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Equitable Life Inquiry

[Relevant document: the oral evidence taken before the Treasury Committee on Tuesday 16th March, on the Equitable Life Inquiry, HC 71-iv, Session 2003–04.]

Motion made, and Question proposed, That this House do now Adjourn.—[Ruth Kelly.]

5.59 pm

The Financial Secretary to the Treasury (Ruth Kelly): The House will recall that the origin of the Equitable Life inquiry carried out by Lord Penrose was the financial crisis experienced by the society in July 2001, when it closed to new business and cut policy values. The inquiry's terms of reference were to inquire into the circumstances of the Equitable Life assurance society, taking account of the relevant life market background, to identify the lessons to be learned for the conduct and administration of life assurance business, and to give a report thereon to Treasury Ministers.

Richard Ottaway (Croydon, South) (Con): On the lessons learned, the Financial Secretary will be aware that Lord Penrose found that regulatory failure was the fundamental reason for, if not the primary cause of, the company's financial crisis. Is it now Government policy never to consider compensation where there has been regulatory failure of any sort?

Ruth Kelly: If the hon. Gentleman were to acquaint himself in greater depth with the contents of the report, he would see that Lord Penrose says specifically that regulatory system failures failed policyholders in this case. He does not point to operational failure. However, I shall deal with that point later.

Mr. Eric Forth (Bromley and Chislehurst) (Con): Further to the question from my hon. Friend the Member for Croydon, South (Richard Ottaway), can the Financial Secretary envisage any circumstances in which there would be a case for the Government to pay compensation to policyholders? Or would she rule out the payment of compensation in any circumstances that she could foresee?

Ruth Kelly: I have considered in great depth the contents of Lord Penrose's report. Lord Penrose makes no recommendation for compensation. He finds no instance of maladministration by the regulator, nor does he make any allegation of negligence by the regulator. The Treasury has also examined the contents of its report. We see no reason to think that the regulator was negligent or that there was any maladministration at any time while the society was being regulated by the Treasury or, indeed, under the previous regime.

Clearly, the Treasury cannot underwrite every business in the country. No regulator can ever provide a 100 per cent. guarantee against failure. However, Lord Penrose says that blame would have to be apportioned through the court system. He says:

"It was not for me to measure any person's actions against accepted standards of conduct defining the legal duties of other people performing comparable duties in other organisations and other similar circumstances."

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He considers that

"Breach of duty, and the financial consequences of breach, are properly matters for the established courts of justice and for other appropriate tribunals in the financial sector."

That is not my analysis, but the analysis of Lord Penrose himself. He finds that, from the early 1970s, the society embarked on a growth strategy that resulted in the progressive financial weakening of the society, such that its ability to meet the long-term expectations of its policyholders was in doubt from the late 1980s onwards.

Lord Penrose describes how the company deliberately ran down its inherited estate and then, in the 1980s, moved into deficit to keep up bonus levels and win market share. According to Lord Penrose, sustained growth became an independent objective pursued with something approaching missionary zeal. He adds:

"Bonus policy became central to achieving the Society's marketing objectives"

and that

"the surplus published by the Society became a function of the desired level of bonus."

He outlines how, in 1973, the society introduced the concept of a terminal bonus and then, in the 1980s, progressively shifted the bonus mix away from annual guaranteed reversionary bonuses towards terminal bonuses, which were not covered by reserves. That allowed the society to inflate bonus levels to a level higher than available assets would have implied.

Mr. John Redwood (Wokingham) (Con): Does the Financial Secretary accept that the financial condition of Equitable Life was much worse in 1997, 1998 and 1999 than it was some years earlier and that that gave the regulators a much greater opportunity to intervene and take action to try to protect policyholders in the late 1990s than at any time earlier?

Ruth Kelly: I could quote from Lord Penrose's report on that point, but I shall quote from the independent authority of the ombudsman, who considered that specific period. She says:

"There is no doubt that in late 1998 the Treasury had briefed FSA in considerable detail about Equitable's weak regulatory solvency position and had indicated a possible need for the regulator to intervene . . . it is very evident . . . the prudential regulators' stated approach to their role . . . could not be criticised for a lack of concern about Equitable and the position of their policyholders nor could their approach in respect of Equitable be described as 'passive'."

Lord Penrose writes:

"By disregarding accrued terminal bonus, the Society was able to over-allocate bonus beyond available assets at market value, and in particular to make payments on claims that exceeded the relative available assets at the time".

By 1989, according to Lord Penrose:

"the Society deliberately distributed a high proportion of the available return for market-related reasons, and entered the 1990s with a negative estate accordingly."

The society was therefore unable to withstand the financial implications of the House of Lords judgment in the Hyman case.

Lord Penrose says:

"Superficially claims of £1.5 billion should not have brought down a society with funds of £32 billion."

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Mr. John McFall (Dumbarton) (Lab/Co-op): My hon. Friend will know that Lord Penrose appeared before the Treasury Committee last week and said that the society was largely the author of its own misfortune. However, on the very point made by the right hon. Member for Wokingham (Mr. Redwood), I hope that my hon. Friend will be aware of Chris Headdon's interview on Radio 4 this morning, when he said that Lord Penrose did not find any evidence of concealment. She will also be aware of the financial reinsurance product—the side letter—that Chris Headdon had, of which the Financial Services Authority was not aware. Indeed, the FSA has said that, if it had been aware of the side letter, it would not have guaranteed anything with regard to the society. Does that not raise questions about a deliberate policy of concealment on behalf of the executive in Equitable Life?

Ruth Kelly: My hon. Friend makes some very interesting points. Of course it is not for me to comment on any action that may be taken by the FSA, the prosecution wing of the Department of Trade and Industry or the Serious Fraud Office, although he will be aware that Lord Penrose has forwarded his report to the SFO. Lord Penrose is clear that a unique situation was developing at Equitable Life. He states:

"The Society's uniqueness lay in the approach adopted by its management, not in the essential characteristics of its business."

With regard to the reinsurance treaty, Lord Penrose is absolutely clear as well that

"Those involved at the society were not in any doubt that a right for the reinsurer to cancel in those circumstances would undermine the regulatory value of the agreement."

Mr. Jim Cousins (Newcastle upon Tyne, Central) (Lab): Did the regulators not require the reinsurance provision, and was not the response of the people who then had control of the society to threaten to sue the regulators?

Ruth Kelly: Again, my hon. Friend makes an extremely valid point. Reinsurance treaties were granted relatively routinely, but he draws attention to, in effect, the difficult relationship that existed between the regulators and the society over quite a long period, under the stewardship of the FSA, the Treasury and, indeed, the DTI before that, particularly in relation to guaranteed annuity rates.

I should make it clear to the House that the Government sympathise with the plight of policyholders who have suffered not only much worry and distress over the past few years, but significant reductions in their expected income in retirement as a result of those issues. As I outlined to the House in my statement on 8 March, Lord Penrose finds that that weakening of the society was made possible by a culture of manipulation and concealment on the part of the company's previous senior management. The report details how executive management failed to keep the board fully informed about the true state of the company's financial position.

Mr. Mark Francois (Rayleigh) (Con): The Financial Secretary will be aware that hundreds of thousands of people around the country are suffering as a result of

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that extremely unfortunate situation. Those people acted in good faith and have done nothing wrong. What have the Government got to offer them, other than sympathy?

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