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Dr. Vincent Cable (Twickenham) (LD): I express my appreciation for having the opportunity to speak on this subject on a somewhat more level playing field than we had at the time of the Minister's statement—she had then had 11 weeks to peruse the report, whereas we had had a couple of hours. I should like to say at the outset that I identify myself with the Conservative shadow Chancellor's comments on the absence of the Chancellor of the Exchequer. This is an important issue,

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and he should be here. That is no reflection on the Financial Secretary, who is an able Minister who clearly understands the subject and debates the points well, but my point is that the Chancellor should be here.

The Chancellor has shown a selective interest in issues of financial regulation. I recall responding to a statement that he made on Sandler products, which was not exactly at the front rank of public controversy on financial regulation, and when in opposition, he took a close interest in matters of financial regulation in relation to the BCCI and Barlow Clowes. His absence today suggests one of two things: he is very embarrassed, or he is not interested. Either of those reasons is unacceptable.

Before we plunge further into the technicalities of Penrose, it is important to reinforce the basic message that we are talking about human beings who have suffered much distress and loss, many of whom are perfectly ordinary constituents. It works out on average that we all have about 1,500 affected constituents, many of whom were not sophisticated investors or they would not have been in Equitable Life in the first place. Equitable Life's reputation as a secure, reliable fund was what drew many people to it who wanted a source of security.

The Penrose report raises two fundamental issues, and the right hon. Member for West Dorset (Mr. Letwin) dealt with one of them at length, very clearly and correctly. That is the distinction between the failure of the regulatory system and the operational failure of regulation. It is abundantly clear on any reading of the report—it was clear when the report was first published—that both are involved. We could debate endlessly whether their relative involvement was 50:50 or 75:25, but both were clearly involved. In the penultimate paragraph of the report, in which Lord Penrose brings his thoughts to a conclusion, he brings both those concepts together, making the point in one paragraph with admirable clarity. It says, and this was the point that the Financial Secretary made:

"As for the regulatory system, I do believe that it has failed policyholders in this case."

The system failed—Lord Penrose is absolutely right. However, he then goes on to make a point that clearly has weight in his mind, because these are almost the last words in the report:

"But I do take the view that the system itself was not overseen, and in particular was not kept up-to-date, and operated in an ineffective manner."

The system operated ineffectively—there was operational failure. The word is the same.

The second key insight of Penrose, to which the right hon. Member for West Dorset did not refer, but which needs to be stressed, was that the main failure was not the failure created by guaranteed annuities in the House of Lords, although many of us had assumed all along that that was the ultimate source of the problem. The problem that Penrose and some action groups identified was that of prolonged large-scale over-bonusing. In effect, there was a pyramid selling scheme. I am not an expert in finance, but those who are tell me that there is a technical phrase for it: a Ponzi pyramid selling scheme. In terms of the broader argument, the significance of

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that is that one can argue that it was just about understandable that the management—and certainly the regulators—did not guess correctly which way the House of Lords would jump in a highly contentious ruling. In fact, Penrose does not argue that case, but he could have. However, it was completely unforgivable and unacceptable for the management and those who were supposed to be overseeing and regulating the scheme to administer what was a pyramid selling scheme for 10 years.

To reinforce the point that has already been made, the report is replete with references to operational failure. I need not read it in detail; rather, I shall pick out a few key summary passages, some specific and others general. I shall read verbatim one key conclusion from the final chapter, because it captures its spirit:

"There was a general failure on the part of the regulators and the GAD to follow up issues that arose in the course of their regulation of the Society, and to mount an effective challenge of the management."

How can that possibly be interpreted in any way other than as concluding that there was an operational failure? It is an explicit and completely unqualified conclusion.

There are numerous instances of the Penrose report's picking up on particular operational failures on the part of the regulators. For example, it refers to the regulators failing to pick up on the company's admission that it was not reserving for its guarantees. It refers to

"a serious lapse in regulation . . . Any reasonably diligent inquiry would have elicited"

the necessary information. The report proceeds to discuss the episode following the period in which the regulators had been alerted to the existence of the annuities guarantee. It says that they knew about the problem in 1993, and states that

"the approach of the GAD and regulators remained the same",

even

"when they were aware that the Society's financial position was weak and that there was a need for vigilance in scrutiny and supervision."

This is all about operational matters and the way in which regulation was conducted; it is not about the system.

Mr. Plaskitt: The report does indeed make these individual observations, but what does the hon. Gentleman makes of Lord Penrose's statement in paragraph 29 of chapter 20? He stands back and sums it all up as follows:

"The thrust of my criticism is that . . . it was the system that failed to provide the regulation the changing circumstances in the industry required."

Dr. Cable: I am not disputing that. Both the Conservative spokesman and I fully acknowledged at the outset that the system clearly failed, but it is also true that there were many incidents of very specific, as well as general, negligence. The issue is the importance of that in the overall scheme of things. We shall come later to the question, which has already been raised, of who is to decide whether that in its totality amounts to maladministration, because we have yet to reach that point.

Chris Grayling: The hon. Gentleman is absolutely right to make that point, and in that regard I was

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astonished by the Financial Secretary's intervention on my right hon. Friend the Member for West Dorset (Mr. Letwin). The hon. Gentleman will be aware that Lord Penrose says the following in the postscript to his report:

"Many readers of this report will be frustrated that it has not provided answers to two questions: who is at fault for the problems encountered by the Society, and who deserves redress as a consequence. It has been no part of this inquiry to attempt to answer either question."

Surely that alone puts a stamp of endorsement on the request from all sides for the ombudsman to look at this issue.

Dr. Cable: Yes, although I am not sure that the ombudsman constitutes the right mechanism, the logic of what the hon. Gentleman says is right.

Certain issues relating to regulatory failure were not even covered in the Penrose report because there was so much material around. One such issue was drawn to my attention by a consultancy company called Thesys, which attempted to brief Lord Penrose but did not succeed. It made the point that a series of insurance laws and regulations were issued in 1958, 1973 and 1983, as a result of which "schedule 5" provisions were established. Those provisions were an arrangement whereby the Department of Trade and Industry collected data with the specific purpose of enabling independent assessments of whether insurance companies were actuarially sound.

In the early 1990s, the schedule 5 forms stopped being filled in. The regulators decided that it was inconvenient or too onerous to collect that information. If one wanted to be party political about it, one could say that Lord Heseltine was the Secretary of State for Trade and Industry at the time and so was somehow responsible for what happened. Indirectly, I suppose that he was. Clearly, however, an operational decision was taken to stop collecting data that were crucial to identifying the failures that subsequently emerged. It was essentially an operational failure—one that even Lord Penrose has not detected.

We then come on to the question of maladministration—what it means, and its significance. I have been careful—I note that the right hon. Member for West Dorset was also careful—to make it clear that we are not asking the Government to get out their cheque books and sign blank cheques to large numbers of people because of their losses. That would be inappropriate, because we first need to establish whether maladministration has taken place. I do not yet know whether it did; the report did not reach a conclusion on that.

Mr. Gardiner: I am trying to follow the hon. Gentleman's argument carefully. Would he not have to show not only that there had been maladministration, but that that maladministration had been relevant to the failure? It is not enough to say that there were operational errors in which those applying the regulations failed to apply them properly. It is necessary to show that they failed to apply relevant regulations in such a way as to precipitate the position with which we now have to deal.

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