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Ruth Kelly: The right hon. and learned Gentleman makes an important point about Barlow Clowes, but unfortunately it is not right. There was a finding of maladministration, but the previous Government did not accept it. I quoted him deliberately, because in 1995 he accepted the point that no regulator can guarantee against a company that is intent on concealment, manipulation or deception. In this case, Lord Penrose sets out clearly a litany of occasions on which the regulators were not given full information, and on which the company concealed information from the policyholders and from its own board.
The right hon. and learned Gentleman asks me to distinguish between the operation of the regulatory system and the regulatory policy. Lord Penrose is absolutely clear: there was regulatory system failure. There was a failure of policy by the right hon. and learned Gentleman's Government, in that they failed to regulate the life insurance industry appropriately. Indeed, when they were offered the opportunity to do just that in 1994, they rejected it.
The right hon. and learned Gentleman asks about individual instances after 1997, so let me give him the details. Lord Penrose questioned, for example, whether the FSA should have granted a reinsurance treaty. On taking a closer look at the report, however, it is clear that he accepts that the company wrote a side letter that withheld information from the regulator. The FSA has said that, in such a situation, in no case would it have accepted a reinsurance treaty. The claim is made that the regulators should have taken action when the company asked for a subordinated debt agreement, but in the next paragraph Lord Penrose says that he does not criticise any of the formal steps taken, in terms of the propriety of the order granted. He accepts—and I must accept some failure here—that the FSA should have handled late joiners in a slightly more sensitive way. That criticism, too, was made by the parliamentary ombudsman when she reviewed the case, and the FSA has already accepted that it could have handled the
situation more fully. However, the company has already admitted liability in that case, and a reserve for late joiners. There is no issue after 1997 in Lord Penrose's report that has not been considered by the parliamentary ombudsman, and she has cleared the Government of all cases of maladministration.
Mr. Frank Field (Birkenhead) (Lab): I thank the Minister for the announcement about the Paul Myners inquiry and the inquiry into the actuarial profession. Given the strategic importance of actuaries to the long-term delivery of our pension schemes, will the House have some say in the terms of reference of that inquiry? Do the Government accept that, whatever final decision the House may come to about compensation in that respect, there is a clear distinction between people like me, who voluntarily saved in an organisation that gave us bad advice, and the 60,000 people who, as a condition of their employment, were made to save in a company pension scheme and now find that all or most of their pension has been lost?
Ruth Kelly: I thank my right hon. Friend for his insightful comments on the actuarial profession. Although we have published terms of reference for that review today, I assure him that they are extremely broad. I am sure, too, that Paul Myners will be interested to learn of my right hon. Friend's interest in the subject of his review, and I shall refer my right hon. Friend to him. My right hon. Friend spoke of the 60,000 pensioners in the ASW case and others. He will understand that as a result of their position the Secretary of State for Work and Pensions has made it a priority to put in place a pension protection fund, through the Pensions Bill now passing through the House.
Mr. John Redwood (Wokingham) (Con): What would the Minister say to a constituent of hers, or mine, who has lost a lot of money and has been hanging on in the hope of something from Penrose, or Government compensation, but who now faces a very mean retirement because of those losses? Is she really saying that such people should spend what little money they have left on good lawyers, that they should just sit and hold on, or that they should get out? That is what my constituents need to know. They have been extremely badly done by, and they want an answer.
Ruth Kelly: The right hon. Gentleman must understand that it is the Government's responsibility to act on the basis of what Lord Penrose has said in his report. Of course, I entirely sympathise with the distress of individual policyholders who have suffered loss over the last four years as a result of the actions of the society. However, I can perhaps give some words of assurance about the fact that the Government have introduced the comprehensive financial services compensation scheme, which is ready, were problems to materialise in a company, to pay out 90 per cent. of guaranteed policy values. Apart from that, the financial ombudsman service is also there ready to offer help, without the expense of lawyers, to individuals who feel that they need redress.
Tony Wright (Cannock Chase) (Lab): Is this not the story of a period when this country was in the grip of an
ideology that said that people would be more prosperous and freer to the extent that the state did not interfere with their lives? Are not the Equitable Life policyholders now being asked to pay a terrible price for that ideology? More specifically, my hon. Friend has made an important distinction between regulatory failure and regulatory maladministration, but I am sure that she will agree that that is a proper distinction for the parliamentary ombudsman to examine, in so far as it is within her jurisdiction, and that she will want to make her own judgment on the matter.
Ruth Kelly: My hon. Friend makes some important points. Lord Penrose's report provides a cautionary tale for all hon. Members on both sides of the House. His main recommendation is that the regulatory system should be constantly reassessed and kept up to date in the light of changing developments in the industry. We set up the FSA immediately on coming to power, and alongside it we are prepared continually to review and update its effectiveness to make sure that adequate protection is in place. My hon. Friend draws a distinction between regulatory failure and operational failure, and it is one that Lord Penrose himself draws in the report. Lord Penrose is clear that the fault principally lay at the heart of the society and that regulatory system failures were secondary factors.
Norman Lamb (North Norfolk) (LD): May I declare an interest as a former policyholder? I draw the Minister's attention to the report's key findings, which identify not only a systems failure but a specific failure by regulators operating within the system. Is it not remarkable that she failed to mention that at all in her statement and that she concentrated only on the systems failure? Her statement is a recipe for years of litigation, which will enormously benefit many lawyers but which will be at the expense of all those who have suffered enormous hardship, and will do nothing to address the crisis of confidence in the industry. It is time for a proper process through either the parliamentary ombudsman or a further remit to Lord Penrose to identify the loss resulting from the regulatory failure—not system failure—identified by Lord Penrose, so that compensation can be paid.
Ruth Kelly: The hon. Gentleman's interpretation is not correct. Lord Penrose's main finding is that there has been systematic and sustained over-bonusing in the society over a matter of decades, and perhaps even longer. As Lord Penrose says, the issue could be determined only by the courts. He specifically rules out any attempt to give him extra powers to deal with consequential issues and says that such issues could be determined only by the statutory process.
The hon. Gentleman points to particular issues about the regulatory system and leads me to examine Lord Penrose's central findings and conclusions. Lord Penrose says that "the system lacked challenge", and he also says why. The system was set up by deliberate ministerial decision to lack resources. In 1999, 70 regulators supervised 800 life insurance companies while 400 regulators supervised 600 banks, which was a complete bias in the system. This Government have
doubled the resources going into life insurance regulation and made sure that the system is set up in such a way that it now has sufficient to do the job properly.
Mr. James Plaskitt (Warwick and Leamington) (Lab): May I refer my hon. Friend to the Treasury Committee's interim report on Equitable Life? We found that the Treasury asked the Government Actuary's Department to survey life offices in 1998. When Sir Howard Davies gave evidence, he told us that the case of Equitable Life stood out among all the others. Equitable Life did not like the regulator's comments and threatened the Treasury with judicial review. Although Lord Penrose rightly says that the society was the author of its own misfortune, does my hon. Friend think that the pre-FSA regulatory vacuum aided that situation?
Ruth Kelly: My hon. Friend makes an important point. Regulators became aware of the guaranteed annuity issue in 1997, and, in effect, the regulators and Equitable Life had a running battle over the following two years. Equitable threatened the regulators with judicial review; the regulators threatened to take regulatory action and shut the company. In the end, the regulators' view prevailed and the company reserved in full. The reason that situation did not materialise earlier is, as Lord Penrose says, that the system was not set up to allow the regulators to pick up any impact on policyholders' reasonable expectations.
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