Examination of Witnesses (Questions 120-139)|
MP, MR JON
TUESDAY 30 OCTOBER 2001
120. I am sorry to interrupt you, Minister,
but that does not relate to the question I asked. It is a very
simple question. The Treasury have to see that the FSA discharges
the agreement that the Treasury has with the FSA. One of the requirements
on the FSA is to carry out the regulation of insurance companies
efficiently and effectively. I am asking you, as the Minister
responsible for looking at and monitoring that service level agreement
over time: do you believe that the FSA has carried out the regulation
of insurance companies efficiently and effectively having regard
to the Baird Report? It is a yes or it is a no.
(Ruth Kelly) Baird speaks for itself.
121. Can you speak for yourself and give me
a yes or no to that very simple question?
(Ruth Kelly) We no longer have that regulatory expertise,
but it is clear
122. You are the Minister responsible, with
(Ruth Kelly) Of course. It is clear from the report
that decisions would not have been taken in the way that they
were and, with the benefit of hindsight, different decisions may
have been taken. What is also clear is that the full benefits,
had they flowed earlier from the setting up of the single integrated
regulator, would have potentially benefited the policyholders
of Equitable Life. That is something we are absolutely determined
to see now when formal transfer of powers takes place and we have
to ensure that those benefits are fully developed.
123. As the Minister responsible, you have to
ensurethat is what Parliament charges you with doing; we
have to scrutinise what you are doingthat the service level
agreement is adhered to. Is that correct?
(Ruth Kelly) My job
124. Is that correct?
(Ruth Kelly) My job is to make sure that insurance
regulation is carried out in the best manner in the most appropriate
framework that we see fit and that the regulatory judgments themselves
are carried out by people
125. The service level agreement, with respect,
does not say that. You have to police it and enforce it. I think
you are conceding that which must be right, but has the carrying
out of the regulation of insurance companies been done efficiently
and effectively? That is what you have to decidenot anything
elseas the Minister, whether or not that has been discharged.
It says so in the agreement.
(Ruth Kelly) Baird makes clear it could have been
done better and I do not think Howard Davies, when he was here
before you, suggested anything different.
126. It was not done efficiently and effectively?
(Ruth Kelly) There are clearly lessons that can be
127. The Parliamentary Ombudsman inquiry relates
to post 1 January 1999 and to the closing of business in the following
December. Would you welcome the Parliamentary Ombudsman extending
his inquiries to cover the period during the calendar year 1998
when the Treasury was the prudential supervisor?
(Ruth Kelly) I think it is totally inappropriate for
me to comment on the terms of reference and the course of the
128. I asked if you would welcome it and the
answer seems to be no.
(Ruth Kelly) I think it is important to preserve the
independence of the Ombudsman.
129. Do you think it would be a good thing?
(Ruth Kelly) It is up to him and it is up to you to
put pressure on him if that is what you think.
130. Could I pursue some of the points we have
just been considering for the period after 1 January 1999? The
government actuary in the Baird Report records two very important
letters that were sent out by the government actuary to the actuaries
of the life insurers after that date around this issue of reserving.
This is after 1 January 1999. One letter I think is in January;
another letter is in December. Were ministers informed or made
aware of those letters and their significance?
(Ruth Kelly) As I said before, the intention behind
the contracting out of the powers of the FSA was to have them
act in as independent a fashion as was possible at that time.
There are regular, bilateral discussions, some of which will have
been minuted, some of which will not have been minuted. There
are regular quarterly meetings. It would be impossible for me
now to know exactly how those conversations developed but whether
that specific issue was drawn to the attention of Treasury officials
I have no evidence about in order to answer the question.
131. But it is after 1 January 1999.
(Ruth Kelly) That is right, so it is the FSA's business.
132. I would be grateful for more information
on that point1.
Could I turn to one matter that was not contracted out to the
FSA under the service level agreement and that is the approval
of section 68 orders. These were the orders that enabled Equitable
Life to draw into its accounts a projection of future profits.
The section 68 order that was made in September 2000 was after
the result of the House of Lords case in its entirety. Were ministers
informed of the issuing of that section 68 order which enabled
Equitable Life to put a sum of over £1 billion of anticipated
profits into its accounts?
(Ruth Kelly) Under the contracting out
order, it was not possible to contract out section 68 orders so
the Treasury had to sign them off. However, in order to benefit
fully from the new approach and to contract out as far as possible
the day to day regulation of the insurance industry and other
industries, all of the technical expertise went to the FSA and
we were wholly dependent on the FSA for their judgment as to whether
it was appropriate to authorise Section 68 orders. The Baird Report
specifically raises some issues as to how Section 68 orders were
handled and whether there was a full assessment of the issues
when the Section 68 order was presented to the Treasury. I do
not think it is unreasonable to say that the FSA are the ones
with the professional expertise and it would have been unreasonable
for the Treasury not to accept their professional judgment. On
the question whether ministers were informed, I have no evidence
that they were ever told about that. I do not think so.
133. You do not think so?
(Mr Fellgett) In that period, there were very many
section 68 orders for many insurance companies. It is a regular
process under which the regulators decided it would be right to
provide this agreement to present their figures in a particular
way. My understanding is it is done regularly for many insurance
companies, not just the Equitable. To the best of my knowledge,
that was not something brought to the attention of ministers because,
as the Economic Secretary has said, it was treated as something
on which we should rely on the FSA's advice as the people who
were the professionals and who could look at the picture in the
round as to whether or not this was
134. How many section 68 orders were there for
the year 2000?
(Mr Fellgett) I believe there are at least dozens.
If you would like me to find the precise figure it may be higher.
I do not mean in relation to Equitable; I mean this is a normal
part of the process under which the regulators
135. This is all the section 68 orders that
were not contracted out and that were still a Treasury responsibility.
(Mr Fellgett) We will find you a figure if you wish.
136. Yes. In the case of the section 68 order
which was given on, Baird tells us, 11 September 2000 without
the relevant committee even meeting, which is fairly remarkable,
this is after the House of Lords judgment. Ministers were not
informed and your attitude to that would be that it is a purely
(Ruth Kelly) My attitude to that is that the issuing
of Section 68 orders was a purely routine thing. Whether it should
be a purely routine thing is a completely separate question. I
am sure it is one that the FSA itself will be considering and
I am sure it is one that Lord Penrose himself may have views on.
137. All of this peculiar period in which the
FSA inherits the powers of its predecessor for conduct of business
it has contracted out to it the Treasury's role for prudential
regulation and this period has gone on now for well over 18 months.
This will be a period of transition of almost two years. Do you
think that the postponement of the date for full operation of
the new Financial Services and Markets Act has had a very woeful
effect on the outcome of this affair?
(Ruth Kelly) On the postponement of N2 at the end
(Ruth Kelly) As far as I understand it, that was a
date which was as early as considered absolutely, technical feasible
by those in the industry and by the FSA. That has imposed huge
pressures on members of the Treasury in order to gain those advantages
as quickly as possible.
(Mr Cunliffe) The objective behind the contracting
out order was to bring those benefits of the full establishment
of the FSA in as quickly as possible. What I saw in the Baird
Report was that the FSA was trying to get those benefits linking
up prudential conduct of business and looking at large insurance
groups as part of an overall question of risk in the financial
sector. Notwithstanding the fact that N2 had not gone through,
the FSA was acting as if it was the single regulator. I have not
seen anything in here which suggested a confusion on the FSA's
part as to where the final responsibility lay, though that is
a confusion that you could not have after N2 because the position
will be clearer, or that it contributed. It is a question you
would also have to ask Howard Davies but I think the FSA was asked
to bring the regulation of insurance companies into its unitary
structure as soon as possible from day one and that is what they
tried to do. I am not sure that, had they gone through N2, it
would have been any different.
139. Not having gone through N2, the formal
responsibility for prudential regulation still rests with the
(Mr Cunliffe) Yes.
1 1 See p.29. Back