asked Her Majesty’s Government:

What steps they are taking to ensure a fair result for policyholders in the current negotiations over the reattribution of the inherited estates of with-profits funds.

My Lords, this is a matter for the independent regulator—the Financial Services Authority—and the courts. The Financial Services Authority sets the rules covering the management of with-profits funds. It requires firms pursuing reattributions to appoint an independent policyholder advocate to represent policyholders in negotiations with the firm. On completion of the negotiations, the FSA will assess the fairness of the deal and make public its conclusion on what fair treatment would require for consumers. Policyholders have a right to vote on the proposal.

My Lords, I thank the Minister for his reply, but the problem rests with the Financial Services Authority rules. My noble friend may not be aware that in the current negotiations relating to the reattribution of the inherited estate of the Norwich Union, amounting to £3.2 billion, both the policyholders’ advocate and Which? have expressed concern about whether policyholders will get a fair deal under the FSA rules. Although the FSA—

Question!

My Lords, are not the Government concerned that the effect of these rules will be that much of the 90 per cent of the inherited estate due to policyholders, as set out in the Government’s published policy on inherited estates, will go to shareholders rather than policyholders? Will they put pressure on the FSA to ensure that the government policy of 90 per cent of the inherited estate to policyholders and 10 per cent to shareholders will be followed in reattributions?

My Lords, I am grateful to my noble friend for his question. There is a distinction between the distribution of surplus funds, which has followed and does follow the broad principle of 90 per cent to policyholders and 10 per cent to shareholders, and the issue of reattribution which arises in the Norwich Union case. This is because reattribution involves the buyout of policyholders and raises the issue of the company’s necessary assets for the future as well as accumulated assets in the past; it raises different issues. That is why the FSA scrutinises these arrangements with great care, as I indicated in my Answer. Negotiations are still going on between Norwich Union and the policyholder advocate. We await the outcome of those negotiations.

My Lords, in view of what my noble friend Lord Joffe has said, could not the FSA be reminded that the purpose of a regulatory framework is to protect the consumer rather than, inevitably, always the insurer? There would be nothing wrong in reminding the FSA of that requirement.

My Lords, there is nothing ever wrong in reminding the FSA of its obligations. That occurs from time to time, in this House as elsewhere, but the FSA is well aware of its responsibilities. At present it is carrying out consultation on whether the costs of compensation for mis-selling claims should be included in the settlement for the shareholders. As the House will appreciate, the Treasury Select Committee in the other place, to which the FSA will be obliged to give evidence, is also looking at these issues.

My Lords, have not successive Governments, including the present Government, said that the reallocation of this money should be in the proportions mentioned by the noble Lord, Lord Joffe? Have the insurers not overprovided with money that was taken from the policyholders? Surely they must have a prior claim.

My Lords, I emphasise again the distinction I sought to make in my Answer. Where bonuses are paid on surplus funds, the allocation is generally on the basis of 90 per cent to policyholders and 10 per cent to shareholders, a formula that the FSA has recommended. The difficulties occur on reallocation, when shareholders are buying out policyholders. In that context, not just the interests of existing policyholders but the future operations of the company have to be taken into account. That is why the formula there is bound to be different from the 90 per cent plus 10 per cent that obtains on straight surpluses.

My Lords, I think we all accept that this is very complicated and that there is no single right or wrong answer. I am grateful to the noble Lord for setting out the legal position, if I can put it that way. The Question was really about the steps the Government are taking and what their view is. As and when the FSA gives its ruling, will the Government have a view and get involved or do they just say that it is entirely a matter for the FSA?

My Lords, I take solace from the fact that the noble Lord finds these issues difficult and complicated. I emphasise that the FSA is the statutory body concerned with this regulation. It has not had complaints about the distribution of surplus funds. There is no doubt that the issues on reattributions are more complex, but we have a clear framework for the FSA to work within. The policyholders will see the FSA judgment on the allocation that is made and they have the right to vote against the proposals if they find them unacceptable—they can even go to court. We recognise that there are difficulties in this area, but regulation means a regulator independent of government, and that is what the FSA is there for.

My Lords, the Minister will be aware that we face the greatest turmoil in financial markets in many decades and that many banks are being urged to increase their capital. Does he not therefore share my puzzlement—I am a director of a life insurance company with a large inherited estate—that insurance companies are being urged to do precisely the opposite; that is, to distribute more capital than their directors think is prudent in these times?

My Lords, if surpluses accrue in insurance companies, it is expected that they will be distributed. Such surpluses are unlikely to accrue in difficult times and are more likely to do so in more beneficial economic times. Several companies have surpluses at present, which is why my noble friend asked his Question.