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Insurance Industry

1.30 pm

Dr. Vincent Cable (Twickenham): Thank you, Mr. Deputy Speaker, for the opportunity to speak to this Adjournment debate. This issue narrowly affects at least 600,000 with-profit policyholders of the Axa insurance companies, but given the precedent that may be created by the case to which I shall refer, almost every family in the country with a life insurance policy could be affected.

I have spent some time ploughing through relevant documents, and they contain pretty esoteric stuff in many respects. To understand some of them seems to require the actuarial equivalent of a PhD. Despite their complexity, however, there are some fairly basic issues of principle, such as who owns the very large--approximately £20 billion--orphan assets or inherited estates that lie in the major life insurance companies. Should policyholders own 90 per cent. of such assets, as tradition and ministerial and official guidance suggests, or should the assets be apportioned differently?

The press, including the Daily Mail, have taken up this issue with a vengeance. Many people strongly believe that allowing the Axa case to set a precedent would fit firmly into the Government's rip-off Britain policy. I am aware that the case is subject to legal action, and it is clear that the political dimension must be dealt with in that context. However, the case is rather unusual in political and legal terms, in that it is a public interest case brought by the Consumer Association with strong public backing.

A minute or two ago, a note was handed to me stating that the first round of the legal action was determined this morning. The Consumer Association has been awarded preventive costs of £100,000 to pursue its case against the insurance company, so it appears to have won the first round. According to that note--I have not established this yet--the judge has confirmed what the Consumer Association has argued all along: that this is not merely a narrow and technical legal issue, and that major public policy issues are involved that concern the Treasury and the Financial Services Authority, among others.

I shall return to those public policy issues in more detail, but let me summarise them now. Essentially, there are four issues. One is the status of Government guidance--originally provided by a Minister, but reaffirmed by the Treasury--on the so-called 90:10 rule. What is the current status of that guidance? The second issue concerns the FSA's performance, which seems a clear case of regulatory capture, as it is termed in the industry. Thirdly, there are issues relating to the Inland Revenue. I am in no sense a tax lawyer--

Mr. Deputy Speaker (Mr. John McWilliam): Order. We are having some problems here, and it would help if the hon. Gentleman were to establish the exact position of this case. Has it been put down for trial?

Dr. Cable : I am not enough of a lawyer to give a proper legal assessment. As I understand it, a case is being heard before the High Court, in which the Consumer Association is involved on the policyholders'

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behalf, and a preliminary round of hearings was held this morning. The matter has been the subject of a great deal of press comment--

Mr. Deputy Speaker : Order. The hon. Gentleman has made it clear that the case is sub judice, so I am afraid that specific discussion of it is out of order. However, he is open to argue the general principle.

Dr. Cable : Thank you, Mr. Deputy Speaker. You have pointed the way, and I shall try to be careful not to refer too much to matters under discussion in court. My point was was that there are substantial issues of public policy principle, to which I wish to return in detail later.

Mr. Deputy Speaker : Order. May I make it clear to the hon. Gentleman that he must not refer to the specifics of that case at all?

Dr. Cable : May I then define the problem in general terms? Insurance companies in general have orphan assets--assets set aside for long-term prudential purposes--which probably derive from the fact that bonuses that were insufficiently generous in the past have resulted in the accumulation of very substantial sums of money. The question is how those orphan assets should be allocated. The traditional assumption has been that 90 per cent. of them should be allocated to policyholders. That principle has been established in two ways: it features in the articles of association of all life insurance companies, and it was the subject of a Government guideline set out in 1995 by a Minister called Jonathan Evans--of whom I had not previously heard--which has subsequently been reiterated by the Treasury. I hope that I have understood correctly that that is the current position.

I have a little difficulty in proceeding, as I am unsure how far I can illustrate the general points that I want to make with reference to a particular case. You have ruled that the case in question is sub judice, Mr. Deputy Speaker, so I cannot pursue my line of argument. However, the case has been in the public domain, and many of the issues that we have to discuss relate to its public presentation. May I seek clarification, Mr. Deputy Speaker? Does your ruling imply that coverage of the matter in the press, including today's press, technically represents a breach of the law by the newspapers concerned?

Mr. Deputy Speaker : Order. It may or may not represent a breach of the law, but it does breach the Standing Orders of the House. I am dealing here with the sub judice rule in those Standing Orders. Any other question is a matter for the courts and not for us.

Dr. Cable : Your ruling, Mr. Deputy Speaker, makes it very difficult for me to deal with the two essential elements in the case, which relate to the principle of apportionment and to the conduct of the ballot, which is highly contentious. I shall move quickly to my conclusion, Mr. Deputy Speaker, because you have cut the heart out of my subject, although, obviously, I respect your judgment. I shall proceed to the issues that affect the Government.

I have read the Minister's spirited article in the Daily Mail, in which she takes the view that this matter is not her direct responsibility. She correctly says that she did

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not approve the decision made by a particular insurance company, and that it is, therefore, not her direct ministerial responsibility. She took the view that examination of the matter by the Financial Services Authority and the courts provided adequate protection to policyholders.

However, there are issues involving public policy to which I hope the Minister will be able to respond within the constraints that we have had placed on us. The first relates to the guidance that the Government have given regarding the 90:10 rule, which has been changed by this case. Does the 90:10 rule still apply? It has clearly generated confusion, and there are now several different interpretations of it. The company involved obviously made a different interpretation from that of the policyholders. Does the Minister plan to re-state that guidance? Would that require legislation, whether primary or secondary? Everyone concerned with the problem--in general terms, and not necessarily in relation to that court action--would like clarification on the Government's stance on the 90:10 apportionment principle.

The second matter of public policy relates to the Financial Services Authority, which reviewed the case in its capacity as regulator. The problem is whether the FSA has acted as one would expect of an effective and independent regulator. When it was set up--as the Minister must remember with pain because she guided the legislation through the House--interminable presentations were made and amendments suggested, almost all of them on behalf of practitioners. Many of those points were perfectly valid, but some of us, particularly those who argued from the consumer viewpoint, always feared that practitioner interests would come to dominate the FSA. We have seen that happen with other regulators--for instance, it was said at one stage that Oftel had been captured by BT. The danger is that a regulator, because of a lack of knowledge of the industry, will tend to err on the side of practitioners rather than consumers.

I am referring to the work of the FSA rather than the matter now being considered in court when I ask how, as a matter of general principle, the interests of a large number of life insurance policyholders can be represented at the FSA. The policyholders appear not to have had a voice. I also question the FSA's expertise. Different judgments have been given on complex matters by independent actuaries, which the FSA seems either not to have considered or not to have understood. Another matter is the conduct of the ballot in the case under consideration by the court, and whether the FSA properly considered the detail involved--but I am not allowed to refer to that. However, the main point is that the FSA has refused to divulge details of its findings on the ground of commercial confidentiality. I should have hoped that, acting as an independent regulator in the public interest, it would do so.

The third point of public policy--I am trying to stay as close as I can to my subject without contravening Mr. Deputy Speaker's ruling--relates to the Inland Revenue. If companies depart from the 90:10 rule and seek to use part of their orphan assets for tax planning purposes, shareholders will pay less tax. It is possible to use orphan assets for tax planning--or, more

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provocatively, tax avoidance--purposes. The Inland Revenue clearly has an interest in the matter, and I sincerely hope that the Treasury has spotted the scope for large-scale tax avoidance by the insurance industry once the 90:10 rule is breached.

My final point is a broad one about the insurance industry. The industry is undergoing a massive process of consultation, takeovers are imminent and demutualisation is possible for some of the large insurers. The future of Equitable Life is highly uncertain, which raises the question of how its orphan assets should be utilised. In many ways, that question will be determined by the precedent that we are not allowed to discuss today. None the less, a broad public policy issue is involved. Within the constraints that we have been set, I hope that the Minister can give us some broad idea of how orphan assets can be utilised in the future.

1.43 pm

The Economic Secretary to the Treasury (Miss Melanie Johnson ): I, too, Mr. Deputy Speaker, will do my best to stick to your injunctions on the specific case involved. I therefore apologise in case some of the questions asked by the hon. Member for Twickenham (Dr. Cable) cannot be answered as fully as he would like.

I congratulate the hon. Gentleman on securing the debate. It will help if I run through the general background of inherited estates and the role of the Government and the regulator in these matters, without commenting on the specifics in which the hon. Gentleman and I are interested.

Issues related to inherited estates, commonly known as orphan assets, arise because a number of with-profits offices have accumulated surplus assets in their long-term business funds. That is to say, they have built up amounts over and above those strictly required to meet their liabilities and the statutory margin of solvency. Those sums can be used to smooth investment returns for policyholders from year to year.

The law requires all insurance companies to keep the assets of their long-term business in segregated funds known as long-term business funds, which can be used only for the purposes of long-term business. The surplus in the long-term business fund is termed an estate. The surplus is also used to meet policyholders' reasonable expectations in respect of the financial security of the fund and, as the hon. Gentleman said, the company's future investment and bonus policies. However, to the extent that prudent management of the estate permits, part of the surplus can be distributed to policyholders and shareholders. The terms on which distributions are made are often governed by each life office's constitutional documents. However, as the hon. Gentleman observed, it is common practice in shareholder-owned life offices for distributions to be made in the ratio of 90:10 between policyholders and shareholders respectively.

In some cases, the surplus estate has been allowed to grow up over a long time and has been passed from one generation of policyholders to the next. It is this class of surplus that is often called an inherited or orphan estate. The estate may reach a point at which it exceeds what is considered necessary for the efficient management of the business. In such circumstances, the company may wish to manage down the level of the estate by making a distribution in a manner agreed with the regulator.

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Although inherited estates have been built up over many years, in most cases the status of the funds and the appropriate basis of their attribution are clear. However, it does not apply to all insurance matters and all companies; in a small number of shareholder-owned life offices, that is not so. Over the years, policies and practices in those offices may have changed, and there may be doubts about the overall entitlements of shareholders and policyholders in relation to the attribution of surplus.

The Government's general policy on the attribution of inherited estates of insurance companies remains as set out in the reply of 24 July 1998 given by the then Economic Secretary, my right hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell), to a question asked by my hon. Friend for Halton (Mr. Twigg). That statement confirmed the principle that the interests of policyholders and shareholders in with-profits life funds should generally stand in the ratio 90:10. As the hon. Member for Twickenham said, that policy was identical to the one taken by the previous Administration in 1995. The 90:10 principle reflected common practice in the industry, and the present and previous Administrations felt that that ratio would be a starting point for policyholders' reasonable expectations in any attribution of inherited states. The general principle on distributions and attributions is subject to interpretation depending on circumstances--for example, the constitution of the life office, contractual commitments, company statements of practice or any other relevant factors. The Government have no wish to move away from that principle. The 1998 statement has applied to all mergers and acquisitions involving life business since then.

The hon. Gentleman asked what is the Government's role. We do not seek to interfere in the individual investment and management decisions of individual life offices, nor in the contractual relationship between life offices and policyholders. In the normal course of events, it is for companies, in consultation with their policyholders, to decide how to run their life businesses. Our intention in making the 1998 statement on the distribution of inherited estates was to reaffirm the view taken by the previous Administration. Our announcement on the 90:10 rule sought to draw together general industry practice and influence how such distributions might be made in future. As I have sketched it out, application of the principle will depend on the constitutions and business requirements of individual firms.

Treasury Ministers are responsible for general policy direction and for making proposals for legislation. The Financial Services Authority is carrying out day-to-day regulation of insurance companies on behalf of the Treasury. We are behaving now as we will when the Financial Services and Markets Act 2000 comes fully into force. Any insurance company is free to seek to undertake corporate reorganisation of its business. Insurance companies are, however, obliged to take their proposals for such reorganisation to the High Court, which, having been advised by an independent actuary, will decide whether to sanction the reorganisation. As the regulator, the FSA has the right to make representations to the court and will exercise that right in any case. However, it has an on-going supervisory

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role for the purpose of protecting policyholders against the risk that the company will be unable to fulfil its liabilities.

Furthermore, in the case of long-term business, the regulator should seek to ensure that proposed changes to the management of life funds are consistent with the company's requirements to fulfil the reasonable expectations of policyholders. The concept of the reasonable expectations of policyholders derives from legislation, but is not defined in it. The FSA carries out the day-to-day supervision of insurance companies on behalf of the Treasury. It is for the FSA to ensure that those companies are meeting the reasonable expectations of policyholders.

The hon. Gentleman made a specific point about operation of the FSA and asked how independently it is acting and how much it is taking account of consumers' interests. It is, of course, acting entirely independently in circumstances such as those under discussion. In cases of proposed change, it has to take its own independent legal and actuarial advice as necessary. It is also required by legislation to balance consumer protection, competition and other issues in the course of arriving at any decisions or representations. The accumulation of significant surplus assets or inherited estates is not necessarily a matter for concern. Different companies have different approaches, depending on their liabilities and their preferred methods of business management. There are arguments for and against retention or distribution of surplus assets. From the regulator's point of view, corporate strategies must ensure that liabilities are met and that the margins of solvency are maintained.

Under your ruling, Mr. Deputy Speaker, I cannot comment on a specific case. It is not the place of the FSA or of the Government to approve or disapprove any particular scheme. Any company has the right to go to court. The regulator's sole role is to assess the likely reasonableness of the scheme in respect of policyholders' expectations. It is for individual policyholders to decide in the light of their personal circumstances whether they want to accept any particular offer.

Eligible policyholders can be asked to decide whether they would agree to the allocation of their policies to a new arrangement. They will have to accept that any agreement reached could cause them to forgo their interests in possible future distributions from the assets of an inherited estate. The present interest in orphan assets has arisen on the basis of a particular case, on which we cannot comment. It is worthwhile to point out that, were any provision to be made, the funds of policyholders who did not accept the agreement would have to be kept in a separate fund to which the general 90:10 principle would still apply.

I hope that my comments on the background to the issue and on the Government's role have been useful to the hon. Gentleman and to other hon. Members who are interested in the topic. I have described a number of important checks and balances that have been built into the legislative and regulatory frameworks in order to safeguard the reasonable expectations of policyholders in an open and transparent way.

It is important for the hon. Gentleman to appreciate that the FSA is carrying out its regulatory functions effectively and efficiently and is taking account of the

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relevant policy issues in discharging its responsibilities, and that the Government are continuing to act in line with the policy framework that has operated for some time in relation to these matters. I hope that he now appreciates the status of the 90:10 rule and the ability of Ministers or the Treasury to intervene, or, as in this or

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any case, not to intervene, in the decision of companies to place particular cases before the courts. It is up to the company concerned, and is not, therefore, a matter in which I, as a Treasury Minister, can successfully intervene.

Question put and agreed to.

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