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7.24 pm

Mr. James Plaskitt (Warwick and Leamington) (Lab): I have had quite an interest in the Equitable Life issue for some years, not only as a member of the Treasury Committee, but from my constituency experience. All hon. Members probably have constituents who are affected by this affair. I do not know how many of mine are affected, but about 50 of them have given the details of their cases to me, and I have found that information very helpful in pursuing the matter through my membership of the Treasury Committee.

It is important to bear in mind the individual stories that lie behind what we are discussing. Many of the people involved do not have considerable means, but they invested significant sums in what they thought was a highly reputable company, and they are now in retirement in much reduced circumstances. Those people are closely following not only the Treasury Committee's deliberations, but what we say in the House. Many of them have been waiting for Lord Penrose to report. So we have reached a critical juncture in trying to unearth exactly what happened.

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Lord Penrose appeared before the Treasury Committee on 16 March—I think that it was the first time for about 40 years that a judge had appeared before a Select Committee—and he gave us extremely important evidence. Of course we wanted to know whether, in his view, he had been given the right terms of reference, and he told us:


In other words, he set his own terms within his given remit. He has certainly not indicated to us that he was in any way restricted in undertaking the research and investigation that he was asked to do.

Lord Penrose's report enables us to identify key moments in the history of the Equitable Life saga. He shows us that the company was using "actuarial techniques" to create what he calls "apparent surpluses" in the 1970s, that


in the early 1990s, and that the accumulation of all that, over 20 or 30 years, led the company to have a £3 billion shortfall by the end of 2000.

After the Treasury Committee took evidence from members of Equitable Life when we opened our inquiry two years ago, we concluded:


So it is natural to focus on what Lord Penrose tells us in his report about regulatory system failure. When he was before us last week, commenting on his report, we asked him about regulatory systems failure and he said in evidence:


He continued:


In considering the focus of Lord Penrose's report, the additional comments that he has made in summary form in evidence to the Treasury Committee help to clarify the situation as he finds it, and they bear out exactly what he says at paragraph 69 in chapter 20 of the report:


When Lord Penrose was before the Treasury Committee last week, we wanted to ask him to expand on the occasions during this story when key opportunities to reform the regulatory system were missed. The evidence increasingly focuses on the period 1990 to 1994, and discussions of the European Union's third life directive. When Lord Penrose appeared before the Treasury Committee, I put it to him that that was probably an important chance to align the regulatory system with developments in the industry. He answered with the simple word "Yes". He also added that the original formula made it an obligation to make proper provision for terminal bonuses.

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In this debate, it will be interesting to look briefly at the way in which the third life directive evolved. Lord Penrose gives all the evidence in his report. In 1990, when the original regulation was first put before the committees that dealt with it, it stated:


Subsequently, there were four years of argument before the directive finally emerged and took its place. It in interesting to see how the wording changed. This was the wording that finally appeared in the directive in 1994:


That represents a very significant watering down of the directive between 1990 and 1994, so one has to ask how it came to be watered down, and why it emerged in that form and not in the form in which it originally entered the negotiations. In the very chapter in which Lord Penrose looks at the evolution of the directive, he reminds us that it was the United Kingdom delegation that led the resistance to the original wording.

That gives us strong evidence to support the view that there was unnecessarily light-touch regulation at that time, and it clearly points the finger towards why, in the 1990s, an important opportunity to bring the regulation into line with what was happening in the industry was missed.

We have heard the suggestion, or accusation, that after 1997 and the change of Government, the Treasury was passive in relation to all these issues. It is hard to find the evidence to back up that suggestion. The ombudsman, from whom the Treasury Committee heard evidence, said that the Treasury was in no sense passive. He reminded us that in 1998, quite a vigorous battle went on between the Treasury and Equitable Life, with the Treasury threatening to close Equitable Life down, and Equitable Life threatening to take the Treasury to judicial review. That does not suggest that there was passivity on the part of the Treasury.

When the Treasury Committee began to look into the matter back in 2001, it heard evidence about what had been happening immediately after 1997. The prudential insurance regulator became concerned about levels of reserves for the guaranteed annuity rate policies in 1997. The Government Actuary's Department subsequently undertook a survey, and it told us in evidence that Equitable Life stood out among all the other life assurance companies. Immediately afterwards, red letters, as they were called, circulated between the Treasury and the company, raising issues about Equitable Life's potential solvency.

Mr. Letwin: The hon. Gentleman has certainly done his homework. Is he really arguing that if his current disquisition leads to a conclusion that all the failures occurred before 1997—he knows that I deny that that is the case, but we shall let that be for a moment—and if

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it emerges that there was both systemic and operational failure before that time, it would affect in any way the issue at stake—the entitlement of current and lost policyholders to possible compensation if there was maladministration? Why does it matter whether the failure occurred before 1997 or afterwards?

Mr. Plaskitt: What matters is unearthing exactly what happened, and that is what Lord Penrose was asked to do. It is essential to look at the totality of his findings, and he helps us to do so by standing back in the final chapter of the report, having looked in detail at events that took place over many years, and asking what basic conclusion one can draw about the causes of the problem. He says, as we know, that the company was first and foremost the architect of its own misfortune, and regulatory system failure played a secondary role.

Mr. Letwin: Why does it matter when that took place? If the hon. Gentleman is making a serious argument about the possible rights of policyholders, is it not incumbent on him to address the question of whether the failure was partly operational, as the hon. Member for Twickenham (Dr. Cable) and I have amply shown is demonstrated in the report? Why does the date matter to the hon. Member for Warwick and Leamington (Mr. Plaskitt)—other than as a party political point?

Mr. Plaskitt: I am not making a party political point at all. I am trying to extract from the dense, 800 page-plus Penrose report the essence of its findings, because that is what my constituents and the constituents of other right hon. and hon. Members affected by the affair want to know. They want to know what happened and how it happened.

Mr. Harry Barnes (North-East Derbyshire) (Lab): Surely the question to which our constituents, including the 50 who have been in touch with my hon. Friend, want an answer is: what is to be done now? It is important to understand the analysis and accept that the Conservatives and Equitable Life were to blame, but now we must decide what is to be done to get out of the mess that other people have created. There are avenues available to the Government that might assist with that process.


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