or as a proportion of the value of the Fund and as to whether he was referring to the total population of customers or only those with valid complaints; a confusion which was not, in my view, satisfactorily clarified in his oral evidence. Third, possibly because of this confusion, Mr Storey failed to take any proper account of the distribution of holdings in the Fund. In particular, almost 70% (ie about 66,000) of policies involved relatively small holdings of less than £10,000 (with an average holding of just under £4,000) totalling approximately £144m ie only about 7% of the total Fund. However, the balance ie in excess of 90% by value of the Fund equivalent to almost £1.8bn was held by a smaller number of customers ie approximately 30,000 customers; and of this group there were approximately 4,000 customers who held a total of about 50% of the Fund with a total value approaching £1bn. Mr Storey was aware of the breakdown. Indeed, he relied on it at para 4.63 (2 nd bullet) of his report for the point that a large number of customers had small holdings, supporting his argument that the response rate in terms of proportion of customers would be low. However, he failed in his report to take into account the opposite side of that coin: that even if the response rate in those terms was lower for that reason, the proportion of the Fund represented by the higher value customers who would be more likely to complain could be very high. Mr Storey substantially accepted this criticism in cross-examination and ultimately accepted that he could not say that just such a scenario would not have eventuated in this case. Fourth, although Mr Storey was no doubt right that response rates (however measured) are never 100%, in my view he seriously underestimated the situation that Standard Life faced. As Mr Wilson explained, the rate of complaints leading up to the decision to restore the Fund was unprecedented. From his perspective " the roof was coming in " and he had never seen the likes of the number of calls and letters and the strength of opinion demonstrated by customers and advisers. This also contributed to what seems to me the reasonable opinion that the response rate to any Option 1 scheme would have been very high although I accept that it is highly unlikely to have been 100%. Mr Storey accepted that Standard Life at the time was much better placed than he was to assess all the relevant factors and to estimate the likely response rate. Moreover, a very high proportion of customers (some 92% of the Fund by value) had invested in the Fund through IFAs, who were already assisting their customers to complain and providing templates for that purpose and would have continued to do so. In principle, Mr Storey accepted that this could happen, but he claimed that it would be unlikely where the IFAs themselves had received good literature and thus would have been potentially on the hook themselves for any mis-selling. Mr Storey had assumed that " the lawyers at Standard Life " had made a clear judgment that there could be no liability to the 36% of customers who were not in the B and C literature category and had not himself considered this important issue. However, when shown the "A" graded literature, Mr Storey accepted that it was not consistent with any expectation of an overnight 5% fall in price; and this had a significant impact on the level of claims to be expected in any Option 1 scheme. In my view, it follows that Mr Storey's views on response rates are flawed because it seems to me inherently unlikely that IFAs would have held back from organising complaints to Standard Life. For all these reasons, I am unable to accept the main thrust of the evidence of Mr Storey. In seeking to bolster their case with regard to response rate, the Insurers also relied on the evidence of Mr Dennehy (a prominent IFA) whose evidence was broadly to the effect that relatively few of his firm's customers had made any complaint by the first week in February with regard to the price fall. At the time (ie about 5 February), he made a "brainstorming" suggestion that SLAL should offer its customers a 3 month period in which to switch out of the Fund without incurring the 4.8% price drop; and that, if SLAL did this, he anticipated customer inertia would result in only about 20% of customers taking this option. However, for the same reasons as stated in the preceding paragraphs, I was unpersuaded by this evidence. On the contrary, I accept the evidence of Sir Sandy Crombie that under Option 1 IFAs would not have held back from encouraging claims. This is further corroborated by the unchallenged evidence of Mr Otter, another IFA, whose company (Oval) had some 550 clients exposed to the Fund in January 2009 with a total holding of some £21m. Further, it seems to me that Mr Dennehy's evidence largely ignores the role of the FSA. As to such role, it is, of course, true that, as SLAL conceded belatedly, the FSA never made a "recommendation" in favour of Option 2 – although the making of such recommendation in the future could certainly not be ruled out and, in my view, remained very much "on the cards" as at 10 February 2009. It is also true that, as submitted by the Insurers, the FSA had not taken the position at the stage when Option 2 was adopted and the Cash Injection made that Option 1 did not comply with TCF principles and was unacceptable on that – or indeed any other - basis. However, the role of the FSA was, in my view, potentially very important not least because of the point made by Mr Ledlie and which is stated in the Board paper viz that it was unlikely that SLAL would be able to reach a position quickly with the FSA that a case by case approach (ie Option 1) was appropriate and there would be a risk that the FSA would subsequently enforce a different and more comprehensive approach. In other words, if Option 1 were chosen by SLAL there was a risk that the FSA would end up requiring some more extensive programme of remediation – a risk which both Mr Hopper and (even) Mr Storey acknowledged. Indeed, Mr Storey agreed that it would be foolish and potentially disastrous for a firm to go ahead with a compensation scheme if the FSA did not approve of it since the FSA had the power to insist on the whole exercise being re-done in a different way. These considerations were, in my view, important because if the FSA had adopted any of the above courses, the likelihood would have been to increase the level of claims against Standard Life. The Insurers also sought to attack the evidence of Mr Gill with regard to the figure of £124m under Option 1. In that context, the Insurers said that although Mr Gill's original evidence in paragraph 20 of his witness statement was that the assumption underlying these original figures was that all customers with B/C literature would claim, he had "corrected" this evidence in a "very material respect" in the face of Mr Storey's report. In particular, the Insurers submitted that Mr Gill in effect changed his evidence to suggest that the 100% figure was really 'taking the rough with the smooth' to reflect the fact that, whereas not all customers with B/C literature would complain, some customers (presumably enough to make up the shortfall) who had been classified as having A literature would either be able to show that they had relied on C literature at some later point or (perhaps) would bring a claim based on A literature and succeed before FOS. Further, the Insurers submitted that there was a number of reasons why there was what they described as "trouble with this reconstruction" viz. i) It bears no relationship to the expected costs table. That table assumed a worst case of 100% of B/C complaints and not some lesser proportion of B/C complaints, with the shortfall made up with an equivalent amount of A literature customers. ii) Neither the expected costs table nor the board papers evidence any contemporary perception that there would be liability to customers with A literature; on the contrary, they demonstrate the opposite. iii) SLAL reasonably did not at the time perceive the A literature as being of poor quality in any respect. As Mr Ledlie said, the literature review was conducted by Mr Dowie, who was a " highly regarded lawyer with over 25 years experience in the pensions industry" and by his in-house team. iv) SLAL reasonably did not structure its pre-Cash Injection decision trees to give effect to any such liability. On the contrary, those decision trees reflected the perception that it would not be liable to customers with A literature. It is easy to look at the A literature with the benefit of hindsight, knowing the Mrs G decision, as Mr Storey was invited to do in cross-examination, and infer that individual retail customers (not sophisticated or large investors) might have received a favourable hearing from FOS on the basis of certain types of A literature had there been no Cash Injection. However, at the time, although it might have been reasonable to expect that some additional FOS complainants who had received A literature might have been expected in the face of declinatures, the volume of any such complaints to FOS would still be expected to be comparatively modest. v) It is hard to visualise how any significant proportion of non-complaining customers with B/C literature could reasonably have been expected to have been matched by an equivalent number of complaining customers with A literature whose claims would have been thought likely to have been pursued successfully to FOS in the face of declinature by SLAL. vi) Although some uncertainty would be bound to exist as regards some customers' literature, the classification of customers between A and C literature had already sought to err on the side of caution, by treating customers as having C literature for these purposes, even if (i) they were sophisticated individual investors who may well have understood the Fund or received advice from IFAs or trustees who were not themselves misled; or (ii) they had initially received A literature but had later received C literature. I do not accept the thrust of these criticisms of Mr Gill's evidence nor the points advanced by the Insurers as summarised above. I accept, of course, that the figure of £124m under Option 1 in the costs tables was based upon a calculation by reference to a potential liability to all customers who had received B/C literature based upon the research that had been carried out. However, it is plain from paragraph 20 of the original statement of Mr Gill that he did not consider that this figure was somehow fixed in stone. Further, as he explained in paragraphs 9 and 10 of his second statement, they expected a "substantial proportion of customers" to make claims – as was recorded in the Board paper. In effect, as stated by Mr Gill, the figure was a "suitable reference point" . Although the literature research had been carried out by reference to interviews with a number of customers who had not complained, it seems to me that Sir Sandy was right when he said that the results needed " careful interpretation" and contained several apparent contradictions. Despite repeated invitations in cross-examination, Sir Sandy never accepted that this research was " thorough " or reliable or capable of being understood at face value. Rather, his view at the time (which I accept) was that the findings were liable to be misleading as the customers surveyed had been called cold and may well have been giving general answers conditioned by their general experience of investments and by the turbulent events of the time rather than having the nature of the Fund specifically in mind. Further, as the contemporaneous documents show, the original analysis of the marketing literature was not that those customers who received category A literature at point of sale could not make a successful claim but rather that it was "unlikely" that this was so. The premise was that A literature was of an acceptable standard. However, this assumption was increasingly questioned as appears both from contemporary comments of, for example, Sir Sandy Crombie (who expressed concern at the meeting on 21 January that although some of the product literature contained favourable wording "..it was "buried" in the key features document which the customer would be unlikely to read") and also the advice from Counsel eg Mr Brisby QC's advice that the Ombudsman "will not be sympathetic to small print" and "….it is therefore not possible to draw arbitrary lines such as only compensating customers who took the policy out in certain years. This means that we can compensate across the board…". Although it is apparent that Mr Brisby QC's analysis took as its starting point the assumption that there would be at least some customers who did not have valid claims, he never gave definitive advice on this point. In particular, there is nothing in any of the notes of consultations with Mr Brisby QC which suggests that he was ever asked to review or to opine on a case involving A literature or advised that a customer who only saw A literature would not have a valid claim. To the contrary, on 4 February 2009 Mr Brisby QC's junior, Mr Brettler, provided a Note considering in some detail potential arguments surrounding various of the formulations used in the Fund's literature. This Note did not provide definitive advice on any of the literature but it raised pertinent questions in respect of all of it. As appears from the Note itself, some of the central questions were raised just as much by the literature graded A as by any other literature. This Note would have provided no comfort that Standard Life would have a good defence to claims brought by any customers. In addition, the figure of 65/64% which was the basis of the figure of £124m in the original costs table did not take into account claims from customers who saw category B or C literature at any point after point of sale. In my view, this is a very important point because if a customer who originally only saw category A literature at the point of sale asserted that they had nevertheless seen category B or C literature at any point thereafter, such assertion would have been difficult if not impossible for SLAL to refute – a point which was emphasised by Sir Sandy, in my view with good reason, and played an important part in the thinking as he (and SLAL generally) came to favour Option 2. Moreover, it seems to me that what Mr Gill says in both his statements is also supported by (i) the fact that the costs tables were excised from the final Board paper because of the danger of spurious accuracy; (ii) Mr Hare's liquidity report at Appendix G of the Board paper which still did contain the £140m gross figure for Option 1 and must have been in the mind of those attending notwithstanding the fact that there is no express reference in the minutes to any specific discussion of this figure; and (iii) the contemporaneous statement made in the Board paper as to the expected costs of Option 1 viz "The costs to Standard Life shareholders under this approach will depend on the numbers of customers making a claim against us, the upholder rate of claims and the determination of the claim in each case. We would expect a substantial proportion of customers to make claims and for at least 54% of these to be successful. It is quite likely that both media and IFAs will provide additional encouragement to customers to complain." In my view, the reference to " at least 54%" (which, as made clear elsewhere in the Board paper, equated to 64% by value) supports the evidence of Mr Gill. The foregoing is, in my view, further confirmed by Mr Otter who gave unchallenged evidence that the Fund was understood in the industry to be a cash fund which invested in cash or in short term instruments which were equivalent to cash. Such understanding derived from the Standard Life marketing literature and other publicly available literature. To my mind, this unchallenged evidence was important because it was entirely general and described the understanding of the nature of the Fund based on Standard Life's own literature across the board. A further point advanced by the Insurers was that it was illogical to assume (under Option 1) a 100% claim rate and (under Option 2) a figure of only 50% for the balance of the unsatisfied valid B/C claims (after the Cash Injection had assuaged the 4.8% element of loss), ie £30m. I do not agree. It seems to me that it was entirely logical to assume that the Cash Injection which would be made under Option 2 would indeed assuage the levels of indignation which had built up amongst policyholders and their advisers and thereby reduce substantially the claim rate. Again, it seems to me that this is a very important point – which was made by Sir Sandy Crombie at the time as reflected in the minutes of the meeting of 10 February. Moreover, as also reflected in the minutes and already noted above, his view was that, contrary to the figure of £30m in the costs table, any additional cost beyond the initial £100m may be limited to "..single digit millions of pounds…" . That view seems to me entirely reasonable as is confirmed by events after the Cash Injection which have resulted in a very modest level of additional compensation payments ie less than £5 million up to July 2011. I agree that this might be criticised as hindsight but at the very least it provides some evidence that the view which Sir Sandy Crombie held at the time and expressed at the meeting on 10 February was not unreasonable. In this context, the Insurers also relied on a memo prepared by Mr Hare in July 2009 on the subject of an estimated provision for potential future claims. The estimate reflected an assumption set out in the paper that the distribution of claims would reflect different response rates by category of fund holding, resulting in total claims of 5% by number of customers. The estimated response rates were as low as 10% for the £1m+ category, rising to 15% for the £100k - £1m category, then falling to 3% for the <£1k category. The Insurers submitted that these figures come nowhere close to supporting SLAL's submissions on this point. I do not agree. The fallacy in this point is that this memo post-dates the Cash Injection. If anything, these estimates are broadly in line with the views expressed by Sir Sandy Crombie as referred to above. For similar reasons, I do not consider that the points made by the Insurers with regard to the response rates referred to by, for example, Mr Wilson and Deloitte after the Cash Injection are of assistance. Again, if anything they support the views of Sir Sandy Crombie in February 2009; although I accept that this might be criticised as hindsight. Conclusion For all these reasons, it is my conclusion that the Remediation Payments including the Cash Injection were made in order to avoid or to reduce third party claims of a type which would have been covered under the Policy within the meaning of "Mitigation Costs" as defined in the Policy. In summary: i) By the time of the meeting on 10 February 2009, Standard Life had already received a considerable number of third party claims and faced the prospect of many more if no action was taken to avert them. ii) It is common ground that the only possible alternative to Option 2 (i.e. Option 1) would have involved writing to all customers with holdings in the Fund acknowledging that they may have grounds for complaint and informing them how to complain. That action, if the 4.8% price fall had not been reversed, would have encouraged claims rather than doing anything to avert them. iii) It is clear from the evidence that Standard Life believed – entirely correctly as subsequent events proved – that reversing the 4.8% price fall would remove what was believed to be the key cause for complaint for many customers and reduce the levels of indignation which had built up among customers and their advisers – with the result that far fewer of them would pursue claims for compensation (including claims for more than the 4.8% fall) than if Option 1 were adopted. iv) Standard Life also obviously believed that the quantum of any claims would be reduced if the complainants had already been compensated to the extent of the 4.8% fall. v) Thus, in Standard Life's belief – and on any reasonable view of the matter – the number and value of third party claims was expected to be very substantially less if the 4.8% price fall was reversed by adopting Option 2 than if no such action was taken and Standard Life simply wrote to all customers informing them how to complain. In addition, there is no doubt in my mind that the Cash Injection was reasonably incurred. However, that is not sufficient for the purposes of the definition of "Mitigation Costs". The question remains to consider whether such payment was also " necessarily incurred" which is an important part of the definition of "Mitigation Costs". I have already considered the scope of this part of the wording of the definition earlier in this Judgment. As there stated, I accept the Insurers' submission that this sets a "high threshold" albeit one which must have regard to the realities. In that context, I recognise and accept that there was no legal necessity to make such payment. However, the existence of a legal obligation is not, in my view, the relevant test of "necessity" and the relevant "payment" does not have to be made to discharge a particular liability of a particular third party claimant. I also recognise and accept that at least at the time when the Cash Injection was made and absent any "recommendation" from the FSA, it was no doubt open for Standard Life to have adopted Option 1, waited for the claims to come in and then considered each claim in turn. That was certainly a possible course of action and, to that extent, I also recognise that the adoption of Option 2 and the immediate payment of the Cash Injection might be said to be not "necessary" in that sense. However, even recognising the "high threshold" imposed by such wording, it is my conclusion that the "realities" did mean that the Cash Injection was necessarily incurred to avoid or to reduce relevant third party claims. As discussed above, it seems to me important to read the various parts of the definition as a whole. In other words, it was necessarily incurred bearing in mind the stipulated purpose. For the avoidance of doubt, I should repeat that, as stated above, I accept the Insurers' submissions that the Cash Injunction was also incurred in order to avoid or to reduce "brand damage". However, in my view, both intended objectives were equally efficacious and, for the reasons stated above, this does not affect SLAL's entitlement. Thus, it is my conclusion that SLAL is, in principle, entitled to recover all the Remediation Payments including the Cash Injection without apportionment subject only to the questions of Exclusion 18(iii) and aggregation (including the appropriate deductible) as considered below. K Clause 18(iii): The "Fair Value" Exclusion The Insurers seek to rely upon Exclusion 18(iii). I have already quoted the entirety of the clause above but, in relevant part, Exclusion 18 provides that the Policy shall not indemnify the Assured in respect of "Any legal liability involving or arising out of……fair valuation or any actual or alleged failure to apply fair valuation to any portfolio securities held by an investment company…." . It is not easy to understand the precise commercial purpose of this wording and in the course of the proceedings the respective positions of both parties shifted from time to time. In any event, at the end of the day, the Insurers' (final) case was that advanced in their Opening Submissions and in the Re-Amended Rejoinder at paragraph 6A(3)(ii) viz "If and insofar as ... SLAL was liable to its customers for the sudden fall in value of their units in the Fund, whether independently of any mis-selling or for a specific form of mis-selling (such that no customer could expect such a sudden fall in value), any such liability arose out of fair valuation ... The customers were subjected to this fall in a single day ... in the absence of fault on [SLAL's] part, and on this premise by the exercise of fair valuation which resulted in the change of pricing sources and/or pricing spreads implemented on that day." More specifically, the main thrust of the Insurers' case was that, because the setting of the price of units in the Fund on 14 January 2009 when the 4.8% fall occurred was an exercise in fair valuation (albeit there was nothing wrong with that valuation), any liability which SLAL had to customers who had claims for mis-selling based on the 4.8% fall was a liability " involving or arising out of fair valuation " and therefore fell within Exclusion 18(iii). As to this wording, the parties were broadly agreed as to the meaning of the concept of "fair value ". In particular, SLAL agreed that " fair value " can be defined in the way stated by Mr Deacon (the Insurers' expert) as " the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction ". SLAL also agreed with Mr Deacon that, where there is an active market, market prices generally provide the best evidence of fair value and that, where the market is inactive or illiquid, more judgment has to be exercised in determining fair value; and that any determination of a unit price on any day under any circumstances is therefore an exercise in fair valuation. The choice of an appropriate pricing basis (offer, mid or bid) and of appropriate pricing sources, the use or adjustment of prices generated by those sources and the setting of spreads are all aspects of arriving at a fair value for the assets in a fund. On this basis, it was my understanding that SLAL accepted that the repricing carried out on 14 January 2009 was properly characterised as an exercise in "fair valuation". However, the basis of SLAL's liability would, in essence, have been that the customer had been provided with a financial product which had not performed as the customer had been led to expect in that a sudden fall of 4.8% was outside the expectations reasonably created by the marketing literature. Fair valuation would not be an ingredient or cause of such liability any more than it would be an ingredient or cause of liability for mis-selling based on a description of the Fund as invested wholly in cash. In either case the only role of fair valuation would be that the determination of the unit price on any given day would involve (as it always does) determining the fair value of the Fund assets. So when the Fund fell in value, as it did on 14 January 2009 and on any other day when the value fell compared with the value of an equivalent cash investment, there would have been a fair valuation carried out to set the price of units (as there was every day). That fair valuation would, however, have merely been the means by which the price was calculated which resulted in loss to the customer. It would not – in circumstances where there was nothing wrong with the valuation – be an element or cause of the assured's liability. On behalf of the Insurers, it was in effect submitted that this conclusion does not give sufficient recognition and weight to the words "involving or arising out of" which are of wide ambit. I do not agree. As submitted on behalf of SLAL, it seems to me that the Insurers' argument proves far too much. If it were correct, then any claim that a product had been mis-sold with the result that the customer had suffered loss would be excluded merely because the fall in value which constituted the loss (in comparison with how the customer had been led to expect that the product would perform) was calculated by reference to prices arrived at through fair valuation. On behalf of SLAL, it was submitted that an interpretation of Exclusion 18(iii) which has this consequence is absurd; that on the proper construction of the exclusion liability " involving or arising out of fair valuation or failure to apply fair valuation " means liability which has as an ingredient or is caused by either a faulty fair valuation or a failure to apply the principle of fair valuation; and the clause cannot reasonably be understood to refer to liability which involves, merely as an incidental part of the history of how a loss occurred, a perfectly proper fair valuation of assets. I agree. Further, as submitted on behalf of SLAL, any unclarity or ambiguity as to the meaning of the exclusion the Insurers' construction should in any event be rejected on the basis of the " well established and salutary principle that a party who relies on a clause exempting him from liability can only do so if the words of the clause are clear on a fair construction of the clause " : Royal & Sun Alliance v Dornoch [2005] Lloyds' Rep IR 544, 550 at [19], CA. Even if I am wrong, it is my view that Exclusion 18 has no application at all in this case because the Fund's assets were not assets held by an " investment company ". As to this term, the Insurers argued (at least initially) that SLIF was an investment company because it was " a company which held assets or securities as part of an investment portfolio ". However, this construction of the term " investment company " makes the words " held by any investment company " in Exclusion 18(iii) completely redundant. If the term " investment company " merely means a company which holds securities as part of an investment portfolio, then any company which holds a portfolio of securities is thereby automatically an " investment company ". So, as submitted by SLAL, the words " held by any investment company " do not limit the scope of the clause in any way: they might as well not be there. In my view, that is not a reasonable interpretation of the exclusion. Rather, it seems to me clear from Exclusion 18 read as a whole that it is not intended to apply to any company which holds a portfolio of securities but only to a particular kind of company described as an " investment company ". As a matter of ordinary language, that term does not mean any company which makes an investment, but, in my view, connotes a company whose main business is investment. Alternatively, in the context of the provision of financial services in the UK regulated under FSMA, it could be understood to refer to a company which is authorised to carry on " investment activities ". On either of these interpretations or any reasonable interpretation of the term, SLIF is not an " investment company ". As explained by Mr Dowie in his unchallenged evidence, SLIF is a company which has as its first object carrying on the business of an insurance company and transacting ordinary long term insurance business and is authorised by the FSA to carry on such business. As such, SLIF is in fact prohibited under the FSA's Rules from carrying on " investment activities ". For all these reasons, it is my conclusion that the Insurers are unable to rely upon Exclusion 18(iii). L. Aggregation Clause 2 of the Policy, which deals with the Deductible, contains the following aggregation provision: "All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together, shall be considered to be a single third party claim for the purposes of the application of the Deductible." In essence, it was SLAL's case that all the claims that it faced arose out of the (actual or alleged) misrepresentation by Standard Life of the nature and risk profile of the Fund and that this was, in effect, a "unifying factor" justifying aggregation. This was disputed by the Insurers. In summary, it was submitted on behalf of the Insurers that SLAL had not properly identified the originating cause or source to which it says all the claims were attributable, still less discharged the burden of showing that they were indeed attributable to it; that the formulated basis of the claim(s) was not an act, error or omission, or originating cause or source in the sense required by the Policy; and that, on the contrary, there was a wide variety of different types of complaints for example: of mismanagement, i.e. that the ABS assets included within it were outside the scope of the mandate; or poor investment performance; or mispricing, i.e. the one-day 4.8% fall arose from an error in SLAL's pricing systems, rather than reflecting a real fall in the value of the assets or their inherent volatility. Further, the Insurers submitted that in late January 2009, 40% of the complaints were estimated to be complaints of mis-selling/misrepresentation whereas the other 60% being dissatisfaction with performance; and, in any event, there was not one misrepresentation made in the same terms, or in substantially the same terms, to all investors but different misrepresentations were made to different customers in different ways. In any event, the Insurers submitted that even if all the submissions above are found unpersuasive, it is indisputable that there were at least two, and on SLAL's case, three originating causes or sources in play. In that context, the Insurers relied in particular on the second notification made by SLAL on 28 January 2009. Further, the Insurers submitted that if SLAL's case that it was under a separate liability to all its customers for the 4.8% fall is accepted, then this is a separate head of liability attributable to a quite different originating cause or source, relating to volatility rather than the 'cash' description of the Fund, customers with no entitlement to redress under the latter head being (ex hypothesi) able to claim redress under the former head. This would be subject to a separate deductible if this basis of claim were upheld. In considering these submissions, the starting point must be the terms of Clause 2. This is very wide wording. Indeed, according to the researches of the Claimant's Counsel, it is as wide as, and in one respect wider than, any aggregation clause which has been considered in any of the reported cases and, as submitted on behalf of SLAL, it is in fact difficult to envisage a more widely drawn form of aggregation clause. As to the reported cases, the starting point is the leading case of Axa Reinsurance v Field [1996] 1 WLR 1026 in which the House of Lords held that a clause which provided for aggregation of claims " arising from one originating cause " differed substantially in its meaning from a clause which provided for aggregation of losses " arising out of one event ". Lord Mustill, with whose speech all the other Law Lords agreed, said (at p.1035G): "In my opinion these expressions are not at all the same, for two reasons. In ordinary speech, an event is something which happens at a particular time, at a particular place, in a particular way. … A cause is to my mind something altogether less constricted. It can be a continuing state of affairs; it can be the absence of something happening. Equally, the word 'originating' was in my view consciously chosen to open up the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate. To my mind the one expression has a much wider connotation than the other." The clause in the present Policy uses the phrase "originating cause or source". The choice of the word "originating" opens up, in Lord Mustill's words, "the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate". Furthermore, the words "or source", as an explicit alternative to "cause", can only have been included to emphasise yet further the intention that the doctrine of proximate cause should not apply and that losses should be traced back to wherever a common origin can reasonably be found. Two subsequent cases illustrate the wide scope of such language. In Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd [1998] Lloyd's Rep IR 421 an insurance claim was made for damage to machinery at the Port of Sutherland. The damage occurred over a period of about 18 months and was the result of a succession of individual acts of pilferage and vandalism carried out by a number of individuals probably acting independently of one another. The relevant insurance and reinsurance contracts had an excess and a limit of indemnity which applied to "any one occurrence or … all occurrences of a series consequent on or attributable to one source or original cause". The Court of Appeal held that all the occurrences of damage in each policy year fell within this description and were therefore to be aggregated. After referring to the remarks of Lord Mustill in Axa v Field quoted above, Hobhouse LJ said (at p.434): "In my judgment what Lord Mustill says covers also the wording with which we are concerned – 'one source or original cause'. These are wide words. There is a clear unifying factor in the history of all the losses which Concorde suffered as a result of the continuing pilferage and vandalising of their goods. The Port had no adequate regard to their responsibilities as the bailees of the goods; they had no adequate system to protect the goods from pilferage and vandalism; it was their want of care which was the consistent and necessary factor which allowed the pilferage and vandalism to occur. On an ordinary use of language, the acts of pilferage and vandalism were a series of occurrences attributable to a single source or original cause." The second case which illustrates the scope of such wording is Countrywide Assured Group plc v Marshall [2003] 1 All ER (Comm) 237, which involved a claim by the insured under a professional indemnity policy to be indemnified in respect of its liability to customers who were mis-sold pensions. As in the Municipal Mutual case, the policy provided for a limit of indemnity which applied to " one occurrence or all occurrences of a series consequent upon or attributable to one source or original cause ". Morison J. held on assumed facts that all the claims made by individual customers who had been mis-sold pensions were to be aggregated under the clause. After referring to the Axa and Municipal Mutual cases, he said (at p.244): "The words 'one source or original cause' are, as Hobhouse LJ said, 'wide'. It is, I think, the force of the word 'original', or 'originating' in the Axa Reinsurance case, that entitles one to see if there is a unifying factor in the history of the claims with which the claimants were faced. In my view, the lack of proper training of the selling agents and selling employees was behind the whole problem. It was this which, on the assumed facts, was a consistent and necessary factor which allowed the misselling to occur. Maybe the activities of individual salesmen were also causative but the clause entitles one to move back and find a single source or original cause; and in this case, there is one." In one respect, the language of the aggregation clause in the present Policy is even wider than that of the clauses considered in the Axa, Municipal Mutual and Countrywide cases. Not only does the clause in the Policy use the expression " originating cause or source ", but the description of the link required between the " originating cause or source " and the claims which it is sought to aggregate is worded in the broadest possible terms. Whereas in Axa the words used were " arising from ", and in Municipal Mutual and Countrywide the words used were " consequent on or attributable to ", the Policy here uses the words " arising from or in connection with or attributable to " (emphasis added). The phrase " in connection with " is extremely broad and indicates that it is not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their " originating cause or source ", and that some form of connection between the claims and the unifying factor is all that is required. In my view, there is no difficulty in aggregating all the actual and potential claims under Clause 2. In every case the originating cause of the complaint has been that Standard Life marketed the Fund as a safer investment than was in fact the case. It does not matter that, as the Insurers emphasise, the Fund was marketed over a period of years to many thousands of customers through numerous different channels using many different forms of marketing literature. The representation of the Fund by Standard Life as a safer investment than was in fact the case was a continuing state of affairs which persisted from the time when the Fund was established in 1996 as a successor to the Pension Cash Fund until 14 January 2009 when the 4.8% fall was announced. It is a factor which unifies both the claims which Standard Life was seeking to avoid or to reduce when the Cash Injection was made and all the claims which have subsequently resulted in further payments of compensation. In my judgment, it follows that these are all claims or a series of claims falling within the very wide wording of Clause 2 of the Policy and subject to a single deductible. K. Conclusion For all these reasons, it is my conclusion that SLAL is entitled to recover all the Remediation Payments subject to the single deductible of £10 million and an appropriate declaration. Counsel are requested to seek to agree an appropriate order (including costs and any other consequential orders) failing which I will deal with any outstanding issues. BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII