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Insurance Industry (Security)

Volume 177: debated on Monday 23 July 1990

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12.30 am

I am pleased to have won an early place in the ballot for the Consolidated Fund debate, particularly to discuss the regulation of the insurance industry. I express my thanks to the hon. Member for Bristol, South (Ms. Primarolo), and to my hon. Friends the Member for Kingswood (Mr. Hayward), for Bristol, East (Mr. Sayeed), and for Bristol, North-West (Mr. Stern), whose constituents have been involved in the matter that I bring to the attention of the House tonight.

I emphasise the extreme distress caused to many of my constituents and those of other hon. Members serving the Avon area who were victims of serious and substantial fraud perpetrated by a former Bristol investment adviser, Martyn Foster, who was recently brought to tnal and sentenced to six years in prison. The sum in question was said to be in the region of £2·4 million, and more than 100 victims are thought to have been involved—most of whom are former employees of Avon companies. The sums in all cases represented their life savings, redundancy payments, or pension commutations. Their number included retired members of Avon and Somerset constabulary.

All the moneys were without exception invested in major insurance companies, spread over investment bonds and endowment policies during the mid 1980s, when the intermediary was employed by a leading firm of Bristol investment brokers.

During 1986, Foster left that firm to form his own business, and he capitalised on the good will and trust that he had nurtured with clients while with his former employer. He subsequently persuaded large numbers of them to transfer to his new brief. One strange feature of the scenario was the reluctance of his former employer to combat that apparent poaching of its business, when all that was required at the time was to inform its clients of the circumstances surrounding Foster's dubious departure. The firm seemed prepared to see all its business decanted without a fight, when a viable solution was available.

Further redundancies became known, and the fraudulent broker was passed from one new client to another in the development of his business. During 1987, clients were told that an application for authorisation under the Financial Services Act 1986 was being made, but that lapsed because of non-payment of dues.

In mid-1988, the Securities and Investments Board was alerted by a firm of insurance brokers to whom someone had complained. The SIB promptly contacted the police and an arrest took place during September, after which bail conditions were broken and the broker was later re-arrested in a London casino with considerable sums of money in cash on his person. He has now been sentenced on a number of specimen charges.

Then effect of those events on the lives of many of my constituents has been dramatic, and is reflected in a considerable change in their life style. I shall highlight a few examples.

Mrs. Ivy Hamilton's husband died on 1 March 1988, at the height of the period when it is known that funds were being illegally withdrawn. She believed that her financial position was secure, due to the considerable amount of their investments and the life policy on Mr. Hamilton. Later, it was discovered that all their moneys had been withdrawn. The policy on Mr. Hamilton had been allowed to lapse and the initial premium withdrawn. Had the policy been kept up to date, it would have yielded a claim in the region of £30,000. A further policy on Mrs. Hamilton with Scottish Widows was withdrawn on the day of her husband's death, using her husband's forged signature. Its surrender value was made payable to the intermediary at an accommodation address.

Then there was the case of Mr. and Mrs. K. Spicer, who had invested in bonds with Trident Life to the value of £21,000 and drew a monthly income of £180, which ceased in August 1988. Everything has gone—both capital and income. They now exist on state pensions and a small company pension. Mrs. Spicer found a small part-time job, but had to give up because of ill health.

Another case is that of Mr. and Mrs. Marsh, who had recently invested £52,000 with Scottish Equitable, Norwich Union and Trident Life. They sold their home in Keynsham, which is in my constituency of Wansdyke, for £52,000 and were persuaded to mortgage their new house in Cornwall and reinvest the balance of the money—after the deposit was paid, along with the other money—in an unknown insurance company. When Mr. Marsh died in February 1989, it was discovered that all their investments had been withdrawn.

Mr. and Mrs. Kirby are another example. Mr. Kirby was a departmental manager with British Aerospace, who took early retirement and a lump sum, of which £28,000 was invested with Scottish Widows and provided him and his wife with a monthly income. On advice, the sum was transferred to Sentinel Life, and a smaller sum to Abbey Life. Mrs. Kirby authorised withdrawal of the Abbey Life policy, with the intention of transferring it to a new Guardian Royal exchange policy. That was the last that they saw of any of their money, as it has been dissipated, together with money belonging to many other people, by forgery.

As a result of their loss, the Kirbys' world has changed dramatically. Mr. Kirby has had to find work to eke out his moderate works pension and at the age of 58 has found it impossible to obtain the type of work to which he was accustomed; he is currently employed as a factory labourer, part of whose duties is cleaning toilets.

Some other constituents, Mr. and Mrs. John Clothier, retired together in July 1985. Mr. Clothier is also a former Cadbury Schweppes employee, with about 42 years service since leaving school—30 years as a production manager.

The Cadbury modernisation programme brought many changes, including the offer of early retirement to Mr. Clothier in July 1985. He accepted it, along with many other colleagues in a similar age group. The terms agreed with Mr. Clothier were for a substantial redundancy payment, also commuting a lump sum from the Cadbury pension scheme. The total was £53,000 plus a monthly pension. Cadbury initiated an intensive programme of advice at retirement seminars and included financial advice from an independent firm of investment advisers. The help from them included the opportunity to manage former employees' investments.

Mr. Clothier also sought advice from various other sources before committing himself to a Bristol company, Redcliffe Associates. That company already had a number of ex-colleagues on its books and, before finally committing himself, he sought the benefit of their experience and satisfaction, and the apparent success of their investment portfolios, and the additional services that the company had on offer. The representative of the company who dealt with them was a man called Martyn Foster.

At this stage, hon. Members should appreciate that this was a group of people, employed by a large company, who were being offered early retirement, with—to them—large sums of money for the first time in their lives: sums greater than they could have dreamed of, when previously the most that they would have had would be a modest building society account or a Post Office savings bank account. Despite the advice on offer, they knew absolutely nothing of the workings of the great financial institutions, and were vulnerable to any predator approach.

Mr. Clothier became happy with the services provided by Foster on behalf of Messrs. Redcliffe Associates. They included a spread of investments over four major insurance companies: Norwich Union, Scottish Equitable, Scottish Mutual and Scottish Widows. These bonds attracted a high interest rate. A further service relating to income tax was available. As a result of Mr. Foster's actions, an overpayment of £4,000 in tax was recovered on behalf of Mr. Clothier.

In circumstances such as these, the element of trust as between intermediary and client is fortified. Any credibility doubts are quickly banished. General satisfaction over the bonds' performance activated further investments, with the addition of Mrs. Clothier's savings, culminating in a grand total of £63,000.

In February 1986, Foster told everyone that he was leaving Redcliffe Associates to form his own company in brokerage, to be called Foster and Company. As a result of the flair and the apparent success of the relationship with clients that he had established, large numbers of my constituents, including Mr. and Mrs. Clothier, transferred their bonds and their new business to that man. At the same time, they all genuinely believed that they had the protection of the insurance companies around them because that was where their money had been placed.

In the meantime, Mr. and Mrs. Clothier began to draw income from the profits on their investments from August 1986. It was paid into their bank account by Norwich Union Insurance. At that time Mr. and Mrs. Clothier believed that they had security for the rest of their lives. All their confidence was shattered during August 1988, when Mr. Clothier was told of the arrest of Foster on suspicion of defrauding clients of their money. It all culminated in the investigation, trial and conviction of the criminal.

Since the trial, Mr. Clothier has obtained Foster's files and documents and has carried out his own research into investment transfers, supposed to have been made by Foster on his behalf. He discovered that an application form for placing money in a Guardian Royal Exchange investment bond in May 1987 for a total of £46,500, signed by him—Mr. Clothier—and his wife, had never been deposited with Guardian Royal Exchange. Another form issued by Guardian Royal Exchange, signed in February 1988 for the transfer of the previous bond to the Rosary managed fund, had also not transpired.

This all points to the fact that Mr. Foster was using Guardian Royal Exchange application forms for his own evil purpose and deceiving people into believing that true transactions were taking place, when he was misappropriating the money for his own purposes. Mr. Clothier also discovered that Foster was authorised to use Guardian Royal Exchange investment documentation by virtue of an agreement between GRE and himself, drawn up and countersigned by GRE on 3 March 1987. Under the provision, he had established this so-called Rosary fund with the full co-operation of the company concerned. A copy of that document is available.

There is certainly room for a thorough investigation here. An explanation is required to judge whether the document has the effect of transferring this company's role from that of an intermediary to that of an agent.

I turn now to the case of Councillor and Mrs. Roy stone, who live in Cadbury Heath in my constituency. As with many other investors, they were former Cadbury employees who took it upon themselves to leave the company in 1964 to start their own business. However, they retained many social links with former working colleagues. To that extent, they opted during October 1986 to withdraw their building society savings and place them in Scottish Equitable investment bonds, with Foster acting as intermediary. The money remained there for only a short while. They agreed to it being transferred to Sentinel Life in June 1987, and put into a new investment bond of some £44,000. On 3 March 1988, the bond was surrendered and encashed by the intermediary on a forged signature—an act completely unknown to Mr. and Mrs. Stone until the fraud was uncovered by the police later that year.

When the incident became reported in the media, the Stones wrote to Sentinel Life in an effort to discover where their money had gone or if it was still intact. They asked for copies of encashment forms relevant to the matter. Almost by return of post came copies of the various documents, confirming their fears that the money had been dissipated along with all the rest, and in similar circumstances, at a surrender value of £30,402. It should be remembered that the effect of the crash in 1987 would have been taken into account when that figure was considered.

The photo-documents released by Sentinel Life also revealed, as with many other cases, that the theft had been successfully concealed for several months because the insurance company involved had glibly accepted the withdrawal instructions of the intermediary to send both the payment, payable to the intermediary, and all the customary advice notes to the policyholder to a special accommodation address nominated by the intermediary, when, in reality, say the Stones, the insurance company required their permission, not the intermediary's, to mail any correspondence addressed to them to any address other than their own. They state that, if that simple common practice had been followed, in their case at least the theft could not have taken place because they would have been forewarned that the withdrawal was taking place and would have taken quicker steps to countermand the illegal instructions.

The Stones are naturally bitter about the affair and say that it could have been avoided if the insurance company had built some basic security arrangements into its encashment operation. They say that they played no part in the withdrawal, so the policy still stands and should be treated as such.

I now come to perhaps the most important part of my speech—to consider the insurance companies' role in the story. When full investigations were made, what was discovered reads like a horror story. It is evident that the insurance industry needs to carry out a special investigation into its security arrangements as they apply to the payment of funds. In this case, a crude, systematic stealing of funds was made easy by a withdrawals procedure that appears to be little more than a clerical exercise performed on a visual display unit.

I understand, for example, that, once new policies are authorised and logged into the software, most companies dispose of the original documents, rendering any future checks on authenticity extremely difficult. What happened in the vast majority of the cases was that letters of confirmation of withdrawal to the policyholder were actually posted, not to the policyholder, but to a special accommodation address on the instructions of the intermediary on the application for withdrawal. As a part of the theft, that effectively ensured that the policyholder would not be aware of what was going on. Had the notes been sent to the proper address, as written on the policy, the majority of the fraud could not have taken place, and the instructions would have been countermanded in time to prevent it.

Such sloppy practice cannot be justified in any shape or form, and requires some explanation from the appropriate source. Representatives of the Association of British Insurers, have criticised the failure of investors to check intermediary authorisation. The House may need to be reminded that all these events took place before the implementation of the Financial Services Act 1986. To a degree, the criticism is accepted. However, one would have thought that the insurance companies, with their expertise and experience, would also have some responsibility in the same direction.

It has been discovered that, in early 1987, Guardian Royal Exchange authorised Foster to manage a new investment brief entitled the Rosary fund. Under its arrangements, he was to act on behalf of that company and had sole control over its investment policy, despite the known fact that he was not authorised, that his application had lapsed and that he was stealing large sums of money from policies.

We need to remind ourselves that the Financial Services Act was already on the statute book and only a few weeks away from implementation. At least one company was not taking the new Act too seriously or ensuring staff training in its new provisions. The Association of British Insurers' code of practice gives guidance to intermediaries on dealing with clients and establishing new clients, but nowhere does it give guidance to clients on authorisation, or deal with the procedures for withdrawal. In the absence of such guidance, surely the common principles of fair play and practice should apply.

In fairness, however, not all the cases that have been brought to my attention are by any means entirely the fault of the insurance companies. Some people were unfortunately naive, and probably contributed to their own problems, but one must appreciate the trust and bond that most people of this age group traditionally have from a lifetime's experience of the insurance industry. They undoubtedly belong to a special social group, weaned on the proverbial penny policy which was brought into their weekly lives with a knock on the door by the insurance man. They have been conditioned to trust the insurance man who has always been the friend of the family and they would not distinguish between an insurance agent and broker. For that reason, much of that trust would have been transmitted to this man, who came into their lives for only one purpose. Indeed, for those reasons, it is possible that several of them signed documents without being aware of, or properly advised about, what they were doing.

There are many such examples of my constituents and those of my hon. Friends—ordinary people who have suffered catastrophe in their lives, causing much hardship to them and their families. Following advice given to them, they ultimately trusted the insurance companies concerned and were entitled, as the real customers, to a reasonable standard of service and administration, in an atmosphere of good faith and integrity. There are good reasons to believe that there has been a serious default in the performance of those standards, which helped fraud to succeed and my constituents to be disadvantaged.

I have seen case after case where policies have been surrendered at a fraction of the value of moneys paid in premiums on the request of a fraudulent intermediary to send payment to an accommodation address. There was no response from the insurance companies concerned, other than to send the cheque as requested with no notification to the customer, who after all is the policyholder. No suspicion was aroused, and there was no investigation. Original policy documents and original signatures are kept only in some cases on microfilm. In one case, an insurance company learned of a fraud only from a newspaper about eight months after the event.

There are many examples of poor service and muddled administration enabling fraud to take place, as in this case, in which more than £2 million was taken from ordinary people who had faith and who believed that they had the strength of the insurance companies around them.

The insurance industry makes a vital contribution to our national and international life, financing industry and commerce and enabling people to invest in their country's future. The people involved in this case are just ordinary folk, and I feel that this powerful industry and national institution should start an immediate inquiry into how to solve my constituents' problems. I am pleased to say that already one major company—Abbey Life—has settled with its customers. I thank it for doing so. It has honoured its legal and moral obligations, and I hope that the lead that it has shown will be a path for others to follow. A number of people will no doubt have a just legal claim against insurance companies, but for others there will be nothing more than a moral obligation on the companies concerned.

I hope that all parties or their representatives can get together and arrive at some settlement. This situation has gone on long enough, as more than 18 months passed between the commission of the offences and the trial. During that time, three of the policyholders died, and there is still little progress. At my instigation, the Association of British Insurers met representatives of the group of policyholders. An offer has been made to investigate each case. This might be a way forward, if firm resolve is shown by the member companies. This morning, I received a letter from the ABI outlining its position. The letter was helpful, and I hope that it or the insurance ombudsman will show another path by which my constituents might receive satisfaction.

There are almost daily instances of investment fraud. There have been other instances in my constituency—the Barlow Clowes affair, to name but one. I congratulate the Government on the Financial Services Act 1986 and the fine work of the Securities and Investment Board, with its substantial regulatory powers and the self-regulatory bodies, all contributing to a high level of investor protection. This includes the ABI.

Is it not time for the insurance companies involved—Trident Life, Sentinel Life, Scottish Widows Fund and Life Assurance Society, Scottish Mutual Assurance Society, Standard Life Assurance, Norwich Union Insurance, Crown Life, Guardian Royal Exchange and Abbey Life, which has already settled—to look back with concern at the difficulties experienced by their customers, the policyholders, who were victims of a fraudulent intermediary, who acted in the names of the insurance companies? A negotiated settlement without a lot of delay and hassle would help many families to reconstruct their ruined lives and to enjoy a peaceful and well-deserved retirement.

12.56 am

I thank the hon. Member for Wansdyke (Mr. Aspinwall) at a simple level for not talking for so long that others could not participate and also for outlining so graphically and clearly the problems suffered by his constituents and others in Bristol as a result of Martyn Foster's fraud. One sad aspect of a Member of Parliament's job is that one receives letters from so many people who have suffered as a result of the activities of various organisations, whether it be Dunsdale, Barlow Clowes or the one to which the hon. Gentleman referred. In a sense, the difficulty is not so much in convincing people how those activities have so badly affected their lives as in getting the Government to acknowledge what has happened and do something. I hope that the hon. Gentleman, as a Conservative Member, will have better luck than some of us have had in getting the Government to wake up and act responsibly.

I am pleased that the hon. Gentleman has had a positive response from the Association of British Insurers and Abbey Life. Let us hope that the other insurance companies follow. The Department of Trade and Industry recently carried out investigations, so perhaps there could be an investigation into how fraud of such depth could occur for so many years and whether there is a need for a review of security arrangements in the insurance industry. Will the Minister at least consider such a review, or will we hear a definite no from him?

The Financial Services Act and the investor compensation scheme were not in place when many of Martyn Foster's frauds took place. Many people, particularly in the wake of Barlow Clowes, are beginning to believe that they are entitled to compensation. Many of those involved in the Dunsdale Securities affair feel that, if the people involved in Barlow Clowes were compensated, the same should apply to them. I think that the same will also be true of many people who have suffered at the hands of Martyn Foster. The feeling is that a compensation scheme exists and should pay out. By paying compensation following the Kingfisher-Dixon fiasco, the Department of Trade and Industry has created a precedent, suggesting that either the Department itself or the investor compensation scheme should continue to pay compensation in such cases.

As we know, the investor compensation scheme is limited, in regard to both the amount involved and the criteria of applicability. I do not ask the Government to do a "savings and loan" and offer compensation across the board. We all know about the political and economic problems that that involves. Obviously, investment involves risk. What is necessary, however, is for the Government to make the present system work more efficiently.

Is the Minister considering any changes in the investment compensation scheme, in the wake of Martyn Foster, Dunsdale and Barlow Clowes? Should the maximum amount available be increased, for instance? Mr. and Mrs. Marsh, whom the hon. Member for Wansdyke mentioned, would clearly not be covered sufficiently by the scheme. If the Minister thinks that the scheme is not quite working, has he thought about that aspect?

As the hon. Member for Wansdyke pointed out, the information provided for investors is not always the kind that people read. It is no good the Minister saying that if they intend to invest their money they should read the information. Under the current Financial Services Act, about 4½lb a year of material about one investment can go through a person's door. Many people will not read that amount of information.

As the Government embark on a wider and deeper share ownership scheme, they should acknowledge the truth of what I have said. They should look long and hard at the nature and format of the information that the FSA recommends and decide whether a review is necessary. As the hon. Member for Wansdyke pointed out, if people trust someone they do not always bother to read the small print. Has the Minister reviewed the insurance indemnity introduced last year by FIMBRA, the Financial Intermediaries, Managers and Brokers Regulatory Association? Should that not be an option?

The present Secretary of State for Transport introduced the Financial Services Act 1986 in a hurry. The Minister looks doubtful, but most people would agree that it was not given time to bed down, and that as a result there are still many rough edges and many elements which do not work. In my view, it is over-bureaucratic, inefficient and top-heavy. It not only fails to protect the investor as it set out to do, but makes it difficult for those in the City to work. Given the number of disasters that have taken place, I should be interested to know what changes the Minister is considering.

The Parliamentary Under-Secretary of State for Corporate Affairs
(Mr. John Redwood)

Will the hon. Lady tell us which bits of the structure and which bits of the rules she would get rid of?

I will certainly do that on 15 October, when we shall have a whole day to debate the Financial Services Act and the single market. I have no intention of going into such detail tonight.

The Minister looked doubtful when I mentioned the speed with which the FSA was introduced. There seems to be no doubt about that among the people to whom I have talked in the City, but on 15 October I will treat the Minister to a breakdown of the changes that I would make if I were in his position. Today, however, we are here to debate the position of the constituents of the hon. Member for Wansdyke.

Let us consider the problems faced by the compensation scheme, given that consumer protection is not working under the FSA. It is essential that we sort this out. In 1992, consumer protection will become more difficult and more complicated, and we have to be sure that our present system is working efficiently.

As we know, since 1979 a life office in one country has been able to open a branch in another. The second life directive covering the controversial area of freedom of service may be more difficult in terms of consumer protection and may worsen some of the problems that we have already seen. As the Minister knows, it will mean that French residents can take out a Dutch policy, written in Dutch rules. That represents a major change in principle in terms of each country protecting its own residents through its own regulatory regimes.

The third directive may be even more problematic, but my point is that that will have a great impact in terms of consumer protection and it is essential that our own system is working more efficiently than it is at present before we can be sure that we can compete on favourable terms in Europe.

Consumer protection is important in its own right and if United Kingdom insurance companies are to compete successfully in 1992. If insurance companies are to gain market share, they must do so on the back of a good record of consumer choice and protection. Our competitive advantage in the eyes of non-United Kingdom customers will be reflected in the diversity and choice of products and services as well as in a competitive cost position and a favourable regulatory regime in which consumers are protected. We should remember that in life insurance our European competitors are much more guarded about protecting their consumer interests. That will be one of the selling points with which we shall be forced to compete. Therefore, it is essential that we make our present position clear and ensure that the system is working more efficiently.

The hon. Member for Wansdyke outlined how Martyn Foster had been able to get away with his fraud by being passed from one company to another, with the companies being pleased to see the back of a bad egg rather than having to deal with the problem directly. The problem has gone on and on. I complain every time it happens and I am told that there is a system of checks. I received a letter from the Minister only a week or so ago saying that there is a system under the FSA to deal with that. If that is so, that is another part of the FSA which is not working successfully. We see in this case, as we have on other occasions, that individuals are able to get away by moving from company to company without a clear recommendation and simply taking the problems with them. They obtain other jobs as a result of having worked for another company. It would be useful to know what efforts are being made to deal with that degree of incompetence.

It would be useful to know what efforts are being made in relation to competence. The McDonald report on training and competence in the financial services industry was published by the Securities and Investments Board in May this year. She outlines clearly the need for training, and I support that report. No one can dispute the need for training. There is a clear shortage of graduates entering the industry. With increased competition in the industry, the need for higher quality staff as well as an added safeguard against fraud are all reasons for increased training resources and a move towards common standards and comparative qualifications. I am interested in the Minister's response in relation to incompetence and what is being done to achieve greater competence.

I intended to raise some proposals for specific changes in the regulatory system, but I should hate to worry the Minister with the details of that when we can deal with them on 15 October. However, when we have duplication of the functions between the Life Assurance and Unit Trust Regulatory Organisation and FIMBRA there is a case for a merger such as that under discussion between the Association of Futures Brokers and Dealers and the Securities Association. Such a merger between LAUTRO and FIMBRA would be sensible in terms of cost and efficiency. It would benefit consumer protection and would bring about greater uniformity of standards across the industry, which would also benefit the consumer. Without going into the details, that is a clear example that would help.

In response to the case made clearly and graphically by the hon. Member for Wansdyke, what particular concerns does the Minister have about consumer protection and what action does he propose to take? I am worried that, as usual, the Department of Trade and Industry will do nothing. That would not benefit consumers and, sadly, it would not benefit the industry in Britain or in the single market as we move to 1992. It would benefit the competitiveness of the industry if there were a cleaner, better protected industry than we have at present.

1.10 am

The Parliamentary Under-Secretary of State for Corporate Affairs
(Mr. John Redwood)

I am grateful to my hon. Friend the Member for Wansdyke (Mr. Aspinwall) for bringing this important matter to the attention of the House. I am grateful to him and to my hon. Friends the Members for Kingswood (Mr. Hayward), for Bristol, East (Mr. Sayeed) and for Bristol, North-West (Mr. Stern), and to the hon. Member for Bristol, South (Ms. Primarolo), for all the work that they have done to put together the dossier and for talking to their constituents to chronicle this sad tale.

Tonight's story was sad. It was a story of ordinary investors defrauded by a dishonest insurance intermediary. Like other hon. Members in the House tonight, I am extremely sorry to hear of the problems that those people experienced.

As my hon. Friend the Member for Wansdyke told the House, the man who perpetrated the fraud has been gaoled for six years. That is small comfort to those who lost money through dealings with him but it is a sign, contrary to the allegations made by the hon. Member for Redcar (Ms. Mowlam), that malpractices and wrongdoings are followed up vigorously by the prosecuting authorities. Investigations are carried out and necessary action is taken.

My hon. Friend the Member for Wansdyke concentrated on the responsibilities—legal and moral—of the insurance companies concerned. The cases of Mrs. Hamilton, Mr. and Mrs. Spicer, Mr. and Mrs. Marsh, Mr. and Mrs. Kirby, Mr. and Mrs. Clothier and Mr. and Mrs. Stone are harrowing. I am glad that the Association of British Insurers has agreed to use its good offices to ensure that each individual case is considered in the companies concerned at the highest level.

Since April 1988, as my hon. Friend implied, all investment advisers, such as Mr. Foster, have had to be authorised or exempt under the Financial Services Act 1986. That new regulatory regime has made a great deal of difference to the way in which those matters are handled. Almost all investment advisers will have joined one of the self-regulating organisations and in order to do so, they will have had to pass a "fit and proper" test designed to assess their competence, honesty and their solvency in appropriate cases. Once admitted to membership, they will have had to operate within a framework of rules and regulations designed to protect their clients.

The overall regulatory standards are overseen by the Securities and Investments Board. The detailed rules and regulations are agreed by the individual SROs drawing on the practical experience of their members.

The system draws on the involvement of practitioners for just the sort of reasons that my hon. Friend brought out so clearly tonight. Practitioners should understand what goes on in real life, where the pitfalls may be—such as surrendering policies direct to intermediaries with no reference to the policyholder—and how best to make sure that investors avoid falling into such pits. The Financial Services Act regulators are particularly concerned where investment advisers wish to hold client money since, as my hon. Friend has shown us tonight, the potential for abuse in that area is higher.

I welcome my hon. Friend's endorsement of the Financial Service Act 1986 and his endorsement of the efforts of SIB and the self-regulating organisations. Establishing the new regulatory system has been a major achievement. It was far from rushed. There was extensive consultation and lengthy debate in the House. It took many months to implement all the parts of the system into law and regulation in this country.

Unfortunately for those about whom my hon. Friend spoke tonight, the much broader coverage of the Financial Services Act, with its more substantial powers to identify and act on abuses, was not in place when most of the events that my hon. Friend described took place.

This case resulted in action being taken once the new system came in. An investor called one of the insurance companies, which informed the SIB, which then took action. Within a few months of the new system being introduced, Mr. Foster's business activities were discovered. Within five months of the new regime, he had been arrested.

Under the new system, if someone is authorised by FIMBRA, their clients are eligible for money from the SIB compensation scheme. If they are not authorised, compliance action should follow when their misdeeds become apparent. Unfortunately, Mr. Foster was never authorised under the Financial Services Act 1986, so no compensation is payable. As Mr. Foster persuaded most of his clients to give him full powers to look after their financial affairs, the insurance companies made payments in good faith.

I note that one insurance company has been sympathetic in its consideration of this matter, as my hon. Friend the Member for Wansdyke says, and I hope that other companies, when looking at cases at a senior level, will consider very carefully whether they too should be sympathetic. Under the financial services arrangements now in place, insurance companies should check that someone is authorised if they do business with him.

The regulation of insurance in the United Kingdom is based on the prudential control of solvency, which is the responsibility of my Department, assisted by the Government Actuary's department, and conduct of business rules, which are the responsibility of the Securities and Investments Board and LAUTRO. The aim of the system is to limit the number of companies that go bankrupt and to control marketing and sales techniques so that the public are not unduly pressured.

That system of regulation has given our industry considerable freedom to compete and innovate, which has benefited the consumer. The products of the United Kingdom life insurance industry are probably the best value in Europe.

Freedom to compete, of course, brings with it the risk of failure, but the rate of failure of insurance companies has been acceptably low. Private policyholders with United Kingdom policies are protected by the Policyholders Protection Act 1975. So far, the Policyholders Protection Board, since its inception in 1975, has found it necessary to raise only two levies on the industry, one in 1976 and another this year, totalling some £2·5 million.

Insurance regulation is being improved all the time by the Department. We have decided to secure private sector expertise, and the first private sector recruit from the industry is already working for us. We are planning a major upgrading of our computer system to help us to detect any potential problems as early as possible so that we can take action in good time to protect policyholders. We have recently put proposals to the industry for strengthening the appointed actuary system. That system is a very important safeguard for ensuring that life funds are properly managed and not exposed to undue risk.

We are currently considering the generally favourable response from the industry and the professions to those proposals. We are also giving considerable thought as to whether there should be professional opinions on the adequacy of reserves for non-life companies. Once we have reached some provisional conclusions on those ideas, we shall issue a consultation paper. All that is part of an active and vigorous regulatory role by the Department as the House would expect.

The hon. Member for Redcar claims that there is nothing going on in the Department and that cases such as the Barlow Clowes case and the Foster fraud show negligence by the Government. How wrong she is. The Barlow Clowes case is a case in point. Because the ombudsman found that the Government had been guilty of maladministration in the past, the Government provided compensation for the victims of Barlow Clowes. It would be nice to hear some comments by the hon. Lady in support of that. Many people are grateful for that compensation money. In the case of the Foster fraud, we have already heard this evening that action was taken to deal with the criminal deeds that were revealed.

The idea that the compensation arrangements are inadequate is also based upon a misunderstanding of what is actually taking place. Compensation is not an entitlement in the way in which the hon. Lady seemed to suggest. In the case of Barlow Clowes, the compensation arrangements arose out of the extreme circumstances of the case, as the Government explained at the time of the announcement. In other cases, they have to be those of the SIB compensation scheme. If the hon. Lady has criticisms of that scheme, she should route them direct to the SIB, because it is charged with its administration and working out the details of its limits, the amounts involved and so forth.

The hon. Lady said that people need less information when investing. I shall be interested to hear her views when she finally gets to the point in October when she can give us the necessary detail about what information the investor does not need which he currently receives. I agree with her intention that investors need the right amount of high quality information that they are likely to read and understand and which gives them sufficient information on which to base a realistic judgment. We must await the formation of the hon. Lady's criticisms in more detail.

The hon. Lady also suggested that the Financial Services Act 1986 is over-bureaucratic, inefficient and top heavy as a result of the structure that it introduced. However, when I asked what she would get rid of, she failed to mention a single item. She merely went on to say that she would welcome a report that imposed extensive new training obligations on all those involved in the financial services industry. I therefore feel that she has not done her homework on the how the legislation, the system and the structure operate in the interests of the customer financial services businesses.

The hon. Lady also spoke about the common market in insurance that the British Government are working to achieve with our partners in Europe. She is right to think that insurance regulation here must be seen as part of a wider European Community market. It is our aim to ensure that every Community consumer can buy whatever insurance policy he likes from any authorised Community insurer. In principle it should be as simple to buy a British or Dutch insurance in Paris or Milan as to buy a French or Italian car in London or Amsterdam. That is why I welcome the Commission's decision to propose a single licence system for insurance, which does not allow Governments to meddle with tariffs or policy conditions.

Insurance companies should be free to compete, and policyholders free to shop around with the advice of intermediaries to find out what suits them best. The single licence system has already been agreed for banking and is under discussion for investment services. There is no reason why insurance should be different. Similar regimes should be adopted for those financial sectors which are in competition with each other—for instance, life insurance and investment services.

The proposed non-life directive to which the right hon. Lady referred and which the Commission has just put to the Council is very important, and my Department will be consulting widely on it. I hope that consumers particularly will take an interest in those proposals since the main benefits should accrue to them. Freer competition produces keener prices and forces companies to become more responsive to customer needs in the design of their policies. The proposed directive satisfies this criterion while laying down a firm basis for prudential supervision, which is at the core of our own system.

The hon. Lady suggested that our system was inadequate or pathetic in contrast with others in the Community, but that is far from true. There is much in our system that is admired by those on the continent, particularly financial services regulation. Many of them are studying what we do as part of their preparation for the wider market in investment services and insurance as the Community wide regime is developed.

In this brief but important debate, I have outlined the range of measures the Government took when introducing the Financial Services Act 1986 and the regulatory structure beneath it. I have sketched the regulatory system for the insurance industry as well and explained the compensation arrangements in place for the users of the services of those great industries.

I recognise that a healthy insurance industry provides security for the many millions of commercial and private customers. The availability of insurance is a prerequisite to private sector investment. Life insurance and pensions are central to personal savings in the United Kingdom.

The total volume of annual business transacted by United Kingdom insurers is estimated at nearly £5·5 billion. The insurance industry is a major employer—more than a third of a million people are employed directly by it and some 80,000 more by insurance intermediaries. More than half that total employment is based outside London, with many working in the north of England and in Scotland.

Above all, insurance is a major earner of foreign exchange. In 1988, the net overseas earnings of the London market, including the substantial contribution from Lloyd's was £3·77billion. That amounted to more than half the United Kingdom's total invisible earnings from the financial services sector. A healthy and competitive insurance industry lies at the hub of the City.

I am glad to have had this opportunity to pay tribute to the insurance industry and to the numerous people who work in it, who make such a central contribution to our national economy. I am sad about the fate that has befallen my hon. Friend's constituents and I wish him every success in pursuing the campaign that he has made known to the House tonight. I am sure that many in the insurance industry will read the accounts of this debate in the newspapers and in Hansard in the days to come, and I am grateful to my hon. Friend for bringing the matter to our attention.