Previous SectionIndexHome Page

Mr. John Wilkinson (Ruislip-Northwood) (Con): I am almost sorry for the Minister, but I am a great deal more sorry for my constituents and the many other electors who have been kept in the dark—[Interruption.]

Mr. Speaker: Order. Let the hon. Gentleman put his question.

Mr. Wilkinson: They have been kept in the dark by the Home Office and Her Majesty's Government over the extent of immigration into this country. Will not boroughs such as Hillingdon, which are in the front line due to the presence of Heathrow—the premier port of entry in the UK for immigration—be deeply preoccupied by the fact that the Government and the Minister's Department have been allowing a flexibility clause whereby those who came in, perhaps legally, have no work, are not in partnership and are not in paid self-employment? That has put a further burden on the health and social services in my borough, which are already over-stretched by asylum seekers and others.

Beverley Hughes: The hon. Gentleman's question illustrates the dividing line between his party and mine on the subject of immigration. Unlike him and his party, we welcome immigration where our economy needs it and do not automatically reject migrants. Provided that people come in legally and do not try to misuse the asylum system, we want people to contribute to our economy. I remind the hon. Gentleman that people coming in through such a route—I am not condoning for a moment the dip in scrutiny that has taken place—are supporting themselves. They do not have access to public funds. They are not able to take paid employment when they enter the country through this route, but they are supporting themselves and their families. Many are providing much-needed services, particularly in London and the south-east, as plumbers, cleaners and builders—services that many people in this country are not willing to provide. Such immigrants play an important part in that sector of our economy.

8 Mar 2004 : Column 1249

8 Mar 2004 : Column 1251

Equitable Life Inquiry

3.59 pm

The Financial Secretary to the Treasury (Ruth Kelly): With permission, Mr. Speaker, I would like to make a statement about Lord Penrose's report into the events at Equitable Life, which I can confirm is being published in full today. Copies are available in the Vote Office.

As the House will remember, following the closure of Equitable Life to new business and the cuts in policy values in July 2001, the Government established an independent inquiry under Lord Penrose on 31 August 2001. The terms of reference were:

I would personally like to thank Lord Penrose and his team for their hard work and dedication. The report presents a full and forensic account of events, covering some very complex issues and spanning a period of more than 30 years. The Government sympathise with the plight of policyholders who have suffered much worry and distress over the past four years and who have seen significant reductions in their expected income in retirement.

Lord Penrose says:

of the inquiry—

He also makes it clear that

Lord Penrose does not attempt to judge any person's actions. He says:

He observes:

He adds:

non-statutory and non-adversarial—

Moreover, he says:

Lord Penrose argues that the judgment of the House of Lords in the Hyman case in 2000, which disallowed the society's practice of reducing terminal bonus to meet

8 Mar 2004 : Column 1252

guaranteed annuity claims, precipitated a crisis, but was not—as some have claimed—solely responsible for it. He notes:

In Lord Penrose's own words,

Lord Penrose describes how a culture of what at various times he calls "manipulation" and "concealment" on the part of some of the company's previous senior management allowed a bonus policy to develop that led to the society's financial weakening—a policy left unchecked by its own board. It was the society's own actions that ultimately precipitated its financial crisis in the summer of 2000.

First, the report details how executive management failed to keep the board fully informed about the true state of the company's financial position, despite the clear responsibility placed on the appointed actuary to inform the board in that regard. Lord Penrose outlines how Mr. Roy Ranson, appointed actuary from 1982, and both chief executive and appointed actuary of the company between 1991 and 1997, did not inform the board

He did not inform the board

and did not inform the board

That meant, Lord Penrose says, that

As a result, he says that the decisions of the board

He does not offer judgment on Mr. Ranson's failure to keep the board adequately informed. In line with his interpretation of his remit, he says:

But, in Lord Penrose's own words:

He adds that the

Lord Penrose also finds that there was

He reveals how the differential terminal bonus policy

8 Mar 2004 : Column 1253

Even when the company decided to inform policyholders about the terminal bonus policy in 1996, Lord Penrose argues that it was done badly—in his own words:

Lastly, Lord Penrose finds that the society concealed information from the regulators. Mr. Ranson was, in Lord Penrose's own words, "obstructive" of scrutiny and "dismissive" of regulators' concerns. The regulatory returns were, he says, "opaque and uncommunicative". The Society did not inform regulators properly about

that were being used by management to sustain the society's capital position and prop up its solvency.

Lord Penrose reveals how, from 1992 to 2000,

the Government Acturary's Department—an adjustment that, he says,

In relation to guarantees, Lord Penrose finds that

More recently, Lord Penrose observes the then appointed actuary, Mr. Christopher Headdon, wrote a crucial side letter relating to a reinsurance contract, which recorded that it would be cancelled, rather than renegotiated, in the event that more than £100 million was claimed. Lord Penrose notes that, if the Financial Services Authority had been made aware of that side letter,

Lord Penrose writes:

Lord Penrose says:

In short, Lord Penrose makes it clear that the society's former management adopted a series of "dubious" practices, many of which it concealed from its own board, its policyholders and the regulators. He argues that that led to the situation in which the society found itself in July 2001. Thus, as Lord Penrose says,

That weakened the society so greatly that it was unable to withstand the claims on guaranteed annuities.

Lord Penrose's central finding is that

8 Mar 2004 : Column 1254

The House will be aware that Lord Penrose sent his report to the Serious Fraud Office. The Treasury followed up by passing the report to the enforcement arms of the FSA and the Department of Trade and Industry—all three are currently considering the evidence of the report.

As I have described, Lord Penrose lays the blame for events at Equitable Life at the heart of the society. He calculates that, by the end of 2000, as a result of the excess bonus declarations, the society's liabilities exceeded its assets and £1.8 billion had been lost to the fund as policies matured taking more than their fair share of assets. That past over-bonusing was a driving factor, he says, behind the need to cut policy values in July 2001.

The current management argue strongly that the cuts in policy values in 2001 reflected different factors. The House will appreciate that this is a complex legal, actuarial and accounting issue, which could ultimately be determined only by the courts. Lord Penrose himself makes it clear that he could not

It was, however, important that the Government acted with due diligence to check with the FSA the potential impact of these complex issues on the society's current policyholders and on wider financial stability. That is why we have been unable to publish the report earlier.

The current board of Equitable Life will, together with the FSA, assess the impact on the society's liabilities and any risks to policyholders posed by Lord Penrose's findings. Those who have already seen limited extracts of the report on behalf of Equitable's board have concluded that it is in the best interests of policyholders to continue in business as before.

To conclude on over-bonusing, Lord Penrose himself makes it clear on claims that

The FSA will continue to monitor the society closely and take whatever action is needed to protect policyholders.

Lord Penrose raises a number of important issues about the deregulatory, light touch, reactive system in the decades before the creation of the FSA. It was a system, however, that in that period clearly reflected the will of Parliament. He finds that the

and that


In 1997, as soon as this Government came to power, they took action to put an effective regulatory system in place, setting up a single integrated regulator combining prudential and conduct of business regulation. A key part of the new regulatory regime was the creation of a comprehensive financial services compensation scheme and a single financial ombudsman service.

Since then, the FSA has proceeded to introduce risk-based insurance regulation and individual capital standards. It is also in the process of introducing realistic accounting by life offices, including a

8 Mar 2004 : Column 1255

requirement to reserve for terminal bonus. In addition, the use of future profits implicit items is being phased out. The FSA is also removing responsibility for making key decisions on asset allocation and distribution in with-profits funds from the appointed actuary and transferring it to company boards, and it has brought forward proposals on better treatment of customers by firms and fuller transparency of with-profit funds.

Lord Penrose fully endorses the Government's actions since coming to power, saying that the FSA's reforms reflect

In particular, he welcomes the FSA's detailed proposals for realistic accounting, which, he says,

In summary, he argues that the FSA's work since 1997

However, Lord Penrose's report deals with a time when a different regulatory system was in place, and a regulatory culture that was light touch, reactive and placed the responsibility for monitoring policyholders' reasonable expectations firmly on the appointed actuary of companies—a regulatory system that was argued for by Ministers and reflected the will of Parliament.

Lord Penrose notes that in 1973, during the passage of the Insurance Companies Act 1974, DTI Ministers resolved

annual regulatory

Lord Penrose argues that the system was not updated to take account of developments in the industry, particularly the trend toward terminal bonuses. He notes that aspects of the regime were reviewed, but that no proposals for change were pursued by Ministers. He writes:

In particular, a proposal was made in 1988 to update life insurance regulation, but in Lord Penrose's own words,

the right hon. Member for Bromley and Chislehurst (Mr. Forth)—

Lord Penrose notes that senior regulatory officers argued to him that

He says:

8 Mar 2004 : Column 1256

Lord Penrose goes further. He says that Ministers argued against reform in the early 1990s—a critical time of development in the industry—when the third life directive was being negotiated in Brussels, maintaining that the reactive approach to monitoring policyholders' reasonable expectations based on regulatory solvency was sufficient. According to Lord Penrose, the DTI believed that forcing insurance companies to reserve for terminal bonus would have been "over cautious". And Lord Penrose adds that the UK delegation "led the resistance" to measures requiring more cautious valuation techniques.

Lord Penrose says:

However, he emphasises:

and argues that

That system was one that Ministers and Parliament intended.

Lord Penrose makes no recommendation for the payment of compensation. His central finding is:

And when he itemises specific findings about the regulator, he is clear that these are matters that are not for him, but for the courts. Nor does he conclude that economic loss was caused to policyholders by the regulatory system. However, as Lord Penrose says in his own words:

He stresses that he examined the regulators with the benefit of hindsight and that they were operating under a system different in its approach, resources and values from that applying today. The misfortunes of the society were caused primarily, he finds, by deep-seated management problems that began as early as the 1980s.

Lord Penrose makes no allegation of maladministration or of negligence against the regulator. He clearly establishes, with the benefit of hindsight, that the "light-touch" approach to regulation was inappropriate. It was not updated to meet the requirements of the industry, but it clearly reflected the will of Ministers and Parliament. He says:

So, it is a question of the laws that Parliament enacted and the context in which Ministers resolved how those laws should be implemented that Lord Penrose criticises rather than the discrete actions of the regulators themselves. Indeed, Lord Penrose accepts that it cannot be the role of the regulator to prevent all failures. The costs of regulation are paid ultimately by the consumer rather than by the institutions themselves.

8 Mar 2004 : Column 1257

Lord Penrose also accepts that even had a different, proactive regime been in place earlier, no regulator can guarantee to protect consumers against what he at various times calls concealment and manipulation. Indeed, the losses suffered by policyholders are attributed by Lord Penrose to decisions that were made by the management of the society from the early 1980s onwards. He observes:

That position is, I know, shared widely across the House. In July 1995, the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), said:

The Government sympathise with all policyholders who were deceived by a company that Lord Penrose says manipulated and concealed information from them. Although we will do all in our power to stand behind policyholders in difficult times, we cannot, in a financial services industry, like any other industry, underwrite each and every company whose managements and boards make fundamental mistakes and questionable decisions. In dealing with the issues, we have a responsibility, too, to the needs of taxpayers now and in the future.

Many people have drawn parallels between Equitable and Barlow Clowes. It has been put to us that as the then Government provided redress in the Barlow Clowes case, we should do so with respect to Equitable, but there are major differences between the two cases. Barlow Clowes had ceased trading; Equitable is still trading. In the case of Barlow Clowes, there was a finding of maladministration; for Equitable, there has been no such finding. At the time of Barlow Clowes, there was no compensation scheme; now there is the financial services compensation scheme. Those who continue to argue that what happened for Barlow Clowes should also happen in the case of Equitable Life have got to take into account both the existence of a compensation scheme and no finding of maladministration.

In the event that Equitable were to be subject to insolvency proceedings, there is now a statutory safety net, which was recognised as not being available at the time of Barlow Clowes, to protect investors, provided by the financial services compensation scheme, which would pay out 90 per cent. of guaranteed policy values. Further, the Government have also provided for a single financial services ombudsman to consider individual complaints. I understand that he is currently considering the cases of a number of different categories of former policyholder who have made claims for redress, for which the society has already made provisions. I want to make it clear to the House that we

8 Mar 2004 : Column 1258

stand ready, if requested, to assist the financial ombudsman in expediting the resolution of those complaints. As I have made clear, Equitable's current board stresses that the company is solvent and policyholders' interests are best served by it remaining in business.

In his report, Lord Penrose raises a number of issues concerning the unlimited liability status of Equitable Life. I can announce that the Government intend, at the earliest opportunity, to publish and consult on draft legislation to protect policyholders in the event that that were ever to become material.

In line with his interpretation of his remit, Lord Penrose does not set out a comprehensive list of recommendations for the Government. Nevertheless, he does make a number of observations that merit further action. I have no doubt that Committees of this House that have taken an interest in these matters will wish to examine what further can be done, but the principle that the regulatory system—even one so recently updated—should be subject to constant review is one that we accept.

I can announce a programme of work to build on Lord Penrose's findings. The Government accept the need to re-examine the corporate governance arrangements applicable to mutual life offices in the light of the experience at Equitable Life. I can announce a review of the governance of mutual life offices, to be led by Paul Myners, so that the boards of mutual life offices are as accountable to their members as those of comparable companies are to their shareholders.

Lord Penrose also offers a number of criticisms of the actuarial profession. He says:

He adds that

I can announce that Sir Derek Morris will lead a review of the actuarial profession with a particular focus on considering how best to modernise the profession and to ensure that high standards are delivered in a more open, challenging and accountable professional culture.

I can announce also that I have asked the independent Accounting Standards Board to initiate a study into the accounting for with-profits business by life insurers. The study will have a particular emphasis on identifying ways of improving the transparency of reporting.

Lord Penrose also argues that there is a clear responsibility on Government to inform and educate consumers about the nature of the financial system. This Government were the first in the world to incorporate consumer education as a key statutory objective of the financial services regulator. The FSA has recently stepped up its work in this area, with the launch of the financial capability steering group, which will examine the approach to consumer education from first principles.

I have set out Lord Penrose's account of events leading to the situation in which Equitable Life found itself in July 2001. Lord Penrose finds that

8 Mar 2004 : Column 1259

However, he adds that a key lesson from the report is that

he says,

We made those changes.

Inevitably, certain key issues arising from Lord Penrose's report, as he recognises, can be resolved only in the courts. Nevertheless, as a result of his findings we will publish and consult on draft legislation to remove any possible concerns relating to unlimited liability potentially facing Equitable Life and some other policyholders.

We stand ready, if requested, to assist the financial services ombudsman in the resolution of any consequential issues before him and his staff. The FSA is working intensively to ensure that all its current policyholders are treated fairly.

Looking forward, there will be a programme of comprehensive reviews on corporate governance of life mutuals, actuarial standards of performance and accounting standards. These, alongside the FSA reforms welcomed by Lord Penrose, are developing the architecture of the life assurance industry for present and future policyholders.

It is now for the Serious Fraud Office and the companies adjudication branch of the DTI to decide whether a prosecution should follow.

Next Section

IndexHome Page