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Chris Grayling (Epsom and Ewell) (Con): The Financial Secretary is being careful to pin the blame on the regulatory regime before 1997, but is it not the case that in 1998 and 1999, after discussions had taken place in the Treasury and in the FSA about the financial viability of Equitable Life, Equitable Life salesmen were still visiting my constituents and selling them with-profits policies which ultimately caused them substantial loss? How can she therefore claim that all was well after 1997, after the reforms that her Government introduced, when palpably for my constituents that was not the case?

Ruth Kelly: As Lord Penrose himself recognises, it is not possible to introduce a fundamental overhaul of a regulatory regime overnight. If the hon. Gentleman cares to consult the Penrose report he will see that it states that

"the regulators persisted in a reactive stance in respect of PRE"—

that is on page 722 of the report at paragraph 215. I quote further:

"In day-to-day regulatory practice, officials operated within the constraints imposed by the existing system, and they had no alternative but to do so."

The regulatory regime was in the process of being overhauled.

As Lord Penrose says, the Equitable case argues strongly for a closer merging of

"prudential and conduct of business regulation"

and he says that while setting up the FSA

"the need for greater regulatory resource had been identified for the Treasury."

The House will no doubt be interested in the fact that whereas before 1997 there were 70 supervisors supervising 800 life companies, compared with 400 staff regulating 600 banks, that figure for the regulation of life companies has been doubled by the reforms that the Government introduced. The FSA has not only doubled the resources allocated to life insurance regulation, but significantly upgraded the personnel devoted to that task.

Today I want to concentrate on the way forward, drawing on Lord Penrose's conclusions on the lessons learned from his investigation. We are continuing the process of regulatory reform that we began in 1997, pushing forward in particular the specific changes in the life insurance sector that the FSA has in train. In addition, we are acting on Lord Penrose's suggestions

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for change in the areas of accounting standards, corporate governance of mutuals and the actuarial profession. Lord Penrose welcomes the FSA's regulatory reform, which, he says,

"has sought to anticipate many of the lessons that might be drawn by this enquiry and it should come as no surprise that it has largely succeeded."

Let me remind the House what has been achieved in this area over the past six years. On 20 May 1997, the Government announced major changes to the structure of financial services regulation in the United Kingdom. Those were implemented by means of the Financial Services and Markets Act 2000, which created a new framework for the regulation of financial services, providing clarity, fair competition and protection for consumers. The Act established the Financial Services Authority as the single regulator for the financial services industry, operating under a single coherent legislative framework, replacing nine different sectoral regulators. It also introduced a single ombudsman scheme to resolve consumer complaints and a single financial services compensation scheme. The major reforms that the FSA has since launched are in many cases changes that have been possible only because of the move to a fully integrated regulator combining prudential and conduct of business regulation.

The main changes that the FSA has already introduced—apart from increasing the resource devoted to life insurance regulation—are first, moving to a single risk model to determine the allocation of the FSA's own resources, and secondly, breaking down the barriers between different types and areas of supervision. The largest companies are now supervised, whatever their principal line of business, on a group basis, so the major insurance groups are now handled by the FSA's major financial groups division, rather than by its insurance division.

Moreover, the FSA has proposed significant changes to the role of the appointed actuary, some of which I have already outlined to the House. The FSA is also introducing, from this year and next, realistic reporting by life offices. The requirement to report assets and liabilities on a realistic basis includes a requirement to provide for accrued terminal bonus. Lord Penrose welcomes those proposals as

"clear recognition of the importance of looking beyond a narrow concept of solvency".

Bob Spink (Castle Point) (Con): That is all well and good, but my constituents want to know what the Government will do to give them the compensation that they both want and need. Lord Penrose said to the Treasury Committee that he did not consider it in his remit to discuss administration and compensation; he considers that to be the Government's remit. When will the Government come forward and offer the victims of Equitable Life some hope?

Ruth Kelly: Lord Penrose definitely did not say in his evidence to the Treasury Committee that that was the Government's responsibility. He was clear that he accepted the conclusion that this was regulatory system failure, not operational failure. But as I outlined to the House, and have been outlining to the House, we have

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set up a structure in which consumers have recourse, if they believe that they have an individual grievance, to the financial ombudsman service.

Let me make it clear to the House that the issue that has been identified by Lord Penrose is not a simple one. It is an extremely complex legal and actuarial issue—about £3 billion of bonuses being paid out more than the company could afford over a period of 10 years or even longer. Lord Penrose says that his estimate is "crude", but he also says that the amount and whether this would lead to claims could be determined only by the courts. He is absolutely clear in his report on that point.

Mr. James Plaskitt (Warwick and Leamington) (Lab): Does my hon. Friend recall that when Lord Penrose gave evidence to the Treasury Committee a few days ago, he said that in order to prove blame it was essential to demonstrate breach of duty, and that that in his view was clearly the business of the courts?

Ruth Kelly: My hon. Friend makes an extremely valuable point.

Mr. Garnier: How does the Financial Secretary expect the damaged policyholders of Equitable Life to afford to get to the court?

Ruth Kelly: The first point to make is that Lord Penrose considers this to be such a complex issue that it can be determined only by the court. He is absolutely clear on that point. I have described the structure set up, which includes the financial ombudsman service to adjudicate on individual policyholder complaints, and if people feel that they have an individual grievance, they could take advantage of the structure that we have set up to present their claim. It would then be up to the financial ombudsman to decide whether it was an issue that he could consider, or whether it would be better determined directly by a court of law.

Mrs. Angela Browning (Tiverton and Honiton) (Con): I realise that the Financial Secretary may not wish to comment on the solvency of Equitable Life at the moment. It says that it is solvent, but if all the policyholders follow the route that she suggests through the ombudsman, she must surely address the question, which is very real, that Equitable Life may not remain solvent if it has to meet all those demands. What is her assessment of the impact that that will have not just on Equitable Life, but on all the other life companies that may well have to contribute to the fund that will be needed to pay out?

Ruth Kelly: Equitable Life—it is an important point—has made it clear that it disputes entirely the analysis and the factual basis of the content presented by Lord Penrose on the over-allocation of bonuses throughout this period. It is an extremely complex legal and actuarial issue, upon which different actuaries will undoubtedly have different views. Equitable Life is clear that it is currently solvent and the FSA has no basis on which to override that view.

Mrs. Jacqui Lait (Beckenham) (Con): Will the Financial Secretary address herself to the issue of how this matter will get to the court? Who will be able to afford to take a case to the courts?

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Ruth Kelly: Clearly, it is up to individuals and categories of individuals to decide what they want to do on the basis of the analysis presented by Lord Penrose. As I have said, there are different interpretations both about the facts and the interpretation of those facts leading to his analysis that £3 billion of over-bonusing took place within that time scale. He says that the issue is so difficult that only the courts can determine it, but policyholders must decide on the basis of advice what is in their best interests.

Sir Peter Tapsell (Louth and Horncastle) (Con): The paradox of the situation is that the policyholders would be better off if the society became insolvent, in which case, as I understand it, the Government would have to pay them 90 per cent. of their promised benefits. Is that not the case?

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