The key conclusion to draw from Lord Penrose's report is not only the one to which my hon. Friends have pointed
"Principally, the Society was the author of its own misfortunes"
as Lord Penrose saysbut that, as he also says:
"If the proposals in hand for the future of the new regulatory regime are implemented and if they are effective in practice, the major criticisms of the earlier regulatory regime will have been addressed both in relation to the general approach to regulation and in relation to the particular issues arising from discussion of regulation of the Society."
So policyholders throughout the country, both in the society and in other life assurance societies, as well as in financial services more generally, can be reassured that Lord Penrose himself concludes that the FSA reforms introduced by this Government, which started in 1997, were the ones that have put the regulatory system on to a fair basis and that can address these issues.
Mr. David Ruffley (Bury St. Edmunds)
(Con): Although Lord Penrose states that the society was the author of its own misfortunes, he goes on to say:
"Regulatory systems failures were secondary".
Does the Minister accept the proposition that a secondary cause can none the less be a significant issue? The fact that a cause is secondary does not mean that it is non-existent. Should not the Government take some responsibility for that secondary cause, which was a failure?
I shall deal with the regulatory system failure in great detail later in my speech. Profound lessons for the House arise from Lord Penrose's report, and I am sure that when the hon. Gentleman reflects on its contents, he will also reflect on his role in these affairs.
Lord Penrose states:
"Substantial amounts of technical and financial information were provided to the Board . . . These failed fully to present the overall financial position of the Society, and in particular the risks inherent in the policies that were pursued in relation to bonus allocation".
He finds that
"the Board's understanding of the annuity guarantee issue was at best limited until the Autumn of 1997, and some directors may not have had any understanding of the position."
He also states:
"Arguably the first and most significant failure in this report lay at the heart of the Society . . . The Board at no stage got fully to grips with the financial situation faced by the Society: information was too fragmented, their collective skills were inadequate for the task, and there were no effective arrangements for ensuring that there was detailed examination of, and onward reporting to the Board on, actuarial reports."
Lord Penrose notes that there were
"executive directors with relevant actuarial qualifications but little or no relevant experience".
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As for the board's non-executive directors, he notes that they
"were so wholly dependent on actuarial input from the chief executive/actuary that they were largely incapable of exercising any influence on the actuarial management of the Society".
Furthermore, he finds:
"None of the non-executive members of the Board had relevant skills or experience of actuarial principles or methodologies".
"the non-executive directors generally had a poor understanding of the Society's developing financial position."
He goes on to describe the board as a
"self-perpetuating oligarchy amenable to policyholder pressure only at its discretion."
Mr. David Drew (Stroud)
(Lab/Co-op): The issue of the role of non-executive directors is not limited only to Equitable Life. We have seen numerous reports on what needs to happen with regard to that role. Are the Government now looking seriously at the matter, not necessarily in terms of legislation or regulation, but to seek to find some arrangement with the City so that we can sort things out once and for all?
My hon. Friend makes a good point. The Department of Trade and Industry recently discussed in the course of preparing the Companies (Audit, Investigations and Community Enterprise) Bill the respective responsibilities that non-executive directors should be expected to have. The Government are actively taking that issue forward.
Lord Penrose describes how the management also failed in its obligations to disclose full information to its own policyholders and to the regulators. He finds that the management of the society fixed on the differential terminal bonus policy as early as 1983, but did not inform policyholders for more than a decade. He says:
"The policy was not disclosed to policyholders by direct communication, in any way, until 1996 . . . Failure to disclose this intention must be regarded as a serious omission in communication to policyholders of relevant information about their prospective interests from at least 1988, and arguably from the time in the early 1980s that management first took that decision."
Even when the company decided to inform policyholders in 1996, it was done badly. Penrose states:
"Attempts were made to change expectations in 1996 and later years. These were ill-conceived, poorly expressed and confusing. The intimations to policyholders were generally uncommunicative."
As for the society's approach to the regulators in that period, Lord Penrose notes that Mr. Ranson, the appointed actuary from 1982, and both chief executive and appointed actuary of the company between 1991 and 1997, was "frequently aggressive" in his dealings with regulators, "dismissive" of regulators' concerns and "obstructive" of scrutiny. The regulatory returns were, Lord Penrose says, "opaque and uncommunicative", and
"failed to identify in value the growing guaranteed obligations that resulted from a combination of falling interest rates and lightening mortality."
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Lord Penrose therefore argues that primary responsibility for the society's problems lies with the society and its former management, saying:
"Principally, the Society was the author of its own misfortunes."
Lord Penrose makes it clear that Equitable Life was unique. As I told my hon. Friend the Member for Dumbarton (Mr. McFall), Lord Penrose says:
"The Society's uniqueness lay in the approach adopted by its management, not in the essential characteristics of its business."
That unique management approach led to the fundamental weakening of the society, as its inherited estate was run down and ultimately became negative. Nevertheless, Lord Penrose's verdict on the regulatory system is perfectly clear.
Mr. Andrew Love (Edmonton)
(Lab/Co-op): Does my hon. Friend agree that the fact that the managing director, who directed the society, was also the appointed auditor led to a clear conflict of interest that should not have arisen?
My hon. Friend is right that a conflict of interest arises in that situation. It is precisely to avoid such a conflict of interest that reforms to the Financial Services Authority have been introduced to remove responsibility from the appointed actuary and place it firmly on the board of insurance companies, where it should properly be.
Mr. Edward Garnier (Harborough)
(Con): I declare an interest as a former policyholder with Equitable Life. I still have one school fees policy, for the good that it does me.
The Financial Secretary is giving us a précis of the Penrose report, which we can all read for ourselves, but she has not told us what the Government are going to do, having read the report. Will she do so, and if so, at what stage?
I shall tell the House about the way forward very shortly, but I thought it important to expose the contents of Lord Penrose's report to the House, as he makes some profound comments about the operation of the regulatory regime before the FSA was set up.
Lord Penrose's verdict on the regulatory system is perfectly clear, as he says:
"the regulatory system failed policyholders in this case".
However, he adds:
"regulatory system failures were secondary."
He clearly states that it was
"the system that failed to provide the regulation that changing circumstances in the industry required, not that there was failure to implement what was fundamentally a satisfactory system."
He makes no allegation of maladministration or negligence against the regulator or individuals, and says:
"I do not pin the blame on individuals, who in the main have operated in good faith and to the best of their abilities within the system as they found it."
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Nor does he suggest that any individual regulatory decision led to economic loss by policyholders. Specifically, he notes that
"it is not enough in this case to infer from the coincidence of systems deficiencies and loss that one caused or contributed to the other".
The House should reflect carefully on the lessons that he draws about the nature of the reactive and under-resourced regulatory system in place before 1997 and his key message that the regulatory system must be kept up to date to take account of industry developments. Lord Penrose states:
"It seems not unreasonable to suggest that those in control of any supervisory regime have a duty . . . to take steps to ensure that the systems of regulation that are in force and enforced remain relevant to the changing requirements of the industry."