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Mr. Mark Lancaster (North-East Milton Keynes) (Con):
Given the appalling service received by commuters in the very first week of the newly refurbished west coast main line, does the Secretary of State at least understand why they are slightly cynical about his promises
and the impact of future investment in the railways? May I ask him to reassure them about the action that he will take to ensure that last week’s events are not repeated?
Mr. Hoon: One of the clear economic justifications for looking hard at future capacity on our rail network and the requirement to build new lines is the increasing use of that capacity on lines such as the west coast main line. Despite the difficulties that we have faced, and while I well understand the impact on travellers in recent weeks and sympathise with them, an £8.8 billion investment is producing better, more frequent services for passengers up and down that line. There will, however, come a point when we need new capacity, particularly if rail usage continues to increase as it has in recent years. That is why we are proposing specifically a new high-speed line to the west midlands and beyond.
Martin Linton (Battersea) (Lab): My constituents will certainly welcome the rejection of mixed mode, which was the greatest threat to their quality of life, even if they are dismayed on environmental grounds by the continuation with the third runway. Will my right hon. Friend make it absolutely clear to them that there will be no increase in landings over south London on to the two existing runways? Also, if he is abrogating the Cranford agreement, could he not also do away with westerly preference, which results in an undue number of flights over south London, and far beyond what is justified in terms of prevailing winds?
Mr. Hoon: My hon. Friend has been assiduous in making the transport case for his constituency. I have had a number of meetings with him where he has argued it extremely effectively. I am pleased to be able to respond in the way that I have in relation to mixed mode—he has argued that case extremely effectively. It is right to make allocation judgments that spread the noise around Heathrow airport more fairly, which is why we have abandoned the Cranford agreement. However, I do not agree with my hon. Friend’s argument about changing the current preference in respect of the airport, because, again, that is determined largely in relation to the populations affected.
Mr. Deputy Speaker: Order. We must move on now, to be fair to the other issues that have to be discussed. I apologise to the Members I have not been able to call, but I am sure they will be remembered collectively by the Chair when this matter comes up for discussion again.
Equitable Life
1.21 pm
The Chief Secretary to the Treasury (Yvette Cooper): Mr. Deputy Speaker, I would like to make a statement in response to the parliamentary ombudsman’s report on the prudential regulation of the Equitable Life Assurance Society from 1988 to December 2001. This is the ombudsman’s second report; it was based on a four-year inquiry, and I would like to thank the ombudsman for her thorough and extensive consideration of all the issues involved. The Government have carefully considered this substantial report over some months, as it has raised complex and important issues. We agree that there has been maladministration in particular areas, and also that Government action is merited as a result.
As the ombudsman’s report sets out, Equitable Life is a mutual life assurance company whose policyholders share in the profits or losses of the business. Equitable had established a business which involved high volumes of policies with guaranteed annuity rates, and a well-advertised policy of distributing earnings as bonuses without building reserves for the future. After market conditions changed and the level of liabilities rose significantly relative to its assets, Equitable attempted to resolve this through its differential terminal bonus policy. However, when this was found unlawful by the House of Lords in 2000 and Equitable was unable to find a buyer to cover the additional liability of £1.5 billion, the society closed to new business in December 2000. As a result of these events, many policyholders now hold policies worth significantly less than they had originally expected.
Lord Penrose’s forensic report on all the events surrounding Equitable Life concluded that the society’s own actions ultimately precipitated its financial difficulties in the summer of 2000. He said:
“Principally, the society was author of its own misfortunes. Regulatory system failures were secondary factors.”
In addition, he found significant problems with the then regulatory regime, which was reactive and unintrusive. Since then, we have introduced major regulatory reforms. It is also right to look at the role of regulators within the regime that applied at the time. The parliamentary ombudsman has looked specifically at this issue—the role of the society and others being, of course, outside her remit. Her extensive report includes 10 findings of maladministration and five findings of injustice as a result.
The Government have considered the report in detail. We have also considered the report of the Public Administration Committee, published in December, and I pay tribute to it for its work on this issue as well. We agree with the ombudsman that there was maladministration by public bodies in several areas. In particular, the Government agree that Equitable Life’s regulatory returns in the period from 1990 through to 1996 in some cases raised questions which should have been resolved by the public bodies, but were not. In some cases we recognise this may have led to injustice for policyholders, although in several we believe it did not, in the context of the different regulatory regime which applied at the time. The Government also agree that the regulator should not have been satisfied that a reinsurance treaty entered into by Equitable Life justified
the credit taken for it from 1998 to 2000. Equitable Life’s regulatory returns gave a materially different picture of the society’s regulatory solvency position because of the credit taken for the reinsurance treaty. We agree, too, that certain statements made by the Financial Services Authority after 2001 had the potential to mislead and may have caused injustice as a result. The detailed response to each finding, and the reasons supporting these conclusions, are set out in the Command Paper.
The ombudsman’s report states:
“I am very far from concluding that everyone who has complained to me about the prudential regulation of the Society has suffered a financial loss.”
Nevertheless, it is clear that people have been affected, and have experienced significant distress due to events at Equitable Life. I think the whole House regrets the problems caused by the mismanagement of the society, and I wish to apologise to policyholders on behalf of the public bodies and successive Governments responsible for the regulation of Equitable Life between 1990 and 2001 for the maladministration we believe has taken place.
We also need to consider the fairest way to respond to policyholders now. We have looked in detail at the ombudsman’s proposal for compensation. As the House will be aware, Parliament has recognised over many years that it is not generally appropriate for the taxpayer to pay compensation even where there is regulatory failure. The responsibility to minimise risks and to prevent problems from occurring in a particular financial institution lies, first and foremost, with the people who own and run that institution. The Financial Services and Markets Act 2000 reaffirmed the long-standing exemption of financial regulators from liability for negligence in the courts. The ombudsman’s framework covering maladministration is, of course, different from the courts’ approach to negligence. Nevertheless, we believe the underlying principle remains an important one; it has informed the approach of successive Governments, and we believe it should be sustained for the future.
It would have serious repercussions for the taxpayer, for the relationship between Governments and financial markets, and for the nature of regulation, if the taxpayer were to provide a remedy for all losses every time the regulator fails to prevent a financial institution from getting into trouble. Nevertheless, we are concerned by the representations we have received from Members and others, both directly and through debates, that some policyholders have been disproportionately affected by the events at Equitable. It is on that basis that we believe it is right in this case for Government to set up an ex gratia payment scheme to help.
To do this in a fair way, there are a series of important issues that we need to take into account. In particular, we need to take account of the role and responsibility of Equitable Life and other parties. As the Public Administration Committee said in its December report:
“The current board of Equitable Life and many others have acknowledged the legitimacy of Lord Penrose’s conclusion; few people dispute that its former management were primarily to blame.”
Even where there was maladministration, there was also a responsibility on the part of the society. Let us take, for example, the case of the reinsurance treaty. Although the FSA failed to follow up problems with the treaty, it
was still the decision of the society to enter into the agreement in the first place, and it was the society which had primary responsibility to ensure that the treaty operated in the way intended. The Select Committee also said:
“The fairness of requiring taxpayers to compensate Equitable Life’s policyholders firmly depends upon making sure that public funds do not pay for loss that is fairly attributable to the poor performance of the stock market or to the mismanagement of Equitable Life’s former directors that could not have been prevented by adequate regulation.”
Secondly, as the ombudsman herself has said, the Government also have a responsibility to taxpayers generally to balance competing demands on the public purse. Her report states:
“I recognise that the public interest is a relevant consideration and that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case.”
It is important to note that neither the ombudsman nor the Government has been able to estimate the cost of her recommendation, as we do not have detailed information on the relative losses experienced by different groups of policyholders or on the factors affecting the losses of different groups.
Thirdly, we also want to focus on those who have been hardest hit. The ombudsman has noted:
“The particular circumstances of each complainant vary enormously—in terms of their age, their involvement with the Society, the amount that they claim to have lost as a result of that involvement, and the degree of reliance that they have now, or had in the past, on income derived from their investments with the Society.”
Many hon. Members have made representations to us on this issue.
Fourthly, we need to take into account important practical considerations. Neither we nor the ombudsman currently have much of the important information or assessments that we need to implement a payments scheme. The ombudsman, commenting on her own proposals, said that
“the creation of such a scheme would not be straightforward by any means”.
We have considered all of these points, and we intend now to set up a scheme to make ex gratia payments to those who have been disproportionately affected. In order to do so, we have today asked Equitable Life to make available its detailed policyholder information. We have also asked former Lord Justice of the Court of Appeal, the right hon. Sir John Chadwick, to look at the information and advise us on the following points: first, the extent of relative losses suffered by Equitable Life policyholders; secondly, the proportion of those losses that should properly be attributed to the maladministration accepted by the Government and to the actions of Equitable Life and others; thirdly, which classes of policyholder have suffered the greatest impact as a result of the maladministration accepted by the Government; and fourthly, the factors arising from this work that the Government might take into account when reaching a final view on determining whether a disproportionate impact has been suffered. Sir John’s terms of reference are being published today.
The ombudsman recommended that a payments scheme should be completed two and a half years after the decision to pay out. The Select Committee said that it could not assess whether that was viable, and our initial
assessment of the ombudsman’s approach is that it might take significantly longer than that to implement fully.
Many hon. Members have raised concerns about the length of time policyholders have had to wait for resolution of this case, and given that many have already retired, we believe it is important to set up a scheme that can pay out as swiftly as possible, taking account of the difficult practical considerations involved. We have therefore asked Sir John to advise as quickly as he is able, and that includes providing interim updates and conclusions on an ongoing basis, so that work can progress on the practical issues in parallel without waiting unnecessarily for all his work to be concluded. We do not want to be constrained by the assessment that we have made of the ombudsman’s proposals in setting out the pace at which we can implement this scheme.
The Government will therefore introduce a fair payment scheme for policyholders who have suffered a disproportionate impact. We will do so with the benefit of Sir John’s advice and taking account of the position of the public finances, as well as practical considerations. For the reasons that I have explained, we do not believe it would be right to set up a compensation scheme in the way that the ombudsman proposed, but we do believe that this is the right response. I hope the House will recognise that there is no easy solution to the problems at Equitable Life and the faults that have been found. The events at Equitable Life have been very difficult and complex and have caused problems for policyholders across the country. The consideration of those events has already informed substantial regulatory reform, as well as wider reviews of corporate governance. Today’s response sets out new help for policyholders that we believe is fair to both policyholders and taxpayers. It continues to support a sensible approach for the future, and I commend it to the House.
Mr. Mark Hoban (Fareham) (Con): I congratulate the ombudsman on the way in which she investigated this matter—she has done her job in an exemplary fashion. I would also like to thank the policyholders and their action groups who have made sure that this issue was always on our agenda—their persistence has paid off. After years of trying to block compensation, the Government have finally admitted today that the regulators failed Equitable Life’s policyholders and that they deserve justice.
It has been a long, hard fight by campaigners, made longer and harder by the intransigence of a Government who have consistently sought to evade taking responsibility for what happened at Equitable Life. In 2004, the Treasury ignored the Penrose report’s findings that the regulators had failed. The Treasury then tried to argue that the ombudsman could not investigate a decade of regulatory failure. Having lost that argument, the Treasury bombarded the ombudsman with new information and a 500-page submission on her draft report, so that a report that was due at the end of 2005 was finally published in July 2008, and for the past six months the Government have been sitting on it. Even this statement has been delayed—the Government promised it in the autumn, the Prime Minister promised it before Christmas and we have been waiting until January to get a copy of it.
Why has the Treasury has sought to block, frustrate and delay this report, and block justice for policyholders? It has done so to hide the Prime Minister’s embarrassment.
The most damning findings of maladministration related to the period since 1997—a period when the Treasury and the Prime Minister had responsibility for regulation. While the Treasury dithered and delayed to spare the Prime Minister, 30,000 policyholders died—they will never see the justice that they deserved—and policyholders living on reduced pensions and annuities paid the price for the Government’s failure to act sooner.
The Chief Secretary to the Treasury quoted Lord Penrose’s comment that
“the society was author of its own misfortunes.”
However, he also concluded that
“the practices of the Society’s management could not have been sustained over a material part of the 1990s had there been in place an appropriate regulatory structure.”
The ombudsman’s hard-hitting report backed that conclusion. The regulators failed to use their powers to stop the destruction of Equitable Life. Report after report shows that policyholders were let down by regulators. Why have we had to wait until now for the Government to concede that compensation should be paid?
In 1989, the then shadow Trade and Industry Secretary—now the Prime Minister—asked
“why it took an internal inquiry, a departmental inquiry and now the ombudsman’s investigation...before justice began to be done?”—[ Official Report, 19 December 1989; Vol. 164, c. 204.]
Twenty years later, we ask the same the question today. Why did the Government wait so long to recognise the regulatory failings that led to Equitable Life’s policyholders losing money?
We have always believed that policyholders should be compensated if maladministration was found, so we welcome the Government’s announcement. Can the Chief Secretary to the Treasury answer some simple questions? She is aware that policyholders have waited some time for justice and she said that she had no timetable to indicate when they would receive it. When will Sir John give an interim report on his work? She also announced what appears to be a hardship fund. Why has she rejected the Public Administration Committee’s conclusion that
“the payment of compensation is not a matter of charity but...of justice”?
Who does she expect will benefit from this fund? Will it depend on how much people have invested or how much they have lost, or on their broader financial position? Is this about means-testing compensation rather than about compensating people for injustice? Can the Treasury explain whether it has imposed a cap on how much compensation can be paid to policyholders, either individually or as a group?
The Treasury could have decided to compensate Equitable’s policyholders when Lord Penrose reported five years ago, but instead it has dragged this out to save the face of the Prime Minister—and it is policyholders who have paid the price. Now the Government have conceded the case for compensation they can no longer drag their feet. Justice cannot be denied any longer.
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