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Lord Peston: Before my noble friend the Minister concludes, there are two questions that I should like to ask him. I listened to this debate as a layman and was most impressed by the analysis of the problem put forward by the noble Lord, Lord Joffe. Two matters struck me as being of overwhelming interest. The first is the transparency question. It was not clear from my noble friend's reply whether he is satisfied with the transparency aspect of the matter, or whether what he said forms part of his further reflection on the matter.
The second matter which, as a layman, rather horrified me was the fact that the noble Lord, Lord Joffe, seemed to be saying--he cited but one example, but that may well have been for the sake of brevity--that certain actions were getting very close to being unlawful in terms of the use of funds. I do not speak as an expert but as someone who has simply listened to the debate. If there were any danger that these enormous amounts of orphan assets were being used in, to say the least, a doubtful way, did I understand my noble friend to say that the matter could be drawn to the attention of the FSA, which would then deal with it? Is my noble friend saying that he is confident that that is at least one response to the noble Lord, Lord Joffe? I ask these questions purely because I have been listening to the debate and am quite interested in the answers for their own sake, quite apart from the practicalities involved.
Lord McIntosh of Haringey: My noble friend's first question was about whether the existing rules were being adhered to. I read out to the Committee what I understand the Insurance Companies Act 1982 provides as regards transparency and reporting to policyholders. It seems to me that the Act makes certain provisions which the noble Lord, Lord Joffe, said were not being implemented; in other words, that particular insurance companies are not obeying those rules. I do not know whether that is the case, but it is certainly a matter that needs further investigation.
As regards uses that may be unlawful, the particular point made by the noble Lord, Lord Joffe, referred to the suggestion that such orphan assets should be used in compensation for pensions mis-selling. As I should have said before, the Government made it entirely clear on 1st July 1997 (very soon after we came into office) that surplus assets in a company's with-profits fund should be used only to meet pensions mis-selling costs, first, where any profits from the pensions business concerned would also be attributed to the with-profits fund; and, secondly, to the extent that use of such surplus was consistent with policyholders' reasonable expectations. Indeed, we have returned to the "reasonable expectations" problem. However, that is the responsibility of this Government. We did try to make it as clear as possible.
Lord Joffe: Perhaps I may comment briefly on some of the points made in the debate. I entirely agree with the noble Lord, Lord Jenkin, that policyholders often act irrationally and seldom take account of their best long-term interests. However, the distinction between a mutual and a proprietary company is that in a mutual company there is a mechanism for policyholders to object because they are the owners; in a proprietary company, which is the main subject of my amendment, the policyholders have no rights whatever other than the contractual rights that they have in relation to their policies. Perhaps I may remind the noble Lord, Lord Jenkin, that in the Nationwide case the members actually rejected the money--the bribe--offered to them.
On the question of practicality, I refer to a distinction here. The noble Lord said that one elects directors, one takes out a policy and one leaves matters to the directors. However, the distinction in the life assurance industry is that these are long-term contracts; they often run for 30 or 40 years. The directors who are elected today may be very different from the directors in charge in 20 or 30 years' time.
I think that I am grateful to the noble Lord, Lord Grabiner, for his comments on the wording of my amendment. I agree with him entirely that the amendment as phrased does not achieve its objective. Should I retable the amendment, I shall certainly take advice of the noble Lord, Lord Grabiner, on how to draft it.
The Minister mentioned the regulator having all sorts of rights to protect the interests of with-profits policyholders. The lack of transparency and opaqueness with which the regulators operate is not something which policyholders would necessarily applaud. Policyholders have by no means complete confidence in what the Treasury and the Department of Trade and Industry have decided in the past in relation to these orphan funds. It is clear that there is a need for remedies which are not solely the prerogative of the regulators.
The question of unlawfulness was raised. I did not suggest categorically that the actions of the Pru and the other life assurance companies were in any way unlawful. The difficulty is that one does not know whether they are unlawful because one does not know who owns the orphan assets and it is impossible for the consumer to find that out. One of the purposes of the amendment is to look into these issues.
I am pleased to hear that the Minister will reflect on these issues. I, too, wish to reflect on them before deciding what course of action to take. I thank all those who have participated in this short debate. I express my appreciation to the Minister for his patience in advising me as a novice on how to submit this probing amendment. I beg leave to withdraw the amendment.
Clause 131(4) provides that an institution, which is usually a bank, with which an account is kept in pursuance of the client money rules, does not incur any liability as a constructive trustee if money is wrongfully paid from the account unless the institution permits the payment, first, with the knowledge that it is wrongful or, secondly, having deliberately failed to make inquiries in circumstances in which a reasonable and honest person would have done so.
Given that the institution will almost certainly be a person carrying on a deposit-taking business, it would be more satisfactory if the reasonable and honest person test should apply to a reasonable and honest person carrying on a deposit-taking business. It would be difficult to judge what inquiries a reasonable and honest person would have made if that person was the proverbial man on the Clapham omnibus. It would be more sensible to apply the test to a reasonable and honest person carrying on the relevant type of activity. I beg to move.
Lord McIntosh of Haringey: This interesting amendment concerns an institution such as a bank at which an authorised person keeps a special account for its clients' money pursuant to client money rules under Clause 131. For example, when an authorised person receives money from his client, he may be required by rules to hold it on trust in a separate bank account until he invests it on his client's behalf.
The institution will be required to handle instructions from the authorised person in relation to the account. The problem for the institution is how to know if the authorised person is withdrawing money from the account to invest on behalf of his client or if he is acting fraudulently.
Under the ordinary common law a banker will not normally be liable to repay the authorised person's client unless he could be treated as a constructive trustee on the basis that he either knew the withdrawal was wrongful or if he deliberately failed to make inquiries in circumstances in which a reasonable and honest person would do so.
For example, one might expect a reasonable and honest person in those circumstances to be suspicious if the authorised person started taking unusually large amounts of money out of the account or asked for funds to be transferred to his own personal or business account. That test was included in the Financial Services Act and is reproduced in Clause 131(4). The amendment would add an additional clarification to that second test by emphasising that it was based on a reasonable and honest person,
The test is concerned with circumstances in which a reasonable and honest person would have made inquiries. Those circumstances involve the handling of funds which have been deposited in an account with that institution pursuant to client money rules. Therefore we are already concerned with the actions of a reasonable and honest person in circumstances in which he is carrying on a deposit-taking business. I hope that on that basis the noble Lord will not press the amendment.
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