Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 120-139)



  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 respect.
  (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 ensure—that is what Parliament charges you with doing; we have to scrutinise what you are doing—that 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 decide—not anything else—as 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 learned.

  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 direction—

  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.

Mr Cousins

  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 point[1]1. 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 routine thing?
  (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 of November?

  138. Yes.
  (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 Treasury.
  (Mr Cunliffe) Yes.

1   1 See p.29. Back

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