House of Commons - Treasury

Select Committee on Treasury Tenth Report

PROCEEDINGS OF THE COMMITTEE RELATING TO THE REPORT

At the Committee's meeting on 16 January 2001, when the decision to inquire into Equitable Life and the Life Assurance Industry was taken, the following Members declared interests as Equitable Life policyholders: Mr Michael Fallon, Mr James Plaskitt and Mr David Ruffley. Sir Michael Spicer declared that his wife was an Equitable Life policyholder.

TUESDAY 27 MARCH 2001

Members present:

Mr Giles Radice, in the Chair

Mr Nigel Beard	Mr James Plaskitt
Mr Jim Cousins	Mr Brian Sedgemore
Mr Edward Davey	Sir Teddy Taylor
Mr David Kidney

Draft Report (Equitable Life and the Life Assurance Industry: An interim report), proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraph 1 read and agreed to.

Paragraphs 2 and 3 read, amended and agreed to.

Paragraphs 4 to 9 read and agreed to.

Paragraph 10 read, as follows:

"Through this period of change, however, there has been a measure of continuity in the staff involved in prudential insurance regulation. Mr Martin Roberts was appointed Head of HM Treasury's Insurance Directorate in February 1998, and was subsequently transferred to the FSA in January 1999 and continued in the same role with his new employer. Other members of Mr Roberts' directorate at HM Treasury also transferred to the FSA when the contracting out of prudential insurance regulation came into effect in January 1999, including Mr Roger Allen, who continued in his post as Deputy Head of the Insurance Directorate, with responsibility for the Life Assurance sector. Mr Allen has worked in the Insurance Directorate of the DTI and then the Treasury since 1993. Additionally, the legal advisers (previously part of the Treasury Solicitors) were transferred to the FSA. GAD, which provides advice on the supervision of insurance companies to the prudential insurance regulator, reported directly to the FSA. Sir Howard said that "there has been, therefore, a high degree of continuity of approach [towards prudential insurance regulation] through 1998, 1999 and 2000"."

An Amendment made.

Another Amendment proposed, in line 13, at the end, to add the words "We could not form a firm conclusion as to whether rapid institutional change coupled with continuity in staff did or did not contribute to this affair. The Committee will wish to return to this issue."—(Mr Edward Davey.)

Question put, That the Amendment be made.

The Committee divided.

Ayes, 4	Noes, 2
Mr Edward Davey	Mr Nigel Beard
Mr David Kidney	Mr Jim Cousins
Mr James Plaskitt
Mr Brian Sedgemore

Paragraph, as amended, agreed to.

Paragraphs 11 to 14 read and agreed to.

Paragraphs 15 and 16 read, amended and agreed to.

Paragraphs 17 and 18 read and agreed to.

Paragraph 19 read, as follows:

"Equitable Life has been a mutual organisation since its inception, and operated on a philosophy of "full and fair" distribution of its profits to "with-profits" policyholders. This had the effect of increasing the returns to such policyholders; and this was reflected in Equitable Life's superior performance relative to other life offices. However, the consequence of this policy was that, unlike other life offices, including many with mutual status, Equitable Life did not accumulate any reserves (alternatively referred to as an "inherited" or "orphan" estate). Equitable Life explained: "if part of the surplus otherwise available for distribution to policyholders was set aside for future emergencies, this would have been at the expense of policyholders whose policies were in force or maturing when those surpluses arose". Mr Headdon said that policyholders were "not explicitly" told that the policy of full and fair distribution was at the expense of creating "a reserve fund that could meet some unforeseen contingency". Mr Headdon admitted to the Committee that if reserves had been accumulated from 1993 onwards, then Equitable Life could have responded to the subsequent House of Lords ruling "in a less dramatic and worrying way", and the problems that afflicted Equitable Life in the light of that ruling would probably not have arisen. Equitable Life's decision in 1993 not to build up a reserve to cover the cost of GAR liabilities was a crucial turning point, although not one its then current and potential policyholders knew much about."

Amendment proposed, in line 15, after the word "Life's", to insert the word "risky".—(Mr James Plaskitt.)

Question put, That the Amendment be made.

The Committee divided.

Ayes, 5	Noes, 2
Mr Nigel Beard	Mr David Kidney
Mr Jim Cousins	Sir Teddy Taylor
Mr Edward Davey
Mr James Plaskitt
Mr Brian Sedgemore

Another Amendment made.

Paragraph, as amended, agreed to.

Paragraphs 20 to 22 read, amended and agreed to.

Paragraphs 23 to 25 read and agreed to.

Paragraph 26 read, as follows:

"The approach undertaken by Equitable Life was approved by the FSA: Sir Howard explained that "[in the absence of] the House of Lords judgment, we are not in economic circumstances which would have created the need for these reserves to be available in cash form". However, this perhaps misses the point: reserves should not be accumulated at the time when the economic circumstances necessitate, as there is not always sufficient time to react to economic circumstances. In addition, while economic circumstances are one reason for accumulating reserves, as was demonstrated in the case of Equitable Life, there are other eventualities that can arise with, or without, warning that necessitate drawing on cash reserves. We ask the FSA to consider whether cash reserves only need to be accumulated when required by the economic circumstances—or whether there are other circumstances in which cash reserves may be required. Sir Howard also argued that "by that time [late 1998] the only alternative in terms of creating cash [reserves] for everything would have been to pay no bonus whatsoever—effectively to do in 1999 what the company had to do as a result of the House of Lords [ruling] in the year 2000—and it did not seem to us to be at that point ... reasonable to insist on that"."

Amendment proposed, in line 9, to leave out the words "consider whether" and insert the words "reconsider the plausibility of its view that".—(Mr James Plaskitt.)

Question put, That the Amendment be made.

The Committee divided.