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25 Nov 2008 : Column 204WH—continued
It is worth remembering that it was due to failure of the management of Equitable Life that the company was allowed to get into the position that it did, but it is also right to say that regulatory failure allowed that to happen unhindered by the Government. The Government, through the Department of Trade and Industry, the Financial Services Authority and the Government Actuary’s Department, had responsibility for ensuring that the company acted properly and prudently. As has been
said, there have been 13 reports on the failure of Equitable Life, all of which concluded that the company was not performing satisfactorily in the interests of those who were depositing money with it.
Ms Katy Clark: The hon. Gentleman will be aware that the parliamentary ombudsman described the regulators as “passive, reactive, and complacent”. Does he agree that one lesson that has to be learned from what has happened in this case and much else that we have seen in the financial sector in recent times is that we need far stronger regulation—indeed, we need a culture such that regulators have the confidence to intervene?
Mr. Browne: I take that point. In a way, the case was a dark sign of further regulatory failures to come. The hon. Lady leads me neatly on to the report, which has already been widely discussed, by Ann Abraham, the parliamentary ombudsman. As we were reminded, she entitled her report “Equitable Life: a decade of regulatory failure”. One almost does not need to go any further than the executive summary in the title of the report, because it tells us all we need to know. The hon. Lady said that the DTI’s oversight of Equitable Life had been described as “passive, reactive, and complacent”. The ombudsman said that the Government’s restrictions on earlier inquiries were “iniquitous and unfair” and that the FSA’s regulatory efforts had been
“largely ineffective and often inappropriate”,
and that there was a “justifiable sense of outrage” among policyholders that compensation had not been forthcoming.
Ann Abraham spoke recently before the Select Committee on Public Administration. If you will forgive me, Lady Winterton, I shall give a slightly longer quote. When giving evidence on 30 October, she said—this gets to the nub of the issue—
“The regulators were on the bank watching this pleasure steamer sailing over the edge or towards the edge of Niagara Falls. All of the information was there in front of them, and they could even see this boat taking on more passengers”—
that point was made by the hon. Member for Chichester (Mr. Tyrie)—
“But it was heading for disaster. But somehow, there was a sense, because it was Equitable, they were somehow going to do a miraculous U-turn. There was a sense that this was Equitable and it could not go down.”
Of course, that confidence proved not to be justified. It is an important point that savers were led to believe that they were investing their money in a reputable and safe institution. Some people, including an hon. Member who spoke earlier, might say that they should not have come to that conclusion. Nevertheless, people felt that they were investing their money in a reputable and safe institution, so their shock was all the greater when they found that was not the case.
The Equitable Life fiasco was caused by systemic failures before 1997—it is worth pointing out that there were failures for many years before the difficulty became apparent—but also by political failures since 2000. The behaviour of the Government in delaying taking action has been unacceptable. They must admit their regulatory failures and start to explain how they will negotiate with policyholders. The Minister has a perfect opportunity
to do so in today’s debate. The Government have refused to redress the losses on the grounds that they cannot underwrite every company, but policyholders have lost out because of the Government’s failure properly to regulate Equitable Life’s undertakings. I accept that the company should shoulder some of the blame, as should the individuals responsible, but there is no point in having a regulatory system if it fails in its core task of regulating. There must be some accountability if the regulators do not discharge their duties properly.
Mr. Letwin: The hon. Gentleman is now at the nub of the issue. Does he agree that there is a difference in kind between a structural problem with regulation and a case in which regulators know that the thing is going wrong and do not take the steps required to remedy it? Is it not the second case that we are dealing with?
Mr. Browne: I am grateful to the right hon. Gentleman for that extremely helpful intervention. Both the former case, which is less malign but still points to inadequacy on the part of those doing the regulation, and the latter are much to be regretted, and it is worth the Government acting on both, but that is particularly the case if the regulator knows that the situation is worsening, yet people are still allowed to put their money into the organisation. In that case, there is a greater moral failure as well as a regulatory failure.
Equitable Life was seen by our constituents and people throughout the country as a low-risk organisation. It has already been said that the Government have bailed out Northern Rock and Icesave—an organisation that was far more reckless in its practices, or appeared to be to the public who were putting money in, and appeared to be a much higher risk. Equitable Life, however, was largely invested in by people who were instinctively rather cautious. One might say that they typically represented the prudent values of middle England savers and therefore were seeking not to make a quick buck, but to find a refuge for their life savings.
Mr. Heath: Is there not another interesting distinction in respect of the Icelandic banks? I do not think that anyone is suggesting that the British Government had any culpability in the case of the Icelandic banks, yet compensation is apparently payable, but in this case, where the culpability of the regulators and the Government has been clearly shown by the ombudsman, they are reluctant to provide compensation.
Mr. Browne: My hon. Friend makes a brilliant point. It is wholly irrational for the Government to go down the path of compensating depositors with the Icelandic banks but not those who invested in Equitable Life. If the Government refuse to do that, a judicial review sought by the Equitable Members Action Group—during the debate we have heard much praise for its work—will cost the taxpayer much more.
I agree with the point that was made strongly by my hon. Friend the Member for East Dunbartonshire. The Government have shown bad faith again because although they promised to bring this matter before the House and bring it to a head in the autumn, here we are on 25 November—a month from Christmas—and there is
no action at all. Had my hon. Friend not secured this debate, we would not have the opportunity to have the Minister before us today.
It is critical that the Government set out a credible, transparent and independent process to enter into dialogue with policyholders about compensation, and ensure that the ombudsman’s credibility is not undermined and that her role is strengthened, rather than becoming entirely redundant. The Government have already ignored the ombudsman’s reports on tax credits and occupational pensions, so this is my concluding big point: if the Government continue to behave in that way, it will surely have the consequence—unintended perhaps—of deterring people from investing their money in saving schemes for their retirement. It cannot be in our collective interest that people become increasingly reliant on state pension contributions because they do not trust private investments, due to their lack of trust in the regulatory system that underpins them. There is a wider interest for the Government in trying to ensure that people have confidence when saving for their retirement, but there is a more precise moral obligation on the Government to act on behalf of all those who lost money through Equitable Life, through no fault of their own.
12.10 pm
Mr. Mark Hoban (Fareham) (Con): I congratulate the hon. Member for East Dunbartonshire (Jo Swinson) on securing the debate. She clearly set out the case, which has been made time and again, why the regulators let down policyholders in Equitable Life. I also congratulate all the other hon. Members who have taken part in the debate. I particularly mention my hon. Friend the Member for Chichester (Mr. Tyrie); without his hard work and investigation, we would not have an ombudsman’s report to debate.
Forcing the Government to accept that the Government Actuary’s Department should be included among the bodies that can be investigated by the ombudsman, and ensuring that the remit was retrospective, gave the ombudsman the opportunity to publish a critical, damning and well-thought-through report. The report offers my constituents and those of other hon. Members the justice that they have been seeking for so long; the recognition that they have suffered loss because of regulatory failure; and, above all, closure—that this long-running saga can at last be brought to a close.
In the four months that have passed since the Minister received the ombudsman’s report, we have had not one word from the Government in response. In the meantime, the Government have proved their ability to move quickly. For instance, others have mentioned the speed with which the Government acted to protect savers in Icelandic banks. However, when it comes to discussing the ombudsman’s report and tackling the problems of Equitable Life, they have been sitting on their hands.
That lack of response implies a desire by the Government to wriggle out of compensating policyholders for what the ombudsman described as a decade of regulatory failure. Why have the Government failed to respond over the last four months? They have seen the report, and were involved in the process of finalising it. They made their own submissions to the ombudsman over the years, yet they still have not reached a conclusion on how to respond to her findings.
It is time for the Government to respond to the report, to make the apology recommended by the ombudsman and to make payments to policyholders that reflect their losses. They may try to wriggle out of doing so, and they may use Lord Penrose’s words and say that Equitable Life was the author of its own misfortunes; but for a decade regulators failed to follow up the warning signs, and their failure to act resulted in opportunities being missed to force management to act properly and avoid the losses suffered by policyholders.
In his report, Lord Penrose was critical of the regulators as well as of Equitable Life. In chapter 19 of his report, he said:
“There was a general failure on the part of the regulators and GAD to follow up issues that arose in the course of their regulation of the Society, and to mount effective challenge of the management.”
“The Treasury remained wholly passive, depending on GAD to initiate any action required...It is difficult to avoid the view that regulation was falling between two stools, the major player in discussions having no regulatory power, and the empowered regulator having little part in the processes that would have instructed regulatory action.”
“If GAD or FSA had considered that Headdon’s take-up rates could not be justified, one might reasonably have expected discussions before the Society submitted its return. It is difficult to identify good reason for inaction, possibly in the hope that the Society would have changed its mind by the time of the return.”
Those three extracts from the Penrose report demonstrate the failure of the regulators to deal with Equitable Life.
The failings found by Lord Penrose flow through to the ombudsman’s findings. She found 10 counts of maladministration. They included the regulator’s failure to challenge the fact that the same person occupied the roles of chief executive and appointed actuary, the lack of effective scrutiny by the GAD and the fact that the FSA failed to act on behalf of the Treasury from 1998, both before and after the House of Lords decision.
There can be no doubt that if the regulators had performed their role properly during that period, they would have protected policyholders from a management team that put the society and its members at risk. The regulators repeatedly failed to use the information they had to challenge Equitable’s management, and each time they failed to challenge management was an opportunity missed. I give one example from the ombudsman’s report.
The ombudsman’s fourth finding was that the GAD did not question or seek to resolve questions within the society’s regulatory returns for each year from 1994 to 1996 relating to four areas. She said:
“One consequence of this failure was that an early opportunity was lost to address the issue of the Society’s practice as to reserving for guaranteed annuity rates. Another consequence was that the Society’s liabilities were considerably understated.”
Understating liabilities and inadequate reserves presented the society in a better light than was appropriate. Instead of ringing the alarm bell, the regulators sat back and let policyholders suffer. That was only one of the many occasions when the regulators could have acted and prevented policyholders from suffering loss.
Having found maladministration and that policyholders had lost as a result, the ombudsman recommended compensation. There is no quick fix to determine how
much compensation should be paid, but we accept that because of the maladministration payments should be made. We need to assess the scale of individual losses, but the Government need to move quickly. As we heard earlier, many investors are elderly and we should seek to reach a settlement sooner rather than later, so that they can see that justice has been done.
We also need to recognise that not all the losses suffered by policyholders were due to regulatory failure. At the time of the write-down in policy values in July 2001, other companies were cutting bonus rates because of poor market conditions, so payments should be made to reflect the relative loss that people suffered. As the ombudsman recognised, it is vital that payments made under the scheme should take into account the state of public finances. Although they have deteriorated sharply since she reported four months ago, the financial position of many Equitable Life policyholders will have deteriorated further.
I could go on for longer, but as this is the first opportunity for the Minister to respond to the House on the ombudsman’s report, I shall conclude. There is only one step that the Minister has to take today. He has to admit responsibility for the failure, issue the apology demanded by the ombudsman and create the payment scheme that she called for in her report. If the Government fail to do that, we will do it when we are the Government.
12.17 pm
The Economic Secretary to the Treasury (Ian Pearson): I congratulate the hon. Member for East Dunbartonshire (Jo Swinson) on securing the debate. I know from my postbag that the events at Equitable Life are of concern to the constituents of many Members. Indeed, the fact that 30 Members of Parliament have attended today’s debate clearly demonstrates the strength of feeling about the issue and its importance.
I do not propose to discuss the situation prior to the issuing of the ombudsman’s report, or the criticisms made by some hon. Members that the Government have acted in bad faith or have been dragging their heels—other than entirely to reject those accusations and say that such comments are unfair and uncharitable. However, I shall say something about the period since the ombudsman reported.
I shall summarise the background to the debate. Equitable Life is well known to many Members. Established in 1762 as the world’s first mutual life assurance society, it was a major player in the developing market for personal pension and additional voluntary contribution plans during the 1980s and 1990s. The society’s products were principally based on its with-profits fund.
Mr. Chope: Will the Minister cut out the guff and get to the point? When will the Government respond to the ombudsman’s report?
Ian Pearson: As I shall explain in a few moments, the Government will shortly respond fully to the ombudsman’s report.
From the late 1950s until June 1988, Equitable Life sold significant volumes of with-profits policies that included a guaranteed annuity rate. Those policies provided
a fixed rate at which the policyholder was entitled to purchase an annuity on the maturity of his or her policy. After that date, all policies were sold without the GAR. During the 1990s, the GAR became increasingly attractive as the income that would be available from an annuity purchased in the market fell, for the first time, below the guaranteed rate, with resulting financial implications for Equitable Life.
Equitable Life’s policy of reducing terminal bonus payments to policyholders who exercised those valuable guarantees when purchasing their annuities was tested in the courts as a result of a growing number of complaints from policyholders. In July 2000, the House of Lords found the practice unlawful. In order to meet an estimated liability of £1.5 billion resulting from the judgment, the society decided that it was in the best interests of members to seek a purchaser. Following Equitable Life’s failure to find a buyer, the board of the society announced in December 2000 that the only realistic option open to it was to stop writing new business. The focus of policyholders’ concerns has been whether Equitable Life’s closure to new business could have been prevented.
Mr. Tyrie: Instead of reading out a summary of what we all know happened—it can found in the Penrose report, ministerial speeches over the years and, in more detail, in the ombudsman’s report—will the Minister get to the point? Perhaps he could read out the last page of his brief and tell us when the Government will respond to the report.
Ian Pearson: The hon. Gentleman has been very active in this matter, but it is right to set out the context. [Hon. Members: “We know the context.”] I assure hon. Members that I shall not dwell on it unduly.
Lord Penrose’s investigation, published in March 2004, concluded that Equitable Life’s own actions ultimately precipitated its financial difficulties in the summer of 2000. Lord Penrose also found regulatory system failures, but concluded that they were secondary. The parliamentary ombudsman’s second investigation into the regulation of Equitable Life’s with-profits fund, under the Insurance Companies Act 1982 regime, looked exclusively at the role of the prudential regulator and the Government Actuary’s Department. Given that the remit of the parliamentary ombudsman, set out in law, is limited to the investigation—
Mr. Crispin Blunt (Reigate) (Con): On a point of order, Lady Winterton. When a Minister continues to repeat previous ministerial speeches and puts on the record matters that are already on the record, at what point do his remarks become repetitious and out of order?
Ann Winterton (in the Chair): The hon. Gentleman has served in the House for a long time and knows perfectly well that that is not a matter for the Chair.
Ian Pearson: Thank you, Lady Winterton. It ill behoves the hon. Gentleman, who has only just entered the debate, to make spurious points of order.
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