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Equitable Life

Volume 486: debated on Thursday 15 January 2009

Mr. Deputy Speaker, I would like to make a statement in response to the parliamentary ombudsman’s report on the prudential regulation of the Equitable Life Assurance Society from 1988 to December 2001. This is the ombudsman’s second report; it was based on a four-year inquiry, and I would like to thank the ombudsman for her thorough and extensive consideration of all the issues involved. The Government have carefully considered this substantial report over some months, as it has raised complex and important issues. We agree that there has been maladministration in particular areas, and also that Government action is merited as a result.

As the ombudsman’s report sets out, Equitable Life is a mutual life assurance company whose policyholders share in the profits or losses of the business. Equitable had established a business which involved high volumes of policies with guaranteed annuity rates, and a well-advertised policy of distributing earnings as bonuses without building reserves for the future. After market conditions changed and the level of liabilities rose significantly relative to its assets, Equitable attempted to resolve this through its differential terminal bonus policy. However, when this was found unlawful by the House of Lords in 2000 and Equitable was unable to find a buyer to cover the additional liability of £1.5 billion, the society closed to new business in December 2000. As a result of these events, many policyholders now hold policies worth significantly less than they had originally expected.

Lord Penrose’s forensic report on all the events surrounding Equitable Life concluded that the society’s own actions ultimately precipitated its financial difficulties in the summer of 2000. He said:

“Principally, the society was author of its own misfortunes. Regulatory system failures were secondary factors.”

In addition, he found significant problems with the then regulatory regime, which was reactive and unintrusive. Since then, we have introduced major regulatory reforms. It is also right to look at the role of regulators within the regime that applied at the time. The parliamentary ombudsman has looked specifically at this issue—the role of the society and others being, of course, outside her remit. Her extensive report includes 10 findings of maladministration and five findings of injustice as a result.

The Government have considered the report in detail. We have also considered the report of the Public Administration Committee, published in December, and I pay tribute to it for its work on this issue as well. We agree with the ombudsman that there was maladministration by public bodies in several areas. In particular, the Government agree that Equitable Life’s regulatory returns in the period from 1990 through to 1996 in some cases raised questions which should have been resolved by the public bodies, but were not. In some cases we recognise this may have led to injustice for policyholders, although in several we believe it did not, in the context of the different regulatory regime which applied at the time. The Government also agree that the regulator should not have been satisfied that a reinsurance treaty entered into by Equitable Life justified the credit taken for it from 1998 to 2000. Equitable Life’s regulatory returns gave a materially different picture of the society’s regulatory solvency position because of the credit taken for the reinsurance treaty. We agree, too, that certain statements made by the Financial Services Authority after 2001 had the potential to mislead and may have caused injustice as a result. The detailed response to each finding, and the reasons supporting these conclusions, are set out in the Command Paper.

The ombudsman’s report states:

“I am very far from concluding that everyone who has complained to me about the prudential regulation of the Society has suffered a financial loss.”

Nevertheless, it is clear that people have been affected, and have experienced significant distress due to events at Equitable Life. I think the whole House regrets the problems caused by the mismanagement of the society, and I wish to apologise to policyholders on behalf of the public bodies and successive Governments responsible for the regulation of Equitable Life between 1990 and 2001 for the maladministration we believe has taken place.

We also need to consider the fairest way to respond to policyholders now. We have looked in detail at the ombudsman’s proposal for compensation. As the House will be aware, Parliament has recognised over many years that it is not generally appropriate for the taxpayer to pay compensation even where there is regulatory failure. The responsibility to minimise risks and to prevent problems from occurring in a particular financial institution lies, first and foremost, with the people who own and run that institution. The Financial Services and Markets Act 2000 reaffirmed the long-standing exemption of financial regulators from liability for negligence in the courts. The ombudsman’s framework covering maladministration is, of course, different from the courts’ approach to negligence. Nevertheless, we believe the underlying principle remains an important one; it has informed the approach of successive Governments, and we believe it should be sustained for the future.

It would have serious repercussions for the taxpayer, for the relationship between Governments and financial markets, and for the nature of regulation, if the taxpayer were to provide a remedy for all losses every time the regulator fails to prevent a financial institution from getting into trouble. Nevertheless, we are concerned by the representations we have received from Members and others, both directly and through debates, that some policyholders have been disproportionately affected by the events at Equitable. It is on that basis that we believe it is right in this case for Government to set up an ex gratia payment scheme to help.

To do this in a fair way, there are a series of important issues that we need to take into account. In particular, we need to take account of the role and responsibility of Equitable Life and other parties. As the Public Administration Committee said in its December report:

“The current board of Equitable Life and many others have acknowledged the legitimacy of Lord Penrose’s conclusion; few people dispute that its former management were primarily to blame.”

Even where there was maladministration, there was also a responsibility on the part of the society. Let us take, for example, the case of the reinsurance treaty. Although the FSA failed to follow up problems with the treaty, it was still the decision of the society to enter into the agreement in the first place, and it was the society which had primary responsibility to ensure that the treaty operated in the way intended. The Select Committee also said:

“The fairness of requiring taxpayers to compensate Equitable Life’s policyholders firmly depends upon making sure that public funds do not pay for loss that is fairly attributable to the poor performance of the stock market or to the mismanagement of Equitable Life’s former directors that could not have been prevented by adequate regulation.”

Secondly, as the ombudsman herself has said, the Government also have a responsibility to taxpayers generally to balance competing demands on the public purse. Her report states:

“I recognise that the public interest is a relevant consideration and that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case.”

It is important to note that neither the ombudsman nor the Government has been able to estimate the cost of her recommendation, as we do not have detailed information on the relative losses experienced by different groups of policyholders or on the factors affecting the losses of different groups.

Thirdly, we also want to focus on those who have been hardest hit. The ombudsman has noted:

“The particular circumstances of each complainant vary enormously—in terms of their age, their involvement with the Society, the amount that they claim to have lost as a result of that involvement, and the degree of reliance that they have now, or had in the past, on income derived from their investments with the Society.”

Many hon. Members have made representations to us on this issue.

Fourthly, we need to take into account important practical considerations. Neither we nor the ombudsman currently have much of the important information or assessments that we need to implement a payments scheme. The ombudsman, commenting on her own proposals, said that

“the creation of such a scheme would not be straightforward by any means”.

We have considered all of these points, and we intend now to set up a scheme to make ex gratia payments to those who have been disproportionately affected. In order to do so, we have today asked Equitable Life to make available its detailed policyholder information. We have also asked former Lord Justice of the Court of Appeal, the right hon. Sir John Chadwick, to look at the information and advise us on the following points: first, the extent of relative losses suffered by Equitable Life policyholders; secondly, the proportion of those losses that should properly be attributed to the maladministration accepted by the Government and to the actions of Equitable Life and others; thirdly, which classes of policyholder have suffered the greatest impact as a result of the maladministration accepted by the Government; and fourthly, the factors arising from this work that the Government might take into account when reaching a final view on determining whether a disproportionate impact has been suffered. Sir John’s terms of reference are being published today.

The ombudsman recommended that a payments scheme should be completed two and a half years after the decision to pay out. The Select Committee said that it could not assess whether that was viable, and our initial assessment of the ombudsman’s approach is that it might take significantly longer than that to implement fully.

Many hon. Members have raised concerns about the length of time policyholders have had to wait for resolution of this case, and given that many have already retired, we believe it is important to set up a scheme that can pay out as swiftly as possible, taking account of the difficult practical considerations involved. We have therefore asked Sir John to advise as quickly as he is able, and that includes providing interim updates and conclusions on an ongoing basis, so that work can progress on the practical issues in parallel without waiting unnecessarily for all his work to be concluded. We do not want to be constrained by the assessment that we have made of the ombudsman’s proposals in setting out the pace at which we can implement this scheme.

The Government will therefore introduce a fair payment scheme for policyholders who have suffered a disproportionate impact. We will do so with the benefit of Sir John’s advice and taking account of the position of the public finances, as well as practical considerations. For the reasons that I have explained, we do not believe it would be right to set up a compensation scheme in the way that the ombudsman proposed, but we do believe that this is the right response. I hope the House will recognise that there is no easy solution to the problems at Equitable Life and the faults that have been found. The events at Equitable Life have been very difficult and complex and have caused problems for policyholders across the country. The consideration of those events has already informed substantial regulatory reform, as well as wider reviews of corporate governance. Today’s response sets out new help for policyholders that we believe is fair to both policyholders and taxpayers. It continues to support a sensible approach for the future, and I commend it to the House.

I congratulate the ombudsman on the way in which she investigated this matter—she has done her job in an exemplary fashion. I would also like to thank the policyholders and their action groups who have made sure that this issue was always on our agenda—their persistence has paid off. After years of trying to block compensation, the Government have finally admitted today that the regulators failed Equitable Life’s policyholders and that they deserve justice.

It has been a long, hard fight by campaigners, made longer and harder by the intransigence of a Government who have consistently sought to evade taking responsibility for what happened at Equitable Life. In 2004, the Treasury ignored the Penrose report’s findings that the regulators had failed. The Treasury then tried to argue that the ombudsman could not investigate a decade of regulatory failure. Having lost that argument, the Treasury bombarded the ombudsman with new information and a 500-page submission on her draft report, so that a report that was due at the end of 2005 was finally published in July 2008, and for the past six months the Government have been sitting on it. Even this statement has been delayed—the Government promised it in the autumn, the Prime Minister promised it before Christmas and we have been waiting until January to get a copy of it.

Why has the Treasury has sought to block, frustrate and delay this report, and block justice for policyholders? It has done so to hide the Prime Minister’s embarrassment. The most damning findings of maladministration related to the period since 1997—a period when the Treasury and the Prime Minister had responsibility for regulation. While the Treasury dithered and delayed to spare the Prime Minister, 30,000 policyholders died—they will never see the justice that they deserved—and policyholders living on reduced pensions and annuities paid the price for the Government’s failure to act sooner.

The Chief Secretary to the Treasury quoted Lord Penrose’s comment that

“the society was author of its own misfortunes.”

However, he also concluded that

“the practices of the Society’s management could not have been sustained over a material part of the 1990s had there been in place an appropriate regulatory structure.”

The ombudsman’s hard-hitting report backed that conclusion. The regulators failed to use their powers to stop the destruction of Equitable Life. Report after report shows that policyholders were let down by regulators. Why have we had to wait until now for the Government to concede that compensation should be paid?

In 1989, the then shadow Trade and Industry Secretary—now the Prime Minister—asked

“why it took an internal inquiry, a departmental inquiry and now the ombudsman’s investigation…before justice began to be done?”—[Official Report, 19 December 1989; Vol. 164, c. 204.]

Twenty years later, we ask the same the question today. Why did the Government wait so long to recognise the regulatory failings that led to Equitable Life’s policyholders losing money?

We have always believed that policyholders should be compensated if maladministration was found, so we welcome the Government’s announcement. Can the Chief Secretary to the Treasury answer some simple questions? She is aware that policyholders have waited some time for justice and she said that she had no timetable to indicate when they would receive it. When will Sir John give an interim report on his work? She also announced what appears to be a hardship fund. Why has she rejected the Public Administration Committee’s conclusion that

“the payment of compensation is not a matter of charity but…of justice”?

Who does she expect will benefit from this fund? Will it depend on how much people have invested or how much they have lost, or on their broader financial position? Is this about means-testing compensation rather than about compensating people for injustice? Can the Treasury explain whether it has imposed a cap on how much compensation can be paid to policyholders, either individually or as a group?

The Treasury could have decided to compensate Equitable’s policyholders when Lord Penrose reported five years ago, but instead it has dragged this out to save the face of the Prime Minister—and it is policyholders who have paid the price. Now the Government have conceded the case for compensation they can no longer drag their feet. Justice cannot be denied any longer.

I am disappointed by the tone of the hon. Gentleman’s response. The Government recognise that serious events occurred at Equitable. As the Penrose report set out, those were principally the responsibility of the society. However, we recognise that maladministration took place. Today, I have apologised to the House and to policyholders on behalf of successive Governments and the public bodies that were involved. I would hope that the hon. Gentleman’s party will join in that apology on behalf of the previous Conservative Governments, who were, of course, also responsible for the regulatory bodies in a way that affected Equitable Life and policyholders over that period.

The hon. Gentleman also quoted from the Penrose report, which said that events might not have unfolded in the way that they did had there been in place an appropriate regulatory structure. The Penrose report indeed pointed to a series of faults with the previous regulatory regime, which stretched back to the previous insurance Act and the regulatory framework that had been put in place and supported by the previous Conservative Government over very many years.

I did not seek to make that a political point in my statement and my response to the House. However, as the hon. Gentleman raised the matter, I must point out that it was this Government who introduced substantial reform of the regulatory process, which took account of many of the failings by Equitable Life and was based on the Penrose report. Indeed, that report welcomed many of the reforms that were under way as a sensible response to the failings of the regulatory regime as it affected Equitable Life—[Interruption.]

Order. I am sorry to interrupt the right hon. Lady, but the crossfire of sedentary comments across the Chamber is doing us no good at all.

The hon. Gentleman asked a series of questions, and I shall try to deal with them. He asked when we expected Sir John to report. We would like him to report continually on an interim basis, because we need to engage in practical work to deliver a payment scheme alongside his work. We should not simply wait for the judge to come up with final conclusions, but work alongside his assessments, so we have asked him to update us continually on his work and conclusions.

On the question of why we have not pursued the overall principle of compensation as set out by both the ombudsman and—as the hon. Gentleman rightly said—the Select Committee, I set that out in my statement. It is important that financial regulation does not come with a taxpayer guarantee. It is important for the future interests of the taxpayer and the relationship between the Government and the financial markets that if a company gets into trouble or takes dodgy action and the regulator fails to prevent that, compensation by the taxpayer is not automatic. I think the hon. Gentleman would agree that that would fundamentally change the relationship between the regulator and the financial markets, and between the Government and the financial markets.

We recognise, however, the points that many hon. Members have made about the difficult circumstances facing their constituents as a result of the events at Equitable Life. That is why it is right to set up the ex gratia payment scheme. That is the right approach, and I hope that hon. Members recognise that although the process is not simple, we are trying to be fair to both policyholders and the taxpayer, and to take the matter forward as fairly as possible.

I thank the Chief Secretary for her statement. I welcome the apology, and I welcome more guardedly—because we do not yet know the full details—the compensation principle. However, that comes after the long, shabby and disreputable treatment of policyholders. The endless delay and dissimulation have angered up to 1 million of them, many of whom have lost up to half their pension to the extraordinary extent that a period of maladministration that occurred largely under the previous Government has become a massive own goal for this Government. That makes it all the more surprising that the Conservative shadow Chancellor did not think it worth his while to turn up today—[Hon. Members: “What about the Chancellor?”] Well, I am here.

We are celebrating the 20th anniversary of the Prime Minister establishing his reputation as a parliamentary star by speaking for the then Labour Opposition in defence of Barlow Clowes’s policyholders. He made a passionate speech in their defence. A question that has often been asked since is why the compensation that was eventually accorded to those investors was not reproduced for Equitable Life policyholders. The answer was always that nothing could be done without an ombudsman’s report. We now have one, nine years after the company’s collapse, and it is worth rehearsing the endless delays, many of which were deliberate.

The ombudsman said that, in 2001, the then Chancellor’s delay in holding an inquiry was “iniquitous and unfair”. There was then a long period before the Penrose report and the establishment of another ombudsman inquiry. Eventually, last year, even after the Maxwellisation process, there was a six-month delay before the matter came to the House. However, it is here, and the Government have announced a compensation scheme.

Has the Treasury doctrine of compensation not changed fundamentally following what happened last year with the Icelandic banks, when people who had chased yields in high-risk accounts were fully and promptly protected by the Treasury? In contrast, prudent, careful investors in Equitable Life have been kept waiting for a highly uncertain scheme for the best part of a decade. That matters, not just because many of them have retired, but because many of them have died. The issue would never have been maintained but for the persistence of the Equitable Members Action Group, which I commend.

Finally, can we try to bring the matter to a conclusion by having an early debate not just on today’s statement and the ombudsman’s report, but on the report of the Select Committee on Public Administration and the European Parliament’s EQUI report, so that we can look forward to early settlement of many deserving cases?

I welcome the hon. Gentleman’s welcome for the key elements of my response to the report. Hon. Members asked about the whereabouts of the Chancellor, and he is in Prague talking to the European Presidency about international banking reforms and capital adequacy in advance of the next ECOFIN. Clearly, it is for the Conservative Front-Bench Members to explain the whereabouts of the shadow Chancellor and Chief Secretary.

Hon. Members on the Conservative Front Bench are clearly not listening. I have just explained the Chancellor’s location.

The hon. Member for Twickenham (Dr. Cable) referred to what happened with the Icelandic banks and asked whether the approach to compensation had changed. That issue was different because it involved systemic risk. It arose at a time when there was considerable movement of money from one account to another, and significant anxiety about confidence in the banking system as a whole and in retail deposits and savings. In that climate, we believed that it was right, for reasons of financial stability, to put in place additional support for the existing financial services compensation scheme. He will be aware that that scheme is funded by the industry. We recognised that additional Government support was needed, just as additional Government guarantees were needed for Northern Rock because of the wider risk to financial stability. I do not think that that sets a precedent for other individual cases and institutions.

The hon. Gentleman asked for an early debate, and I will pass his request to business managers.

Order. Without disrespect to the importance of the subject—I doubt whether any hon. Member does not have constituents who are concerned about it—we cannot continue with it for an unlimited time as many hon. Members want to take part in the debate on Gaza, which is also important to many people. My aim is to conclude this debate at 2.20, so I beg for brief questions and answers to facilitate that.

I thank my right hon. Friend for accepting the essentials of the ombudsman’s report. The decision was difficult for the Government, but I think they have come to the right conclusion. The apology is right, the acceptance of maladministration is right, the acceptance of injustice is right, and setting up a compensation scheme is right. Nevertheless, why did the Government decide not to adopt the ombudsman’s recommendation to set up an independent tribunal, but instead to ask Sir John Chadwick to give further advice?

Secondly, will my right hon. Friend explain the phrase “disproportionate impact”? As I understand it, she is trying to identify a category of policyholders who have suffered a disproportionate impact and saying that only they will come under the rubric of a compensation scheme. Does that not excessively narrow the scope of such compensation in a way that the ombudsman did not recommend?

I welcome the work that my hon. Friend’s Committee has done to look into this matter. The ombudsman’s recommendation was to set up an independent tribunal that would then consider individual cases. We believe that in order to set up a payment scheme, we need additional advice on the position that policyholders are in. We also need to consider the relative losses they experience, as well as at how far those losses can be fairly attributed to the regulatory failure and to mistakes made by the society and others. My hon. Friend will recognise that we need independent advice on the issue and that that is preferable to the Government’s simply making a decision on how to apportion responsibility fairly. The issue is complex and that is why we felt that appointing an independent judge to provide us with that advice would be the most sensible way to proceed, as well as the swiftest, rather than setting up an independent tribunal to do the same job.

My hon. Friend raised the matter of disproportionate impact. We have asked Sir John to give us advice on how we should interpret disproportionate impact by considering the experiences of policyholders. We would expect that interpretation to include consideration of the extent of somebody’s losses and how great they were as a proportion of their income—that is, at whether they were relying on that income or had other sources of income.

We know, for example, that there is a difference, as I hope the House would recognise, between someone who relies on their Equitable Life pension for most of their income and has seen significant reductions in it as a result, and someone who might still be in work, and has alternative ways in which they can invest. For example, in the debate that took place in Westminster Hall, the hon. Member for Cities of London and Westminster (Mr. Field) brought up cases of his constituents who had been particularly heavily hit, while the hon. and learned Member for Harborough (Mr. Garnier) said that he was an Equitable policyholder. Clearly, there is a big difference between those circumstances. We believe that it is right to be able to take such circumstances into account. However, we are asking the advice of the judge in order to inform our final decisions.

Will the right hon. Lady reflect on what she has just said? Surely the simple question is whether the Government were culpable in any shape or form, and today the Chief Secretary has admitted that they were. She has apologised, and that apology is accepted. Surely the reality is that the money lost is money lost. If the Government have any involvement in the process, they have a duty to ensure that those other people are properly compensated and not to investigate who has a right to be compensated and who has not just because some are slightly better off than others.

The right hon. Gentleman is advocating a pure compensation scheme. I set out in my statement exactly why I think that that would not be the right approach and why it would fundamentally change the relationship between the Government and the financial markets were we to set up a system in which the taxpayer was always to pay out whenever there was regulatory failure. We believe that that is an important principle, but we also think that it is right to focus on those who have been hardest hit and to recognise where there has been disproportionate impact. The shadow Chancellor has also said:

“As the Ombudsman makes clear, policyholders cannot expect to receive payments for the full losses suffered and any payment scheme must be consistent with…public finances”.

Members on both sides of the House recognise that there are difficult issues that need to be taken into account. We believe that we should be fair and recognise the difficult circumstances that some policyholders, in particular, have been hit by.

I welcome my right hon. Friend’s statement. A considerable number of my constituents will be waiting to see the detail. On a practical point, many of the people involved are getting old—some of my constituents are getting extremely old. Within what kind of time frame—weeks, months or years—should they expect to get money in their pockets?

My hon. Friend makes an important point. The ombudsman recommended a two-and-a-half-year time scale within which to begin payments and we are mindful of that recommendation. We want to set up a scheme that can pay out as speedily as possible. The ombudsman also said that there were potential difficulties and trade-offs between a scheme that is speedy and swift to implement and one that is fair to individuals and to the taxpayer. We have to take all those things into account. We will be working with Sir John on an ongoing basis to try to assess some of those practical issues as speedily as possible and we will keep the House updated on the progress that we make.

Will the estates of policyholders who have died be able to make a claim, and in which quarter of which year does she now expect the first payments to be made?

Clearly, the issue about people’s estates when they have, sadly, died is important. We will need to take it into account as part of the consideration of disproportionate impact. We will ask the advice of Sir John Chadwick on how that issue should be addressed. I cannot tell the hon. Gentleman the precise time scale or which steps that we will be able to take, but I can tell him that we are keen to do this as speedily as possible.

I congratulate my right hon. Friend on her statement. I have two points. First, on the time scale, she has come up with what she describes as a simpler scheme. Does that mean that it will be quicker than that suggested by the ombudsman? Secondly, she said that hardship would be a significant criterion for compensation. Will she describe that a little more? Can she reassure those who have lost significant sums of money in Equitable Life that they will still be compensated?

My hon. Friend asks what the time scale will be relative to the ombudsman’s scheme. My view is that the ombudsman’s own proposals would have taken some time to implement. We will all be aware from examples in our constituencies of different payment schemes or compensation schemes that have taken considerably longer than was originally intended. We are mindful of that and, in the design of the scheme, we need to take it strongly into account. We need to aim to design a scheme that can pay out as swiftly as possible, and that will be part of our considerations. It will also be one of the issues that we will discuss with Sir John Chadwick.

My hon. Friend also asked what we will take into account when it comes to considering disproportionate impact. Some policies might have been hit harder than others and have been more heavily affected, and some people will have seen larger losses. The ombudsman said that she was far from concluding that all the complainants had experienced financial loss as a result of the events at Equitable. Policyholders are in a wide range of circumstances and a wide range of impacts have been experienced. It is right that we should take that all into account in designing a fair scheme.

I, too, am appalled at the proposals to means-test the compensation. Given the fact that tens of thousands of policyholders have already died without compensation, may I press the urgency of compensation on the Chief Secretary? In particular, will she consider looking at interim payments for people to ensure that they get some benefit, especially for those who might be approaching the end of their lives?

Again, we have asked Sir John to consider what disproportionate impact might be. That might include a range of issues, such as the scale of the impact on someone’s policy, rather than simply their current circumstances. Secondly, I completely appreciate the hon. Gentleman’s point about the urgency. However, he will understand that there are a series of practical difficulties. We do not have the information about policyholders yet, and the information that the ombudsman held meant that she was constrained in setting out how any kind of scheme should work. We are prepared to consider whether there are ways of speeding up payments for particular groups or whether there are different approaches that can be taken, but we will need to take the advice of Sir John Chadwick and to look at the policyholder detail in order to be able to do so.

I welcome the fact that the Government have accepted that there needs to be conversation, and the fact that they have said that the process has to be speedy, but may I express a word of caution? Of course it has to be speedy, but it also has to be fair. With other compensation schemes, such as the financial assistance scheme and the cod war trawlermen’s scheme, our experience has been that the Government have had to go back and look at them again. In some cases, there has had to be another trawl of applications. My advice is to make sure that we get the scheme right from the beginning. The scheme that we are talking about will be much more complex than either of the two compensation schemes I mentioned. I also wonder whether there is anything that MPs who have large numbers of Equitable Life policyholders in their constituencies can do to help the Government to find out about the different types of people who have been affected.

My hon. Friend raises an important point. She is right that the issues involved are complex. Assessing relative losses, and how far policies might have changed simply because of market conditions, raises a series of wider questions. We know that there are many people who hold similar policies with other companies whose policies changed in value, or made losses, in particular periods. So the issues are complex, and we have to take that into account.

My hon. Friend also asked what MPs can do. My hon. Friend the Economic Secretary to the Treasury will write to all MPs with updates on what the next steps will be. I know that he will be happy to talk to her about what else MPs could do to take the process forward.

If the scheme ever does come to a conclusion—unlike the Liberal spokesman, the hon. Member for Twickenham (Dr. Cable), I do not think that the matter is concluded—it will take into account the position that the public finances are in when the scheme pays out. That position could hardly be worse. How much will that discount the possible amount of compensation?

As I have said, we will take account of Sir John’s advice, the relative losses experienced, how far the responsibility is fairly apportioned between the regulatory bodies, the society and others, and the public finances. As the ombudsman has said, it is right to do that, because in effect we are talking about taking account of the interests of taxpayers; it is fair to do so. The shadow Chancellor has said that any payment scheme

“must be consistent with sound public finances”.

His party has a rather different view from ours about what should happen to the public finances over the next few years, so his party’s assessment of that may be different from ours.

I welcome the statement and, in particular, the apology at the start. It looks as if we are coming to the beginning of the end of this sad, long saga. My right hon. Friend has in part answered the many requests made by Members today by saying that the scheme needs to be quick so that the money can get to those individuals who live in poverty because of this saga, and who might not have much longer to live. Will she tell us, today if possible, when she expects Sir John to get back to us on the first instalment? Will she then set up a pro rata payment system, or a system that pays some money to those pensioners? Who will staff it, and what process will we Members of Parliament have to use to ensure that those affected know who to write to, and what progress is being made with their claim?

As I have said, my hon. Friend the Economic Secretary will update Members of the House on the progress made. Again, we will need to take a wide range of issues into account. Clearly, we do not want a judicial process that takes many years, and it is not at all Sir John’s intention to have one. We are talking about an ongoing process in which we will work with him, and we will receive his conclusions or findings as he comes to them on a monthly basis. I cannot give my hon. Friend a specific undertaking about a particular timetable, because I do not know how long it will take to complete that work.

Earlier, the Minister mentioned that she could not take the route that the Government took with the banks, because in that case the Government were trying to restore financial stability. Surely we are trying to encourage investors once again to have confidence. Investors believe that they have been victims of maladministration and have had an apology; surely that apology has to be followed up by a proper compensation scheme that is related to what they lost, not their circumstances.

I think that a fair ex gratia payment scheme will take account of what people have lost, but it is also right to take account of the wider circumstances, as we have set out. I recognise the hon. Gentleman’s point about people’s approach towards their investments and the regulatory framework. However, the circumstances that we faced when it came to making decisions about the Icelandic banks, and the very serious financial stability problems that we faced in the autumn, were unique; that was a set of events the like of which we have not seen for many generations, and it was right to respond to those in a different way. I do not think that that necessarily has wider implications for how we deal with societies or companies in normal times.

I thank my right hon. Friend for her statement and apology. We in the House have dealt with the issue of occupational pensions schemes over the past five years, but Equitable Life is at least 10 times bigger than that. Can she tell us how large Sir John Chadwick’s office will be and how many people will be in it? Moreover, if she is to run a shadow system in the Treasury, how will that be staffed? Our experience with occupational pensions was that there was incompetence in analysing each individual case, and individual cases will be analysed in the case of Equitable Life, too. Will she report back before the summer recess to tell us where we have got to, so that we better understand the time frame? That is the key issue that most Members are concerned about.

My hon. Friend the Economic Secretary and I will be keen to keep the House updated, and to report back at regular intervals—not only before the summer recess—on the progress made. Obviously, we are in discussion with Sir John Chadwick about the scale of resources or support that he needs to carry out his work, and I am happy to update my hon. Friend on that, and to write to him in due course.

What obstacle was there to getting Sir John Chadwick’s work under way immediately after the publication of the ombudsman’s report and as soon as it became clear that some compensation would be necessary? That would at least have sped up this whole ghastly process by six months.

I think that the hon. Gentleman would recognise that the ombudsman took four years to complete her work. It has taken us some months to consider the issues that she raised, and to ensure that we can set out a process that is fair to both taxpayers and policyholders, and that takes into account wider issues to do with the relationship between the Government and financial markets and the role of the regulator within financial markets. The ombudsman has raised a whole series of complex issues. We have given them detailed consideration and have come to our view. We think that the next step will be for Sir John to carry out his work, while we work alongside him on some of the practical measures.

I, too, welcome the Government’s apology, but regret that we have heard nothing similar from Conservative Members. On the fair payments scheme, is it the Government’s intention to cap payments to individuals, or the totality of the scheme?

My hon. Friend makes an important point. It would be helpful if the Opposition recognised the history of the events and joined us in apologising to policyholders for the events that have taken place. My hon. Friend asks whether caps should be applied. We have said that we will ask Sir John Chadwick what approach should be taken, and how payments can be set out in a way that is fair. That is one of the issues that he will need to consider.

After all the ducking, weaving and kicking into the long grass, the bottom line is that Equitable policyholders simply want to be restored to the position that they would have been in but for the five admitted instances of injustice and the 10 admitted instances of maladministration, not least on the reinsurance treaty, even under the current financial and prudential supervisory arrangements. Surely it must be right not to believe that a system is fair simply because the Minister says that it is fair. What can be said to any policyholder on the fairness of the system when there is uncertainty about whether they will be discriminated against in a scheme intended not to restore them to their former position, following maladministration and injustice, but to bring about social engineering?

Again, the hon. Gentleman’s party’s position, as set out by the shadow Chancellor, is that

“policyholders cannot expect to receive payments for the full losses suffered”.

I have set out in some detail why we think that it is appropriate to set out an ex gratia payment scheme that recognises that there is a wider principle, which Parliament has recognised and supported in other cases. That principle is about the regulator not becoming the guarantor of the regulated bodies, and the taxpayer not providing a guarantee for regulated bodies. We have to ensure that the way in which the financial markets operate, and the way in which the relationship between the financial markets and the Government operates, is not fundamentally distorted by our changing a long-standing approach, taken in many areas, on how compensation is dealt with when it comes to regulatory failure.

We recognise, however, the circumstances raised by hon. Members, which is exactly why we have said that there should be ex gratia payments in cases of disproportionate impact, which will take account of the scale of people’s losses and their experiences. However, it is right to do that in a way that is fair to taxpayers as well as to policyholders, and that takes account of the importance of a sustainable system in future.

Again, on the time scale, does my right hon. Friend accept that because this prolonged and fundamental regulatory failure occurred more than eight years ago—and a significant number of the people who suffered losses have died—it is vital that we proceed with extreme urgency? The ombudsman recommended that a compensation payment scheme be set up within six months, but does she accept that what matters is how quickly people receive those payments? Can she give them some encouragement that the measure will proceed at some speed?

There are significant questions about whether it is possible to set up the kind of scheme that the ombudsman recommended within a six-month period. The Select Committee on Public Administration did not feel able to assess whether that was a sensible or plausible time scale. My right hon. Friend is right to say that we need to do this as speedily as possible, but I hope that the House also accepts that these are complex issues. The ombudsman herself has said that people with different circumstances have been affected in different ways. We need to look at the information about the policyholders and their position to take this forward.

Like many hon. Members, I too have received a lot of correspondence from my constituents in Croydon, Central. Would it be unsafe for me to write back them telling them to expect some payments to start this calendar year?

I cannot give the hon. Gentleman a specific timetable for the payment, and I would not want to mislead him. We have asked for the information from Sir John Chadwick, and we must also undertake additional work on the practical issues. I would not want to give people misleading information, and I am trying to be straight with them about the fact that we simply do not know how long it will take. However, we accept the important points that people have made about the need to implement this as fast as possible, bearing in mind the points that my hon. Friend the Member for Aberdeen, South (Miss Begg) made about the need to make sure that it is fair, too.

I very much welcome what my right hon. Friend had to say, and I am interested in the proposal for an interim arrangement. Will she include in that arrangement policyholders’ widows and widowers as a priority, particularly older ones, who have lost out doubly from the whole process?

We will look at all those issues. However, we would not want to set up an interim payment scheme that ended up being so complicated that it delayed the main payment scheme. We will take all those things into account when we set out the next steps.

I am sure that many thousands of our constituents will be relieved to hear the statement but, as ever, the devil is in the detail. The right hon. Lady will have thought about the staffing needed to do this quickly and properly, and about from where those staff will be drawn, even before Lord Justice Chadwick finishes his deliberations. I hope that she will correct me if I am wrong but—call me a cynical old lawyer—“ex gratia” often means selling someone short to make them go away.

Work is under way on the resources needed for the work over the coming months, and I am happy to keep the House informed of our progress. We are attempting to do this in a way that is fair to taxpayers, as well as to policyholders, and takes into account people’s different experiences.

My right hon. Friend’s statement was a gracious one, and her apology in particular was gracious, which will mean a great deal to many of my constituents. Speed and simplicity—

Order. I do not want a statement from the hon. Gentleman, particularly at this stage—he must ask a question.

Will my right hon. Friend ensure that there is an examination of the way in which those people who are closest to their latest years in life, and who have been most severely disadvantaged by the losses that they have suffered from Equitable Life, will be part of an interim scheme to make sure that they receive some benefit before their lives come to an end?

One of the issues that we want to look at is the age of policyholders, their circumstances and the extent to which they have been affected. As I have said, we will look at the issue of interim payments but we would not want that to delay the overall scheme. We must take all those things into account and ask the judge’s advice.

May I press the right hon. Lady on the issue raised by the hon. Member for Stroud (Mr. Drew)? If she cannot promise that the estates of deceased policyholders will be compensated for their losses, can she at least promise that widows and widowers who, because of the losses in Equitable Life, have lived in penury since their spouses died, will be included in the scheme?

I can certainly say that that is one of the issues on which we will ask for Sir John’s advice about taking disproportionate effect into account. That means looking at what the disproportionate effect is, its impact on family members, and other issues. We will ask Sir John to look at that and advise us on it, and we will deal with it as speedily as possible.

I must declare a personal interest that has no bearing on my comments.

This is the result of a gross failure of regulation under successive Governments, so there is a case for full compensation for all those who have lost out. I know I am not in a minority in saying so, but it is the case. In future, would it not be sensible, advisable and, indeed, necessary for the Government to declare that when something is regulated, people will be compensated, or to tell them, “You’re in the market—you’re on your own”? The final alternative is to set up a much larger state savings system in which people are guaranteed returns and have no fear of loss.

My hon. Friend makes an important point. We do not have a system of regulation in this country under which any investment in the markets is guaranteed by the regulator, who would effectively become a guarantor of the system. It would not be fair to the taxpayer to have a system in which every time a company did something dodgy and the regulator failed to prevent them from doing so, the taxpayer had to step in and make good the losses. We recognise the importance of the issue of financial stability when the Government have to act, as well as the fact that, as in this case, there are examples of disproportionate impact as well as maladministration. It is therefore appropriate to act in this case, but it would lead to a fundamentally different relationship between Government and the financial markets and, perhaps more importantly, between the taxpayer and financial markets, if we moved to a system of automatic full compensation whenever there was any kind of problem in the financial markets, including regulatory problems. That is why we have taken a different approach.

Many people will welcome the compensation, but there is still uncertainty, because they will benefit only because of the disproportionate impact and the position of the public finances. What assessment has the Minister made of the proportion of policyholders who are likely to receive compensation?

The hon. Lady makes an important point. We have simply been unable to make that assessment, because we do not know policyholders’ circumstances at the moment. We have anecdotal evidence from individual members, but we do not have detailed information, which is why we have asked Equitable to provide us with it. We will work with the judge to answer the legitimate question that the hon. Lady has put to us.

I can understand why my right hon. Friend is concerned that an interim payments scheme might add further complexity. No one would want that, but surely it cannot be beyond the wit of all the experts involved to come up with some simple interim payments scheme, because people are going to need some form of payment in a reasonably short time. I am sure that the welcome that policyholders will give today’s announcement will be qualified by the talk of the months and years that payments might take. Some people need money much more quickly than that, and I strongly urge my right hon. Friend to consider some form of interim payment scheme as part of the package that she is now discussing.

I should like to make it clear to my hon. Friend and to the House that we are prepared to consider an interim payment scheme. We will need to take a range of issues into account, but we are keen to look at all sorts of options. We will do whatever we can to speed up the process, especially for people who need payments to be made as swiftly as possible.

But have not the exchanges over the past hour shown that there is widespread anxiety on both sides of the House about the Chief Secretary’s proposals? Does that not underline the need for an early and calm debate in Government time on what she has put forward? In the meantime, can she at least say that it is her intention that the first compensation payments will be made in the year 2009?

The right hon. Gentleman has asked for a debate, and I shall pass his request on to the business managers. However, the principle that the regulator should not act as guarantor has been recognised in debates in this House, and it was set out and reinforced in the Financial Services and Markets Act 2000. That legislation continued the financial regulator’s long-standing exemption from claims for negligence in the courts. Successive Governments have supported that approach in order to be fair to the taxpayer and to recognise the relationship between Governments and financial markets. I should be very surprised if the Opposition really wanted to end that principle at this stage.

Several hon. Members have asked what the Government think that the timetable will be, but I have to be honest and say that we will ask the judge for advice on the matter. We will complete the process as speedily as possible.

Order. I am afraid that we must move on. I apologise and am sympathetic to the hon. Members whom I have not been able to call, but I am sure that this subject will be another to which the House will return properly in the form of a debate raised by one means or another.