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Ruth Kelly: I was about to come on to the proposals set down by the Financial Services Authority, which are currently out for consultation, to ensure better treatment of customers by firms. The hon. Gentleman makes a point about what is currently in the best interests of customers, and the society is absolutely clear that its continuing in business is in the best interests of current policyholders. As I have said, the society is confident that it is solvent.
From next month, firms must also publish a statement of their principles and practice in financial management, setting out how they manage their with-profits funds.
Mr. Redwood: I am grateful to the Minister for giving way, because many people are concerned about the matter. Is it not the case that what she now says—that the company is solvent and that, as the regulator, the FSA is happy with it—means that she does not think that anybody has a legitimate claim against the company, and that she does not think that anything wrong has happened, because the Government are still not taking regulatory action?
Ruth Kelly: I have said nothing of the sort. I have set out the facts as presented by Lord Penrose, who says that his estimates are necessarily "crude". Lord Penrose has also said that the issue could be determined only by a court of law. I do not want to pre-empt a judgment by a court of law or, indeed, any judgment made in another setting.
Mr. Andrew Tyrie (Chichester) (Con): The Minister says that the policyholders who have been hit should consider going to court. Let us suppose that they go to court and win: who would pay the bill and where would the money come from? In that case, the money would come straight from Equitable Life, so, in other words, it would be robbing Peter to pay Paul. Is she not, therefore, holding out false hopes to hundreds of thousands of policyholders?
Ruth Kelly: I am not holding out false hopes; I am not saying anything of the kind—I am presenting the situation as Lord Penrose found it.
Dr. Vincent Cable (Twickenham) (LD): Before the Minister develops her points about the need for litigation, is she aware that all the policy makers who were members of the with-profits scheme in February 2002—in other words, the people who ratified the scheme—were required to sign away their right to go to court or the financial ombudsman? None of those members has any possibility of pursuing legal action.
Ruth Kelly: Although I do not like to get involved in legal matters—as the hon. Gentleman is no doubt aware—there are various legal interpretations of that point.
I am confident that the root-and-branch reform of insurance regulation that I have described will result in the industry becoming more transparent and accountable, and with the financial resources to meet fully the reasonable expectations of its policyholders. I am also confident that the introduction of the stakeholder suite of more simple and transparent saving and investment products, which the Treasury is currently developing in conjunction with the FSA, will provide the life industry with products that are attractive to consumers and that will also help to improve the transparency and accountability of the industry.
The reform of the regulatory system has been strongly endorsed by Lord Penrose, who said:
- "If the proposals in hand for the future of the new regulatory system are implemented, and if they are made effective in practice . . . the major criticisms of the earlier regulatory regime will have been addressed".
- "my clear impression is that the approach now being adopted is a very considerable improvement on what there was before".
- "The fundamental problem with the statutory accounts of any life office is that the accounting professions have failed to develop acceptable accounting standards for the preparation and presentation of accounts of long-term business that require realistic accounting on a consistent basis . . . what is required are practical standards of general application."
Although, as Lord Penrose pointed out, the problems at Equitable Life arose as a result of particular circumstances in place during the inquiry period, the report raises important questions for the governance of mutual life offices in general. The Government see no reason in principle why boards of mutual life offices should not be as accountable to their members as those of comparable companies are to their shareholders. On 8 March, I announced that I have asked Paul Myners to
lead a review into the corporate governance arrangements applicable to mutual life offices. The review's terms of reference are to:
- "Consider the governance framework for mutual life offices in comparison with that for comparable companies (and, where relevant, for listed companies). Where appropriate, bring forward recommendations to ensure that boards of mutual life offices are as accountable to their members as boards of comparable companies are to their shareholders."
Ruth Kelly: Although I do not want to prejudge the results of Paul Myners's inquiry into the accountability of mutual life offices, my hon. Friend draws attention to a particularly important point. We need to ensure that mutual life offices are as accountable to their policyholders as possible.
The review will consult as widely as possible, taking into account the recent experience of other mutuals in this respect in developing its conclusions and recommendations. As the governance of mutual life offices has much in common with that of other mutual societies, the review may, where appropriate, develop general governance principles for other types of mutual, taking into account the particular characteristics of other parts of the mutual sector. The review will deliver a report, with recommendations, by the end of 2004.
Mr. Geoffrey Clifton-Brown (Cotswold) (Con): Will the Financial Secretary give way?
Ruth Kelly: I must continue with my speech.
Actuaries play a vital role in the financial services industry and, as a profession, have placed admirable emphasis on high standards of technical ability, knowledge and integrity. However, Lord Penrose makes it clear in his report that it is not enough to rely on that. He makes a number of general criticisms of the actuarial profession, drawing on his findings in relation to Equitable Life. Clearly, a modern professional or regulatory framework is necessary. As I announced on 8 March, Sir Derek Morris will lead a wide-ranging review of the actuarial profession. It will start on 1 May, following his retirement from the Competition Commission. The review's terms of reference are:
- "Consider what professional and/or other regulatory framework would best promote recognised, high-quality and continuously developing actuarial standards, openness in the application of actuarial skills, transparency in the professional conduct of actuaries, accountability for their actions and an open and competitive market for actuarial advice in the UK."
Ruth Kelly: On the subject of actuaries, I give way for the last time.
Mr. Clifton-Brown: One of the items that Penrose identified was the obstructive nature of the actuary at Equitable Life. He also identified the paucity of function of the non-executive directors and the problems involving the auditor. Clearly, there were service failures by the regulator in relation to Equitable Life. Have the Government considered whether, instead of a protracted court procedure, it might be better to have a one-off payment for affected policyholders on the basis that the regulator would not be held liable?
Ruth Kelly: I do not think that those were the conclusions drawn by Lord Penrose's report. He is absolutely clear that this is not a question of individual regulatory failure, but of regulatory system failure and the policy that prevailed. The House should reflect carefully on what Lord Penrose has written in that regard.
Lord Penrose's report provides a full and detailed account of the developments at Equitable Life over a long period. In doing so, it has provided us with a clear explanation of how the society got itself into financial difficulties, and clear pointers to the way forward. One of the key lessons that he draws from his work, with the benefit of hindsight, is that the regulatory system in place before 1997 was inadequate and unable to keep pace with changes in the financial services industry. Since 1997, this Government have radically overhauled the regulatory system that we inherited. We will ensure that that system remains fit for the purpose.
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