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8.15 pm
Ms Diane Abbott (Hackney, North and Stoke Newington): I am glad to have the opportunity to speak about the Government's proposals. I wish to speak briefly on an aspect of the proposals that has not had enough attention in the debate--the implication of a privatised pension regime for financial services regulation. I shall also speak about the experience of pensions misselling and shall make three points: first, the size of the pensions misselling problem has been underestimated; secondly, we are nowhere near solving the problem; and, thirdly, we must recognise that pensions misselling is not merely a past aberration which must be cleaned up, but raises issues for financial services regulation in the future.
Figures on the number of people who might have been affected by pensions misselling have been bandied around. In any debate about increased privatisation of pensions, it is important to stress that more people have lost money than most people imagine. The issue first came to light in 1984, when KPMG, one of the leading City accountants, reviewed the files of a sample of 735 clients who had been sold private pensions. Only 9 per cent. of the files showed evidence of substantial compliance with the regulations. The firm classified 37 per cent. of the files as suspect.
In my view and that of many members of the Treasury Select Committee, the 500,000 people whose cases the Personal Investment Authority is reviewing are the tip of the iceberg. The problem arose not just with pension transfers; similar bad advice was given on opt-outs and to people who left SERPS. Of the 5.2 million who left SERPS, 200,000 were paid so little that they did not even qualify for a rebate. Leaving SERPS could have had no possible value or benefit to them.
The problem is greater than we believe. We may never know its full dimensions, because many tens of thousands of people may die before they receive any compensation. I understand, from the evidence given by the chief executive of the PIA to the Treasury Select Committee earlier this week, that the industry's letters to people asking them to come forward do not even mention compensation. People are getting letters from financial services providers, with other junk mail from the financial services industry, with nothing to suggest that it would be in their interest to respond. The problem goes wider and deeper than anyone on the Tory Benches will acknowledge.
Mr. Clifton-Brown:
The hon. Lady is making a serious and thoughtful contribution. Many of her hon. Friends have majored on pensions misselling this evening, but will she accept that the elimination of misselling in every circumstance would involve more regulation? In that context, what does she think of supermarkets selling pensions without giving any advice?
Ms Abbott:
As a member of the Treasury Select Committee, I have studied all aspects of financial services
Mr. Bernard Jenkin:
Does the hon. Lady think that misselling is continuing on the same scale as during the period to which she referred? What proportion of those million or so cases would be eligible for compensation? In many cases, there might have been some technical non-compliance, but whether people finished up with the wrong product is another question. I see a smile on the hon. Lady's face, and I am genuinely interested in her answer.
Ms Abbott:
I love the phrase "technical non-compliance", and the financial services industry and its lackeys are keen on this type of euphemism. What we had were salesmen, almost all of whose income came from commission, scouring local newspapers for information about firms going bankrupt or coal mines closing. They then targeted the former employees and coal miners and sold them pensions, although even someone like me--with no expertise in these products--would know that, once those people lost their employers' contributions and the guaranteed benefits of an occupational scheme, they had to be worse off with private pensions. It was not, as the industry insists, a technicality. Salesmen were driven by the bonus system and by commission knowingly to sell people products that could not have left them better off. The problem was not a past aberration, but one of structure.
Mr. Jenkin:
The hon. Lady has not answered my questions.
Ms Abbott:
I hope to answer them in the final section of my remarks. Tory Members have said that the problem is being dealt with, but I want to know who is dealing with it. The Treasury Select Committee took evidence from the PIA this week, and we have said over and over again that it has taken two and a half years to deal with 1 per cent. of cases. On that time scale, we will reach the millennium without clearing the backlog. We asked how long it would take to clear up the problem, but the PIA could not answer.
Pensions misselling is tragic; but, when the pensions misselling review was set up, the Government, the PIA and the other regulatory authorities set their face against finding out what had gone wrong, to what extent it was a technical problem and to what extent there had been real fraud. They sought co-operation from the industry to get the matter cleared up as quickly as possible, but the industry has been let off the hook and still has not co-operated. The biggest names in financial services--including the Prudential and Legal and General--are some of the worst offenders. There is no evidence or information from the relevant regulatory authorities to suggest that we are in sight of clearing up the problem.
I believe that many of the institutions are simply waiting for the grim reaper to do his work before they have to cough up compensation.
Some Tories have said that this was a technical problem, and asked whether misselling is still going on. The pensions misselling of the 1980s and 1990s goes to the heart of what is wrong with the financial services industry and the retail sale of its products. Far too many salesmen depend on commission for almost all their salary. When someone is commission-driven and has to pay his mortgage and pay for his shopping, it is only human nature for him to sell people products on the basis of how much commission he can earn rather than whether the product is what the customer needs.
I agree with the Consumers Association, which has said over and over again that we need to move towards a transparent system for independent financial advisers, and towards a fee-based system where people pay for genuine and clear advice, rather than having people posing as independent financial advisers. The implications of pensions misselling for financial regulation in the future are great, and we have to look at the commission and bonus system and at the continuing lack of transparency.
The industry has dragged its feet on this issue. People who try to buy financial services products will be deluged with paper that they do not want to read and that is unreadable, even if they try. The real information about commission, bonuses and administration charges is hard to winkle out.
As the hon. Member for Cirencester and Tewkesbury (Mr. Clifton-Brown) said, we may need to limit the types of investment that pension advisers can make. We do not want to go the way of the United States savings and loans companies, which attracted investment from millions of ordinary Americans and, free from serious regulation, were able to throw their investors' money away on junk bonds. It cost the American taxpayer billions of dollars to bail them out.
As the Consumers Association said in 1994,
As we move to an era in which many of the benefits that would have been provided by a welfare state--pensions, unemployment benefit and sickness benefit--will be the province of the financial services industry, we need a different, clearer and tighter system of regulation. When I was a schoolgirl, many ordinary people did not have a bank account or a mortgage. Twenty or 30 years ago, a person had contact with the financial services industry because he or she chose to do so. We are now moving into an era when most of us--whether we choose to or not--will depend on the financial services industry for pensions, unemployment benefit and care for the elderly.
"It is very difficult to have confidence that every single individual who has been affected and has been given what we would class as bad advice is necessarily going to be identified let alone given full compensation".
The PIA has acted poorly on this issue. It is no coincidence that the chairman of the PIA, Joe Palmer, was previously the head of Legal and General, one of the companies most heavily implicated in pensions misselling. We have to get away from self-regulation of the financial services industry, as it means that the regulators are unwilling and slow to act against their friends and colleagues.
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