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Lord Phillips of Sudbury: My Lords, before the noble and learned Lord sits down, might I ask him whether he would be prepared to help the Houseif it is an inappropriate question I apologiseand if he is prepared to express a view on whether or not the
I would, on the other hand, be very concerned if this Bill was not passed, and we were left with the present situation with regard to the appointment and disciplining of judges, and the great many other mattersI think that there are 700 of themwhich are the subject of the agreement that was reached in the concordat. They deal with a range of responsibilities which we have never needed to sort out, which we accepted should lie in the hands of Lord Chancellors and which were safely there because Lord Chancellors exercised the powers in fact in a way that was not inconsistent with the independence of the judiciary.
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey): My Lords, with the leave of the House I shall now repeat a Statement which has been made in another place by the Financial Secretary to the Treasury. The Statement is as follows:
"As the House will remember, following the closure of Equitable Life to new business and the cuts in policy values in July 2001, the Government established an independent inquiry under Lord Penrose on 31 August 2001. The terms of reference were:
'To enquire into the circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life market background, to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury ministers'.
"The Government sympathise with the plight of policyholders who have suffered much worry and distress over the past four years and who have seen significant reductions in their expected income in retirement.
'I have interpreted the remit [of the inquiry] as requiring me to focus on the events that explain the Society's fate'. (Foreword/11)
'It was not for me to measure any person's actions against accepted standards of conduct defining the legal duties of other people performing comparable duties in other organisations and other similar circumstances'. (Foreword/8)
'Superficially claims of £1.5 billion should not have brought down a Society with funds of £32 billion' (2/113).
"First, the report details how executive management failed to keep the board fully informed about the true state of the company's financial position, despite the clear responsibility placed on the appointed actuary to inform the board in that regard.
'of management decisions in the period 198393 related to the recovery of the cost of annuity guarantees from terminal bonus' (19/126);
'the Board's understanding of the annuity guarantee issue was at best limited until the autumn of 1997, and some directors may not have had any understanding of the position' (9/45).
'brought the Society to the position of weakness in which it found itself in 2000 and 2001 without full knowledge and understanding of the developing position' (19/88).
'I have not sought to form or express a view whether Ranson was in breach of duty . . . that is a matter for the courts and for his professional institute' (19/119).
'The Board at no stage got fully to grips with the financial situation faced by the Society: information was too fragmented. Their collective skills were inadequate for the task, and there were no effective arrangements for ensuring that there were detailed examination of, and onward reporting to the Board, on actuarial reports' (20/50).
'serious omission in communication to policyholders of relevant information about their prospective interests' (19/24).
'Attempts were made to change expectations in 1996 and later years. These were ill-conceived, poorly expressed and confusing. The intimations to policyholders were generally uncommunicative' (19/72).
'a series of particular valuation practices of dubious actuarial merit' (19/240(5)),
'the Society never clearly communicated the nature of its quasi-zillmer adjustment to GAD' (7/24),
'Such references as were made . . . failed properly to disclose their nature and extent to the regulators' (19/128).
'they would not have been prepared to accept the reinsurance arrangements as providing as much security for reserving purposes as was in fact taken' (7/93).
'Those involved at the Society were not in any doubt that a right for the reinsurer to cancel in these circumstances would undermine the regulatory value of the agreement' (7/96).
'the Society was able to over-allocate bonus beyond available assets at market value, and in particular to make payments on claims that exceeded the relative available assets at the time' (19/49),
'principally, the Society was the author of its own misfortunes' (20/84).
"The current management argues strongly that the cuts in policy values in 2001 reflected different factors. The House will appreciate that this is a complex legal, actuarial and accounting issue, which could ultimately only be determined by the courts.
"The current board of Equitable Life will, together with the FSA, assess the impact on the society's liabilities and any risks to policyholders posed by Lord Penrose's findings. Those who have already seen limited extracts of the report on behalf of Equitable's board have concluded that it is in the best interests of policyholders to continue in business as before.
'that again is a matter for other proceedings' (Foreword 14),
'lack of co-ordination of prudential and conduct of business regulation . . . was unacceptable' (20/64),
"Since then, the FSA has proceeded to introduce risk-based insurance regulation and individual capital standards. It is also in the process of introducing realistic accounting by life offices, including a requirement to reserve for terminal bonus. In addition, the use of future profits implicit items is being phased out.
"The FSA is also removing responsibility for making key decisions on asset allocation and distribution in with-profits funds from the appointed actuary and transferring it to company boards. And it has brought forward proposals on better treatment of customers by firms and fuller transparency of with-profit funds.
'a major, comprehensive reassessment of the requirements of an efficient regulatory system for the insurance sector' (Appendix E/3).
'has sought to anticipate many of the lessons that might be drawn by this inquiry and it should come as no surprise that it has largely succeeded' (20/3).
'that action on the basis of policyholders' reasonable expectations would be reactive to what was found in the [annual regulatory] returns so as to restrict the workload that a less restrained approach would involve' (13/56).
'Virtually no primary legislation in the regulatory area for which DTI was responsible was taken forward by Ministers . . . there were specific proposals for change that Ministers did not pursue' (19/162).
'the Government required a "light touch" approach to regulation, and allocated resources accordingly' (19/161).
"According to Lord Penrose, the DTI believed that forcing insurance companies to reserve for terminal bonus would have been 'over cautious' (10/26). And he says that the UK delegation 'led the resistance' to measures requiring more cautious valuation techniques (10/28).
'As for the regulatory system, I do believe it has failed policyholders in this case' (20/83).
'principally, the Society was the author of its own misfortunes' (20/84).
'Ministers resolved that scrutiny would continue to be based on the examination of the regulatory returns, and that action on the basis of policyholders' reasonable expectations would be reactive to what was found in the returns' (13/56).
"Lord Penrose accepts that even had a different, proactive regime been in place earlier, no regulator can guarantee to protect consumers against what he calls at times concealment and manipulation. Indeed, the losses suffered by policyholders are attributed by Lord Penrose to decisions that were made by the management of the society from the early 1980s onwards. He observes that,
'by appearing to insulate consumers entirely from the risk inherent in the selection of an investment product such an approach could give rise to perverse economic incentives for both consumers and providers' (20/70).
'I should like to remind the House of an important point. No regulatory system can provide a 100 per cent. guarantee against a bank failure, especially where there is a deliberate intention on the part of individual traders to conceal or deceive, combined with inadequate management controls. In cases such as this, it is important that lessons are learned quickly and promulgated widely, so that all parties, including the management of other financial institutions, can learn from the unfortunate example'.[Official Report, Commons, 18/7/95; col. 1457].
"In the event that Equitable Life were to be subject to insolvency proceedings there is nowwhat was recognised not to be available at the time of Barlow Clowesa statutory safety net to protect investors provided by the Financial Services Compensation Scheme, which would pay out 90 per cent of guaranteed policy values.
"Further, this Government have also provided for a single Financial Services Ombudsman to consider individual complaints. I understand that he is currently considering the cases of a number of different categories of former policyholders who have made claims for redress, for which the Society has already made provisions. I want to make it clear to the House that we stand ready, if requested, to assist the Financial Ombudsman in expediting the resolution of these complaints. As I have made clear, Equitable's current board stresses that the company is solvent and policyholders' interests are best served by remaining in business.
"In his report, Lord Penrose raises a number of issues concerning the unlimited liability status of Equitable Life. I can announce today that the Government intend to publish and consult on, at the earliest opportunity, draft legislation to protect policyholders in the event that this were ever to become material.
"In line with his interpretation of his remit, Lord Penrose does not set out a comprehensive list of recommendations for the Government. Nevertheless, he does make a number of observations that merit further action. I have no doubt that committees of this House which have taken an interest in these matters will wish to examine what further can be done. The
"The Government accept the need to re-examine the corporate governance arrangements applicable to mutual life offices in the light of the experience at Equitable Life. I can today announce a review of the governance of mutual life offices, to be led by Paul Myners, so that the boards of mutual life offices are as accountable to their members as those of comparable companies are to their shareholders.
'The profession resisted prescription. The individual judgment of the appointed actuary prevailed' (13/101).
"Lord Penrose also argues that there is a clear responsibility on government to inform and educate consumers about the nature of the financial system. This Government were the first in the world to incorporate consumer education as a key statutory objective of the financial services regulator. The FSA has recently stepped up its work in this area, with the launch of the Financial Capability Steering Group, which will examine the approach to consumer education from first principles.
'The first and most significant failure identified in this report lay at the heart of the Society'.
"Looking forward, there will be a programme of comprehensive reviewson corporate governance of mutuals, actuarial standards of performance and accounting standards. These, alongside the FSA reforms welcomed by Lord Penrose, are developing the architecture of the life assurance industry for present and future policyholders. It is now for the Serious Fraud Office and the DTI to decide whether a prosecution should follow".
This inquiry was set up as long ago as August 2001. My understanding is that the report was presented to the Treasury many weeks ago. As far as timing is concerned, it is singularly unfortunate, after we have waited for this report to be laid before the House week after week after week, day after day after day, that the Government should decide to make their Statement today in the middle of a vitally important debate for the House.
It is an appalling history of mismanagement, which is brought out clearly in the report, with disastrous consequences for many individuals and a serious effect on the confidence of the public in saving and encouraging people to provide for their retirement. That is a matter of great concern, and we are grateful to Lord Penrose for his report.
We must be clear that this inquiry was set up by the Treasury to look into the Treasury, the DTI and the FSA on terms of reference that were determined by the Treasury. I said at the outset, many months ago, that it did not seem to me that those terms of reference were sensible. It is becoming increasingly clear, from
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