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Mr. Graham Brady (Altrincham and Sale, West) (Con): I, too, have a small interest to declare. The Minister refers to the statement by Lord Penrose that insulating policyholders from any kind of risk would provide a perverse incentive. On the other side of the account, does she accept that leaving people suffering loss and hardship in their retirement also provides a perverse incentive? What is her assessment of the damage that could be done to confidence in the industry and of the danger that people will simply stop saving for their pensions?

Ruth Kelly: The hon. Gentleman makes an important point, and it was one that Parliament considered when it set up the financial services compensation scheme, which acts as a comprehensive safety net for individuals in a case of insolvency. Were Equitable to become insolvent—I stress that the company thinks that it is still solvent—the financial services compensation scheme is there to meet individuals' needs and would pay out 90 per cent. of policy values. However, in addition, the financial ombudsman scheme is available, whether a company is solvent or insolvent, to pay out on the basis of individual policyholder complaints. It is to that scheme that individuals should look in the first instance if they feel aggrieved.

Mr. Nigel Beard (Bexleyheath and Crayford) (Lab): Equitable Life is the oldest insurance society in Britain and, in many people's eyes, was the gold standard of the life insurance industry. What are the implications for the rest of the life insurance industry?

Ruth Kelly: Lord Penrose says that the FSA, in its reforms, has anticipated many of the lessons that could

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have been drawn from his report. He says that it has "largely succeeded" in that. The lessons for us as a Government are to keep his report in mind to ensure that the regulatory process is constantly updated and to ensure that policyholders have the most effective system possible in place. At the same time, we must acknowledge that no regulator can guarantee against a deliberate and particular intention to conceal and manipulate by a company. No regulator could guarantee to prevent that from happening.

Richard Ottaway (Croydon, South) (Con): Millions of policyholders listening to the Financial Secretary's statement this afternoon will be dismayed by its content and tone, and the way in which everybody seemed to be to blame except the Government. I remind the Minister of the guidance in the letter of 18 December 1998 from the Treasury's insurance directorate, which condoned, confirmed and accorded with the accounting practices of Equitable Life. That guidance was slaughtered by the House of Lords in its judgment of July 2000. However, the Treasury has always stood by that guidance and never suggested that it was wrong. Will she now take this opportunity to admit that the guidance was wrong and that Equitable Life did not operate in accordance with proper procedures?

Ruth Kelly: I have already said to the Treasury Committee, when the issue was last considered, that with hindsight it probably would have been better not to have issued that guidance. I can only cite Lord Penrose who, when he looked at the issue, accepted that the regulators' view of the guidance was that it was neutral. Indeed, he accepted that the regulators thought that the guidance could act as a warning shot across the bows of Equitable. He accepts that that is the case, and that was the view that was held by regulators at the time.

Mr. Harry Barnes (North-East Derbyshire) (Lab): There is the widest possible distinction on the issue of regulation between the former and current Governments—I hope that we will hear less bleating from the Conservatives about red tape—but Governments are a seamless whole as far the public are concerned. Do we not often have to clear up the mess that was created by the Conservatives? That needs to be taken into account in connection with the Equitable Life policyholders, and we may have some responsibility to deal with their problems.

Ruth Kelly: The distinction is fundamental, and it is essential for the Government of the day to get it right. There is a clear separation between policies, which are dreamed up and implemented by Ministers of the day, with Parliament's support—effectively representing the will of Parliament—and the operation of a regulatory system that can lead to circumstances in which policy is not effectively implemented and does not represent the wishes of Ministers and Parliament. That is a distinction that Lord Penrose makes when he says that in this case the problem was regulatory system failure: it was the policy that was the cause of the problem.

Mr. Mark Field (Cities of London and Westminster) (Con): Will the Government find a way to enable the

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ombudsman to investigate the serious regulatory failure of the Government Actuary's Department, which was identified in Lord Penrose's report?

Ruth Kelly: The ombudsman has already considered the position since 1997 and found no evidence of maladministration. The hon. Gentleman should look more carefully at the Hansard report of my original statement. I pointed out that Lord Penrose himself made serious criticisms of the actuarial profession—not least the fact that one appointed actuary was reluctant ever to criticise the opinion of another appointed actuary. Lord Penrose also said that the profession was set up in such a way that there were no standards of discipline of the type that are normally accepted as applying to any professional body. That is why the Government have set up an independent review to examine the actuarial profession, and it will include the Government Actuary's Department.

Mr. George Mudie (Leeds, East) (Lab): I genuinely commend the Minister and other Treasury Ministers on dealing with the political and technical aspects of the problem, but I genuinely put down a marker on my concern about the humanity of the position. This is the second time in a week that the House has debated the plight of ordinary pensioners who now have to face life on reduced pensions. That is their reward for doing exactly what the House has urged them to do—to put money aside and save for pensions. I acknowledge that the Minister has set out an able case against compensation, but the prospects for Equitable Life pensioners now hinge on succeeding in legal action against the directors and auditors. That will take years and will enrich only the lawyers. It will in no way help the ordinary pensioners who are now living on reduced pensions.

Will the Minister and other Treasury Ministers speak to the FSA to establish whether it can do something similar to what it did last week to the split capital investment industry—by knocking some heads together? They should try to bring some help not only to people affected by Equitable Life, but to the pensioners we spoke about last week, who look to us not for technical or political arguments, but for help to maintain their standard of living.

Ruth Kelly: I understand my hon. Friend's empathy for the policyholders in Equitable Life and I share it. It is difficult to see people suffer financial hardship and stress, but my hon. Friend must also be aware of the scale of the problem that we face. Lord Penrose identified a problem that was driven primarily by management failure at the society itself. That is what led to £3 billion extra being paid out in bonuses than the society could afford. Of course the Government stand ready to help where we can and where appropriate in that context. Indeed, I have personally spoken to the financial ombudsman to see whether there is any more we can do to help people as they pursue any consequential claims through his office. The reason we set up the financial ombudsman service was to provide an avenue for people to seek speedy resolutions of their complaints.

Chris Grayling (Epsom and Ewell) (Con): Is it not curiously ironic that the one person who was successful

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in extracting money from Equitable Life pension funds after 1997 was the Chancellor of the Exchequer? When the company was pulling the wool over the eyes of the regulator in the early 1990s, the system was supposedly to blame; but when the company was still pulling the wool over the regulator's eyes at the end of the decade, the post-1997 Labour-introduced regulatory system was entirely blameless. Does the Minister honestly believe that the policyholders will think that that is credible?

Ruth Kelly: The hon. Gentleman suggests that the society was pulling the wool over the eyes of the regulator, but in fact Lord Penrose set out a litany of ways in which the company failed to disclose information to the regulator. For example, it failed to disclose in 1992 with the quasi-Zillmer adjustment—and it went on from there. It also failed to disclose information about a side letter written on reinsurance agreements under the stewardship of the FSA. However, the Penrose report found no maladministration or negligence by the regulator and also states clearly that no discrete actions by the regulators led to loss. It was not the regulatory system that was responsible for policyholder loss, but the action of the society itself.

Alan Howarth (Newport, East) (Lab): Wherever responsibility may lie for the disasters that have so devastatingly affected Equitable Life policyholders, does my hon. Friend agree that it may have contributed to a dangerous undermining of confidence in pensions more broadly, and that there is an urgent need to rebuild that confidence? Over and above the regulatory improvements that the Government have already brought in, will the Treasury act to improve incentives for savers who are not high earners, perhaps by replacing tax relief with grants, for example? Will the Treasury also offer incentives to employers to contribute more generously to the pensions of those who work for them, as well as to provide financial education and financial planning advice in the workplace?

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