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Baroness Anelay of St Johns: It might be convenient at this point to state that I look forward to receiving the support of the noble Lord, Lord Corbett, and of the noble Earl, Lord Russell, when finally we reach Amendment No. 118 tabled in my name and that of my noble friend Lord Bridgeman. That amendment seeks to achieve exactly what the noble Lord, Lord Corbett, hopes for; that is, the provision of legal services on site at accommodation centres. The amendment appears in its proper place in Clause 26.
Lord Avebury: Perhaps I may ask the Minister a question which has been running through my mind during the debate. He spoke about "trialling" the accommodation. Presumably he means that initially only a single accommodation centre will be built at which the Government will test the availability of all the facilities to see whether or not they work before they go on to spend hundreds of millions of pounds in rolling out the whole programme.
Can the Minister assure the Committee that the Government will not embark upon the whole programme until the first test has been fully undertaken and everyone can see how it works so that an awful lot of money is not wasted on providing facilities that may not be right for the purpose?
I sympathise with everything the Minister said when introducing this group of amendments. We certainly agree that on the whole it is best if the facilities can be provided either on site or in the immediate neighbourhood of the accommodation centres.
However, let us first see how it works before we embark on an expenditure of hundreds of millions of pounds.
Earl Russell: Perhaps I may respond briefly to the noble Baroness, Lady Anelay. Her Amendment No. 118 is a good one and I welcome it. Its sits next to our Amendment No. 117, which says exactly the same thing. I would be happy with either of the amendments and am perfectly happy to leave the choice to the Minister.
Lord Filkin: I am deeply troubled to hear of this fraternisation taking place on the Opposition Benches, given the dire import for subsequent stages that it might imply. Seriously, I thank both Opposition Benches for their generally supportive comments and for the commonsense way in which they have responded to what we have said.
The first point concerns the Government's commonsense approach. If there is already an adjudication centre near an accommodation centre one would not want to be forced to build a new one. Clearly, that would be nonsense. The debate related to how far away it would be reasonable to have one. The short answer is that in the trials—we intend that there should be four pilots rather than the one to which the noble Lord, Lord Avebury, referred—the presumption is that there would be adjudication on site, unless there were very good reasons not to have it.
The noble Earl, Lord Russell, answered the question as well as it could be answered. He signalled that these matters could not be specified further in terms of any roll-out of the programme, either in primary or secondary legislation. One would have to look at the experience of the early centres and see what was workable. The spirit of the matter is to try to speed up processing while retaining fairness. Therefore, one is trying to avoid either paper chases or people chases or adjudicators having to waste time. We are trying to maximise the amount of co-location as is sensibly possible.
We shall be referring to legal advice. Therefore, I shall not deal with it exhaustively at this point, except to mark that in general terms there are benefits in having independent legal advice available at all stages. The one area of difference is that the Government do not believe that it is essential for a legal adviser to be present at an initial interview. That is frequently the case, but we do not believe that the absence of a lawyer should inhibit the proceedings of the initial interview.
My noble friend Lady Whitaker and one or two other noble Lords raised the question of facilities. The noble Baroness asked about facilities on site. The Home Secretary, through the Bill and his powers, is providing facilities on site to enable interviews between an independent lawyer, or an independent voluntary organisation, and his client to take place in private—all the necessary facilities that support an independent judicial process, which is what a hearing before an adjudicator is.
The noble Lord, Lord Dholakia, asked about the appeal mechanism and how it will work in practice. The simplest way to illustrate that is if, as we intend, these centres contain 750 people, up to 1,000 to 1,500 initial considerations and a potentially near to that number of appeals could take place each year. Already that gives a picture. It starts to be efficient and potentially economic to bring other support facilities closer on site. It makes it easier to provide independent legal advice to asylum seekers, which is funded by the Legal Services Commission. It may make it easier for voluntary organisations to have a presence—not necessarily a permanent one but a supportive presence—on site.
However, we do not have a fixed view on that issue with regard to NGOs, the Refugee Council and the Immigration Advisory Service. We want to consider further and to look at the implications of how co-location of those functions can assist in the voluntary sector's contribution. We shall, as ever, be open to receiving its views and thoughts in that respect.
I was asked a good question by the noble Baroness, Lady Carnegy of Lour. The Lord Chancellor's writ does not run to Scotland. As she knows, it is the Lord Advocate. I am told that we shall consider the point further and consider whether we need to make specific provision in respect of Scotland. I think that that counts as a half hit at least.
The noble Lord, Lord Hylton, marked, quite rightly, that initially this is a trial whereby we shall test whether what we believe to be sound policy and practice works well. In the early years most decisions will not be taken in accommodation centres; the existing processes will continue. I agree with the noble Lord on his central point that high-quality first decisions lead to fewer—I am not sure that they lead to fewer appeals but certainly they lead to fewer successful judicial reviews. There is evidence to support that. So I am with the spirit if not the full detail of his point.
The noble Lord made a point about the importance of interpretation on site. He spoke of the potential benefits in having decent sized accommodation centres with concentration by particular language groupings making the provision of interpretation facilities simpler. As he rightly said, it is crucial that people are advised both about the process and about their rights.
The noble Lord, Lord Carlisle, spoke about early and fair adjudication. I strongly agree with him. In a sense that issue is not specifically covered by the Bill, although we shall debate the matter later as signposted by the noble Baroness, Lady Anelay, and the noble Lord, Lord Dholakia.
My noble friend Lord Corbett made similar points about the contribution of NGOs and of the benefit of legal advice. He spoke also of how well, by and large, despite initial concerns, the Oakington centre works. One cannot necessarily read across from Oakington to accommodation centres, but one should not believe that specialist bodies, organisations or facilities necessarily are against the interests of applicants.
Clearly, they have led to faster decision-making at Oakington, which we hope will be one of the benefits of accommodation centres.The noble Lord, Lord Avebury, marked that there were four centres in the initial trial or pilot. He then asked about research evaluation. They will be evaluation-led by the research division of the Home Office. We have not yet finalised the detail of that. But it is likely to be ongoing action monitoring and research so that we try to learn the lessons relatively rapidly, rather than running them for two years, letting a university contract and then waiting for another two years at the end. For reasons which noble Lords will understand, that would be too slow. But we expect that there will be a thorough evaluation, which is objectively done. No doubt we shall have an opportunity at a subsequent stage to explore its findings.
On Question, amendment agreed to.
Lord Bassam of Brighton: I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
Retail Savings
3.47 p.m.
Lord McIntosh of Haringey: My Lords, with the leave of the House, I shall now repeat a Statement made in another place by the Financial Secretary to the Treasury. The Statement is as follows:
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"I would like to make a Statement about the Sandler review, published this morning, and the Government's preliminary reactions to it.
"Twelve months ago, the Government asked Ron Sandler to review the market for medium and long-term retail and I am extremely grateful to him for his work in producing this report.
'to identify the competitive forces and incentives that drive the industries concerned, in particular in relation to their approaches to investment, and, where necessary, to suggest policy responses to ensure that consumers are well served. It will look at the applicability of the principles of investment proposed by the Myners review of Institutional Investment'.
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"Ron Sandler's recommendations have the potential to bring benefits for consumers and for the retail investment industry and to improve the workings of the market. They will mean more competition, greater efficiency and more productive investment.
"That builds on the agenda we started in 1997 in introducing ISAs, CAT standards and stakeholder pensions as simple, easy to understand savings vehicles. They also build on our agenda to improve the effectiveness and competition within financial markets.
"The review proposes a set of simple, safer investment products—that it calls 'stakeholder products', building on the concept of stakeholder pensions and CAT standards. These products would have a strict cap on charges, restrictions on investment profile and the ability to exit easily on reasonable terms. As regulation would be built into the products themselves, firms would be allowed to sell them through a streamlined system of sales regulation.
"A set of 'stakeholder products' would provide safer, good value products that ordinary people can understand. Greater focus on product design could clear the way for a streamlined sales process. This would make it profitable for providers and distributors to sell to a wider range of less well-off people. That will encourage people to save.
"The review shows how the sales process for investment products can be costly and time-consuming, disenfranchising many on low and middle incomes from investment that would benefit them.
"Shifting the burden of regulation from the sales process to the products themselves, for products aimed at the smaller investor, would help to improve access to saving without sacrificing consumer protection. For people with more sophisticated investments, more complicated products may still be appropriate. The new products would therefore not replace but complement the existing market and for many products the present regulatory approach should remain.
"Building on the review's suggestions, we will consult consumers' representatives, the industry and the Financial Services Authority on the stakeholder products and their design. We shall work closely with the FSA, which will want separately to consult on the regime for their sale.
"I should stress that seeing value in simpler products with simpler sales regulation does not mean that we do not value financial advice. On the contrary, the review presents a challenge for the industry and others to think radically about how it provides advice. Advice is too often understood as an adjunct to a sale, not something valued in its own right. As a result, it is perceived as costly, time-consuming and inaccessible to those on low incomes. But it is simply not the case that only the wealthy need or would benefit from advice.
"The review's proposals should make it possible for the industry to offer to the mass market good quality, high-level advice that helps people to understand their financial needs and the products that can meet them as a complement to the sale of stakeholder products. I look forward to the industry response.
"Those on lower incomes also need financial advice. Citizens advice bureaux and other money advice centres across the country offer good quality, impartial advice to many people in financial difficulty. People have argued that their remit
- should cover financial advice more generally. I am pleased to say that the FSA has offered to fund research into extending the role that those organisations may be able to play. I welcome that, and look forward to reading the results.
"The review proposes reform to with-profits policies and describes an ideal model of such a policy. It would still allow the smoothing features that so many investors have found valuable, but it would be transparent, allowing investors to understand and choose the policy that is best for their needs. It would also clearly separate policyholders' and shareholders' interests, which are intertwined in the current, dominant 90:10 model.
"The review does not propose that every aspect of the ideal model should be mandatory—except for a with-profits policy sold as part of the stakeholder suite of products. But it suggests that much of the transparency of the ideal model could be applied to existing with-profits policies.
"With-profits policies are a huge feature of the British savings landscape. Many people have valued—and will continue to value—being able to smooth out investment returns. So change in the market cannot come overnight. But with-profits policies need to change. Indeed, recent work by the FSA and the industry itself has already begun that process. The review proposes a balanced approach that represents an opportunity to move to a new, stable future for the with-profits market.
"The FSA will consult on the review's proposals on with-profits policies, which build on earlier work that it has carried out as part of its continuing consultation on with-profits policies. The review strongly supports the FSA's proposals to reform the market for the distribution of investment products. It also makes some specific recommendations about how independent financial advisers should be remunerated.
"It will be for the FSA to consider the review's recommendations as part of its consultations on reforming the 'polarisation' system. But it has the potential to bring benefits of increased choice for the majority of consumers who currently invest through the tied channels, which offer the products of only one provider.
"The review proposes an increased and ring-fenced consumer education budget for the FSA and better co-ordination of the Government's work to provide financial education. The FSA has welcomed that suggestion and will consult on whether to increase its consumer education budget. Meanwhile, the Treasury has begun work to co-ordinate the Whitehall effort devoted to financial education.
"The retail savings market is clearly one that many consumers find complex and hard to understand. One answer to that is to simplify the market. But the essential complement to simplification is creating better financial knowledge among consumers and driving competition. The
- review proposes a set of investment principles for providers of retail investment products, building on the approach taken in the Myners review. The review proposes that this disclosure should, in most cases, be voluntary. The Government agree that such disclosure should help to produce a more transparent, better informed and hence more competitive market. We shall be advancing that proposal in consultation with consumer representatives, the industry and the FSA.
"Finally, the review contains a wide-ranging analysis of the impact of the taxation system on the savings industry, urging that the system should be as simple as possible. It makes several proposals on specific current tax rules: abolishing qualifying life policies and the 5 per cent tax deferred withdrawal rule for life insurance policies; equalising treatment with respect to exemption from value added tax on fund management fees; simplifying the pensions tax regime; considering changing the rules for individual pension accounts; and revisiting the maxi/mini-individual savings account distinction. We shall consider the review's proposals on tax as part of the Budget process in the usual way.
"Ron Sandler has a produced a set of proposals that have the potential to produce a simpler, more transparent and more competitive retail investment industry. In so far as his proposals relate to pensions saving, they will also be advanced in the context of the Government's proposals on pensions, which we will set out this autumn. The Government believe that Ron Sandler has tackled long-standing concerns about with-profits policies, giving the industry the chance to draw a line under the problems of the past and to build a new, stable future for with-profits schemes. His proposed stakeholder products, which will be easier for people to understand and viable to sell to a wider range of less well-off people, can only help to meet our ambition to raise the level of long-term saving."
3.56 p.m.
Lord Higgins: My Lords, first, I thank the Minister for repeating the Statement made in another place by the Financial Secretary. I also declare an interest as chairman of a company pension fund.
Some aspects of the report are certainly to be welcomed—for example, the proposals for education and the careful analysis of with-profit policies. But the report must be appraised against the current background of a crisis in pensions provision that is a cause of grave concern and of a collapse in savings. Perhaps the Minister can tell us what is the present savings ratio compared to 1997. I understand that it has virtually halved in that period—obviously a matter of great concern.
Clearly, some causes of that situation are beyond the Government's control, but many—perhaps most—are the result of government action: most notoriously, perhaps, the stealth tax on pensions introduced by the Chancellor in his first Budget. I say a stealth tax, but
the effect of that change is now all too apparent. Since then, the pensions industry has suffered a loss of about £5 billion a year—effectively, a reduction in savings. Perhaps the Minister can tell us what he estimates to be the total increase in Government revenue as a result of that change since they first came to office.Perhaps the report's most important recommendation is the call for simplification—what it calls its driving principle—and the proposals for so-called stakeholder products. That must obviously be considered against the background of the Government's introduction of stakeholder pensions, but that matter is dealt with only briefly at paragraph 5.70.
It is apparent that take-up of stakeholder pensions by the target group has been disappointing, to say the least. They were aimed at about 5 million people who have no pension provision. In fact, the report suggests that only 631,000 policies have been sold. It is not even known exactly how many of those were hitting the target audience. The figure seems likely to be about 100,000, about 2 per cent of the target. It is rather surprising that the report is so enthusiastic about stakeholder products, given the limited success of the stakeholder pension.
Of course, the whole problem of complexity is partly due to the Government themselves. We could take for example the proposal to renege—that is the right word—on the manifesto promise to retain SERPS and to substitute a second state pension that, many expert commentators believe, should not go ahead.
However much one simplifies, the real reason why there is such a problem is that savings depend on confidence. That is not dealt with adequately in the report. In many respects, the Government have undermined confidence. As my honourable friend Mr Willetts pointed out in another place a few weeks ago, ahead of anyone else, the Government overestimated the extent of savings in this country by £35 billion, because of double counting. They then tried to blame the mistake on the Office for National Statistics, and now, following that, they want to change the definition to include other asset classes to make the figure look better. I hope that the Minister can give us the Government's present estimate of the true figure for savings, with which the report is concerned.
Confidence has been undermined in a series of other ways. There was the disaster—tragedy, perhaps—of Equitable Life. Instead of setting up a single inquiry with adequate powers to go into the matter, the Government set up a multiplicity of inquiries, only one of which has, so far, seen the light of day. One cannot help but feel that it is partly because the industry—Equitable Life, in particular—was supervised by the Treasury at an earlier period that that is the case. That has also shaken confidence.
Perhaps the most important effect on savings is that caused by the minimum income guarantee and the enormous increase in means-testing under this Government. I think I am right in saying that the report does not cover that matter. If people invest in
the way the report suggests, they may find that, when they retire, they will get absolutely nothing for their savings because they will have been deducted from the minimum income guarantee. The Minister shakes his head. Can he tell us how much one would need to have in a savings fund in order to get any benefit over and above the minimum income guarantee at retirement?Confidence has also been undermined by the situation in the stock market. In its second paragraph, addressed to the Chancellor, the report says that consumers have benefited from equity market returns in recent decades, indicating an incentive to save. Can the Minister tell us to what extent the value of the stock market has increased since the Government came to power?
The crucial issue here is the transfer of assets between one generation and another and the extent to which a particular generation makes provision for its future. We find the Government adopting an extraordinary position and failing to tell us their estimate of the value, in terms of liabilities, of the basic state pension. The way in which statistics are not revealed is extraordinary; it is difficult for the public, the Government and, indeed, the House to appraise the true position.
The present situation is dangerous. We must hope that the report helps to achieve some improvement, particularly with regard to taxation. The changes in taxation have done little, if anything, to improve savings. The opening words of the statement were about individual savings accounts, which were, of course, less generous than the personal equity plans they replaced. That is typical of the way in which the Government fail to deal with the fundamentals. We must hope that the report will be helpful and that the Government will pay attention to what has been said. In particular, we must hope that the Chancellor's taxation policies improve the situation: so far, they most certainly have not.
4.5 p.m.
Lord Sharman: My Lords, I join the noble Lord, Lord Higgins, in thanking the Minister for repeating the Statement made in another place.
On these Benches, we welcome this thorough review. We are cognisant of the words of Sheila McKechnie, who said:
- "This is a powerful report. It has correctly diagnosed the fundamental failings of the financial services industry. It offers a way forward which focuses on the needs of consumers, not industry".
- "poor products, bad advice and failed regulation".
The report makes some good, practical recommendations, especially those relating to a new generation of products tailored to low income groups.
We welcome specifically the notion of the introduction of simple, regulated products. We like the idea of simplifying the tax structure, which is also recommended. The recommendations relating to the need for clarity about financial products, for removal of unnecessary jargon and for demystification of with-profits funds are also particularly good.I note that the report asks for a clear definition of mis-selling. That would be desirable. If nothing else, such a move would cut compliance costs. The proposal that exit charges for withdrawal from funds should be regulated is particularly welcome. Anybody who suggests—as the report does—that financial advisers should have further in-depth training will have my support.
Several questions are left open. I share the concern of the noble Lord, Lord Higgins, about how the Government propose to deal with the gap in savings. The industry cannot do it. Sandler opposes tax incentives. The Government oppose compulsion. What is left? Do the Government have a target, and can the Minister tell us what it is? Can the Minister give an outline of the Government's strategy to fill the gap?
How is consumer confidence in financial advice to be restored? Will the Government consider radical options, such as asking—or telling—the industry to get together with the citizens advice bureaux to promote a nation-wide pro bono financial advice service? How is the confidence of consumers who have been seriously ripped off to be restored? When will the Government-sponsored Penrose report be available, so that we can draw a line under the Equitable Life de’bacle? If the Government will not agree to a comprehensive review of the mis-selling of endowment mortgages, will they, at least, name and shame the main culprits? When will the Government introduce new rules for orphan assets that will prevent companies from expropriating policyholders' funds for their shareholders?
I conclude by welcoming the report. Ron Sandler has done a thorough job. Most of all, he has shown us that there is a great deal of work to be done.
4.9 p.m.
Lord McIntosh of Haringey: My Lords, in all honesty, I can thank only the noble Lord, Lord Sharman, for his welcome for the review. In a dense and closely argued speech, the noble Lord, Lord Higgins, said not a single word about whether Mr Sandler had done a good job. I suppose that, given the weakness of his fundamental position, there was not much else that the noble Lord could do.
It strikes me as extraordinary that the noble Lord, Lord Higgins, should use as the basis of his attack a comment on the collapse of the savings ratio. Yes, the savings ratio today is 5.6 per cent; and, yes, in the mid 1990s it was of the order of 10 per cent. Therefore, the noble Lord is correct in saying that the savings ratio has declined.
But savings ratios are not an end in themselves. It depends what savings are for. Apart from an investment in pensions, we see net savings as being
thoroughly desirable. They are necessary for people and households to have for family occasions, university education or whatever. We are certainly anxious to improve the savings ratio. However, much of the saving in the 1980s and 1990s under the noble Lord's government was a hedge against the mismanagement of the economy for which his party was responsible. People had to save because they did not know what would happen to inflation; what would happen to interest rates; or what would happen to their jobs. We now have a more stable economy with stable interest rates and we have a recovering employment situation. Under those circumstances, it is not surprising that there should be a reduction in the savings ratio.The noble Lord, Lord Higgins, moved on to the familiar attack on what he called the "stealth tax" in pensions. It was the removal of the double tax incentive for pension schemes which ensured that the companies in which investments were made distributed dividends rather than investing in the future of their companies and of this country. If the noble Lord is arguing that savings depend on confidence—and he did so repeatedly in his speech—he must recognise that the pensions industry is part of the economy of this country and a large part of investment in our service and manufacturing industry. He must recognise that the success of the economy has made it possible for us to correct the imbalances and imperfections in the taxation system relating to pensions.
The noble Lord approves of the proposals for simplification, but implies that stakeholder pensions are not a success. The figure is more like 820,000 rather than the 600,000 that he mentioned. But we are talking about the first year and we believe that there has been a promising start. We agree with Ron Sandler that the analogy between stakeholder pensions, with a cap on charges and greatly simplified provisions, is the correct one for the medium and long-term savings industry. I am pleased to hear that the noble Lord, Lord Sharman, agrees with that point.
The noble Lord, Lord Higgins, then asked what happened to our manifesto promise to maintain SERPS—and that from the representative of a party which did its best to destroy SERPS in 1988. It removed the link between earnings and benefits and did everything it could to get people out of SERPS. It even went so far as to remove the condition that employers could require that their employees contributed to a pension scheme. I would like to know whether he now believes that any of the changes made in 1988, which we have had to correct at great cost with the state second pension, were justifiable.
The noble Lord had some justification in mentioning the mistake that was made on double counting. We have apologised for that mistake and we have corrected it.
It is remarkable that he should say that under this Government there has been a shake in confidence, in particular because of what happened to Equitable
Life. Confidence in the capitalist system is a little more shaken than that, as events across the Atlantic go to show.The noble Lord queried whether the savings for pensions have not been invalidated by the minimum income guarantee. I noticed that ultimately he did not oppose the minimum income guarantee or the measures which the Government have undertaken to deal with pensioner poverty. But neither did he note that the pension credit, which comes into effect next year, will ensure that everyone who saves for their retirement benefits from it. The tapers, which discouraged saving, have been removed.
I have nothing to say about the value of the stock market as an indicator of the economy. The fundamental soundness of the economy has been shown by consumer confidence during the period in which the stock market has been declining.
I am grateful for everything the noble Lord, Lord Sharman, says about the analysis. He is right that the retail savings industry is not so much under attack—yes, it is under attack from the report, let us be honest. However, it is not in danger from the report because the retail savings industry will always have a number of more complex products in addition to the simplified products. The noble Lord, Lord Sharman, was right to say that the lack of transparency and commission-based selling has meant that the retail savings industry has missed a large part of its potential market. That is what Sandler proposes to overcome. I do not know that I have a definition of mis-selling and I suspect that it would be a semantic exercise.
The noble Lord, Lord Sharman, properly asked me about the savings gap and about our target. It is not one of the measures we have used and therefore it is not appropriate for me to comment. He also asked about more radical options such as the development of pro bono financial advice. That is exactly what Sandler recommends and what the FSA is taking up with some enthusiasm. I agree with him about the need to restore consumer confidence not so much in the economy as in large parts of the financial services industry. Given the fact that I have run over the available time, I would like to write to the noble Lord about the review of endowment mis-selling and about orphan assets.
4.18 p.m.
Baroness Hooper: My Lords, I listened with considerable interest to the Statement, particularly as I am a non-executive director of a life assurance company and an investment trust company. Does the Minister agree that openness and transparency are highly desirable, but that the costs of compliance and regulation are escalating enormously? For example, some five years ago in the life assurance company with which I am involved the compliance department consisted of three people. It now consists of 25 people and it is growing. Those costs affect the costs of the financial products in which we hope the public will invest for the purpose of saving. Therefore, will the Minister reassure me that if the recommendations of the report are fully implemented, the costs of implementation will be rigorously studied?
My second question concerns the training and education of independent financial advisers—which, again, I welcome, as did my noble friend Lord Higgins and the noble Lord, Lord Sharman. Who is pay for this training?
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