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Finance: Equitable Life

Volume 706: debated on Thursday 15 January 2009


My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chief Secretary to the Treasury.

“With permission, Mr Deputy Speaker, I would like to make a Statement in response to the Parliamentary Ombudsman’s report into the prudential regulation of the Equitable Life Assurance Society from 1988 to December 2001.

This is the ombudsman’s second report and 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 that government action is merited as a result.

As the ombudsman’s report sets out, Equitable Life is a mutual life insurance 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 Life 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 Life 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 into all the events around 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. But 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 some detail. We have also considered the report of the parliamentary Select Committee on Public Administration published in December. 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 from 1990 to 1996 in some cases raised questions that 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 that certain statements made by the FSA 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 that the whole House regrets the mismanagement of the society that caused problems. I 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 that we believe has taken place.

We also need to consider the fairest way to respond to policyholders now. We have looked in some 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 when there is regulatory failure. The responsibility to minimise risks and to prevent problems 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 that the underlying principle remains important; it has informed the approach of successive Governments and we believe that 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 were the taxpayer to provide a remedy for all losses every time the regulator failed to prevent a financial institution getting into trouble.

Nevertheless, we are concerned by the representations that we have received from Members of this House 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 that it is right in this case for the Government to set up an ex gratia payment scheme to help.

To do this in a fair way, there is 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 Select Committee said in its report published in December:

‘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. Take, for example, the case of the reinsurance treaty. Although the FSA failed to follow up problems with the treaty, it was still the society’s decision 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 policy holders 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 have 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, nor on the factors affecting the losses of different groups.

Thirdly, we also want to focus on those who have been hardest hit. As the ombudsman herself 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 in the Society’.

Fourthly, we need to take account of important practical considerations. Neither we nor the ombudsman currently have much of the important information or assessments that we need to implement a payment 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 these points and we intend now to set up a scheme to make ex gratia payments to those who have been disproportionately affected. To do so, we have today asked Equitable Life to make available its detailed policyholder information. We have also asked the former Lord Justice of the Court of Appeal, the right honourable Sir John Chadwick, to look at the information and to 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 the actions of Equitable Life and others; thirdly, which classes of policyholder have suffered the greatest impact as a result of 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 published today.

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

Many honourable Members have raised concerns about the length of time that policyholders have had to wait for a resolution of this case. Given that many have already retired, we believe that 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, including 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. The Government will therefore introduce a fair payment scheme for policyholders who have suffered a disproportionate impact, 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 that it would be right to set up a compensation scheme in the way that the ombudsman proposed, but we believe that this is the right response. I hope that the House will recognise that there is no easy solution to the problems of Equitable Life and the faults that were found.

The events of Equitable Life have been very difficult and complex, and have caused problems for policyholders across the country. Consideration of these events has already informed substantial regulatory reform since then, as well as wider reviews of corporate governance. Today’s response sets out plans for new help for policyholders, which we believe is fair to both policyholders and taxpayers and continues to support a sensible approach for the future. I commend it to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement that was made in another place, but I have to say that it is difficult to thank him for very much more than that. We should make no mistake about it: this is an inadequate Statement from a Government who have tried for years to avoid responsibility for the failures that occurred in Equitable Life. It falls far short of the ombudsman’s recommendation for a compensation scheme; it even falls short of the version being briefed to the press in the past few days; but it does not fall short of our expectations of this Government.

The Statement comes just one day short of eight months since the ombudsman reported last July. To say that the whole story of the Government’s response to Equitable Life was a tale of foot dragging would be a massive understatement. Since Lord Penrose reported, the Government have quoted like a mantra his finding which singled out Equitable Life for blame, which the Minister has done again today. Let me remind the House that Lord Penrose also concluded, although this was not the purpose of his report, that it was regulatory failure which allowed Equitable Life’s management to undermine the interests of members.

It took Herculean efforts by my honourable friend in another place, Mr Andrew Tyrie, to get the ombudsman to be allowed to look at the issues of regulatory failure. The Treasury tried to hide behind technicalities about jurisdiction. The terms of reference for the review did not come out until the end of 2004. The Treasury then started its campaign of information overload, which was successful in delaying the review’s completion. Eventually, by last July, it could delay the report no longer.

If there was ever a doubt about the value of the ombudsman’s work and the need to give that office wide powers, this case has provided all the evidence that is needed. The ombudsman did a splendid job in very difficult circumstances. As the Minister said, she made 10 determinations of maladministration and five findings of injustice. We wish to place on record our admiration for the work of the ombudsman.

It is all too clear why the Government have tried to avoid dealing with this. The findings of the ombudsman reflect directly on the regulatory competence of the bodies for which the Prime Minister was responsible when he was Chancellor. In particular, half the 10 findings of maladministration were laid at the door of the FSA, a body which was a pet project of the current Prime Minister and did not exist until after 1997.

In today’s Statement, the Government have said that it is not generally appropriate for the taxpayer to pay compensation even when there is regulatory failure. We are not talking about ordinary regulatory failure; we are talking about 10 findings of maladministration and five findings of injustice. The Government simply cannot hide behind a version of caveat emptor to avoid accepting the ombudsman’s clear findings. We have accepted her findings that there should be a compensation scheme. It is a pity that the Government cannot bring themselves to do so.

According to their Statement, the Government have accepted only three of the findings of maladministration, but they say nothing about the findings of injustice. We have had very little time to look at the command paper referred to in the Statement. But from a brief examination, it looks as if the Government are merely using this as a way of arguing against the ombudsman’s findings, even in those few cases where they appear to have accepted them. If the Government think that this has given them the last word on the subject, they will find that they are mistaken.

I have some questions for the Minister. The Statement talks about some form of proportionate liability with the Government paying out for only the amount attributable to maladministration. What is the purpose of this, other than to leave policyholders with no remedy or a reduced remedy? As I understand it, there is no spare money, no reserves, in Equitable Life available for any further claims. The organisation has already settled quite a large number of claims which have been pursued through other routes. Remaining funds are, in effect, allocated to policyholders. Is it not the case that the Government’s use of proportionate liability is nothing more than code for saying that Equitable Life members will not get compensation on the relative loss basis recommended by the ombudsman? Why have the Government not pursued the ombudsman’s recommendation that an independent scheme should be set up along the lines of a tribunal or an adjudication panel?

I do not doubt the competence and integrity of Sir John Chadwick, but he appears merely to have been an adviser to the Government. Are the Government saying that there will be no independent body in the sense put forward by the ombudsman involved at any stage? Will the advice given by Sir John Chadwick be made public? Will he seek evidence from interested parties? Will he have open hearings? How will his work be made public? The Government cannot expect policyholders to have confidence in outcomes if the work of Sir John is to be intermediated through the Treasury and not conducted in the public domain.

Compensation, according to the Statement, will get a double hit. The first comes from the proportionate liability route, but the Statement goes on to refer to finding out which classes of policyholder have suffered the greatest impact and talks in terms of setting up a hardship fund, the so-called “fair payment scheme”, which will apply only to those who have suffered a “disproportionate impact”. Will the Minister explain what these terms are intended to mean? How is “disproportionate impact” to be measured—relative to losses incurred on policies or relative to a policyholder’s financial circumstances? Do the Government intend to inquire into the personal circumstances of policyholders and use some form of means testing? The Government must have some ideas in this regard, having had so long to consider the ombudsman’s findings.

What will be done for those who have already died? The Equitable Members Action Group, which has worked so hard to keep the plight of the losses incurred by policyholders to the fore, estimates that 30,000 have already died and that at least 400 are dying each month. Will the estates of these people be given priority?

Lastly, I expect that the policyholders will not be happy with today’s Statement and will want to examine further ways of getting what they see as justice. Can the Minister give an absolute assurance that if payments are given on an ex gratia basis in due course, they will not come with strings attached, such as not supporting any other action around the ombudsman’s report?

My Lords, I, too, thank the Minister for repeating the Statement. We on these Benches are pleased that the Government have accepted the principle, at least to a degree, of compensation from public funds for Equitable Life policyholders. However, I am afraid that that is far as I can go in keeping company with the Government in approving the approach they have adopted. On timings, why has it taken well over six months for the Government to do little more than accept a principle and appoint an adviser? Why could not this Statement have been made when Parliament resumed in October, or even before? When we briefly debated the issue a couple of months ago, the Minister replying at the time said that the Treasury had other priorities. But having read today’s announcement, it is clearly not the case that the entire Treasury—officials and Ministers—has been taken up in reaching such an incomplete conclusion. It is thus very difficult indeed to avoid the conclusion that the Government are stringing out the process to minimise the amount that they eventually have to pay out.

However, given where we are, have the Government given Sir John any indication of how long he might take? Have they specified when they would like to receive updates? If, when he starts looking at all the documentation, he finds it is extremely difficult and gets bogged down in it, what pressure will the Government seek to apply to try to ensure that months and months of silence do not pass as poor Sir John tries to deal with this issue? What resources has he been given to help him? Does he have a support team, and who are they? As the noble Baroness asked, what do the Government mean by “disproportionate impact”? Do they have a view on what proportion of Equitable Life policyholders might be included in that definition, and does that, by definition, mean that the bulk of policyholders who suffered equally will get nothing?

The Government say that, alongside Sir John’s advice, they will take account of the position of the public finances. We hope that the advice will be forthcoming in a matter of months rather than years. But the Government know about the position of the public finances—they are shot through. Why can they not make a Statement at this point about what the phrase means? Does it mean, in effect, that if at the time the finances are as bad as we expect them to be—and as the Government expect them to be—they could simply disregard all Sir John’s advice completely? It is advice and the Government have given no indication of whether they will accept it in whole or in part.

Why can the Government not set at least an indicative timetable for even initial payments? When the ombudsman originally reported, she said that the whole process should take two and a half years. The Government imply in their Statement that they do not want to follow the route she proposed because that would take too long. If that is the case, what view do they have about what would be an acceptable period? If they believe that we are talking about a matter of years rather than months before the whole process is completed, is there any reason why there cannot be an interim fast-track system of payments to start the process of meting out justice to those who have suffered—or are we going to find ourselves in the same situation as with the miners’ compensation scheme, where it takes decades to make payments and as a result, in many cases, justice is actually negated?

When this issue was raised earlier in your Lordships’ House I contrasted the lack of speed of payment in this case with the speed of payment of depositors in Icelandic banks. The Minister chided me, saying that that was an unfair comparison. I disagree. The truth is that if a Government want to act quickly, they can. If they had wanted to act quickly—or at least significantly more quickly than this, in the case of Equitable Life—they could have done so. They could now have started making payments, as the ombudsman suggested and believed was perfectly possible. The Government’s failure to do so and the further delays that today’s announcement will set in train simply demonstrate an unacceptable lack of urgency in dealing with a problem created, albeit in part, by regulatory failure.

My Lords, the noble Baroness, Lady Noakes, has placed on record her admiration for the work of the Parliamentary Ombudsman. I support that. I note, however, that no apology has been forthcoming from the opposition Benches with regard to the maladministration that took place when they were in office, a serious omission which, I fear, was also the case in the other House.

The noble Baroness accuses me of repeating the “mantra” of Lord Penrose’s report. It is not a mantra but the core of his recommendation that Equitable Life’s problems were brought upon the society by its own board and management, that being a particularly interesting feature of a mutual. In many cases these policyholders were also the members or owners of the society. Penrose was right to identify that factor and to make it clear that regulatory failure was a secondary factor, while still an important one.

I reject the suggestion that we overloaded the ombudsman with information. Far be it from us to suggest that she would be capable of having her timetable so influenced. It seems to me that the quality and thoroughness of her report reflect the information that she received and the representations from many places, including from the Government, because there are many important public policy issues here that required recommendations.

We have accepted the findings of the Parliamentary Ombudsman in a number of respects, and we have properly made an apology to the policyholders of Equitable where they suffered as a consequence of that maladministration. We have proposed the establishment of ex gratia payments—a model which, I may say, was also adopted in the case of Barlow Clowes when another Government were in office.

The use of proportionate liability and its relevance is a concept recognised by the ombudsman, who acknowledges that there are matters of public policy interest here. That is the point that I would refer to when responding to the good and balanced contribution of the noble Lord, Lord Newby. The Parliamentary Ombudsman made clear her view that public policy considerations had to be taken into account. I note that that view has also been strongly endorsed by the shadow Chancellor of the Exchequer.

The noble Baroness, Lady Noakes, asked about Sir John Chadwick’s processes. Sir John is an eminent lawyer. His terms of reference do not limit his processes; they do not specify the manner in which he will work; they do not in any way limit the evidence that he may seek in the pursuit of his duties and responsibilities. If Sir John, of his own volition or in response to recommendations, decides that he wishes to issue public reports on an interim basis, or if he chooses to take evidence, that will be for him to determine and for him to report. In answer to a question from the noble Lord, Lord Newby, we have said that Sir John should press on with this as quickly as possible.

The noble Baroness and the noble Lord both asked about disproportionate ex gratia payments. This will be a matter on which we will seek to be advised and informed by Sir John, but we envisage that he will take into account the features of different policies. Holders of certain policies may well not have experienced as much damage as others. He will certainly take into account the contribution to any damage that was as a result of maladministration as opposed to any other circumstances, including investment market conditions. He will also, quite rightly, take into account the circumstances of policyholders. This is a matter on which we ask him to reflect; it is a matter on which we ask him to tender advice.

In response to another of the noble Baroness’s questions, it will be for Sir John to advise us whether any conditions should apply to the payment of ex gratia amounts. I note that conditions were applied in the case of Barlow Clowes.

The noble Lord, Lord Newby, asked why this has taken such a long time. I understand his frustration, but these are extraordinarily complex issues. The commendable work of the ombudsman, which was endorsed by the noble Baroness, took four years. We took six months to consider her response. I think that that was an appropriate period, given the importance of the issues resolved. In so considering matters of this complexity with the care shown by officials and Ministers, we have managed to achieve a good position in which the apology that she sought has been tendered and the payment of ex gratia payments can be made. We are certainly not stringing this out; the language in the Command Paper indicates that Sir John has been asked to reply as quickly as possible. I am sure that he will ensure that he is appropriately resourced; I would not wish to see him in any way frustrated in that respect.

Whether an interim payment can be made is a matter on which we would seek Sir John’s advice. In another place, the Chief Secretary to the Treasury quite correctly drew attention to the possibility that the making of interim payments may lead to delays in final payments. That needs careful consideration.

The noble Lord, Lord Newby, made an observation about the Icelandic banks. The core difference is that the payment in that case was to protect against systemic risk, to ensure that we did not see the consequences of a complete collapse and failure of the banking system. Those steps were appropriate. I suggested earlier that there was a conflation of investment and depositors. The concepts are different, but the noble Lord was quite right to challenge me on the point. It is why one payment could be made swiftly and executed almost overnight. Here, we are looking at something which the Parliamentary Ombudsman has said will take two and half years using the model which she recommends, but about which the Public Administration Select Committee had some doubts.

I commend the Statement made by the Chief Secretary to the Treasury to the other place. I hope that I have answered the questions raised by the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, if not to their satisfaction then at least in terms of completeness.

My Lords, I welcome my noble friend’s Statement and declare a financial interest—I, possibly like others, have suffered a financial loss. Does my noble friend agree that, the House of Lords judgment notwithstanding, a mutual society cannot privilege one group of members over another, which is why so many of us were taken aback by that judgment? Will he also confirm that the Parliamentary Ombudsman could investigate only the conduct of government, as she made clear, and not the conduct of the society—unlike Penrose—and that there is therefore no way so far of estimating proportionate liability or for what fraction of loss government are responsible, hence the need for Sir John Chadwick’s inquiry? Will he confirm the distinction, therefore, that needs to be drawn between ex gratia and full compensation payments? Does my noble friend agree that, as the noble Baroness pointed out, just because the Government alone have financial resources, unlike Equitable Life, it does not necessarily mean that they should take full responsibility for all losses?

My Lords, the noble Baroness, Lady Hollis, again evidences her accomplished grasp of these complex issues. I shall not be tempted to comment on the Hyman judgment or preferential treatment between one set of policyholders and another. However, I absolutely endorse the correctness of her observation that the Parliamentary Ombudsman was limited to a review of the performance of public bodies and therefore could not have done the further stage of work which Sir John Chadwick will now do; namely, to seek to allocate proportionately the contribution of various bodies to any loss suffered, which is quite right and proper. Anything short of that would be an extraordinary abuse of the public purse, which is acknowledged by many, including the Member of Parliament for Tatton in another place.

My Lords, I should declare an interest as a former reinsurance broker and that I am now the honorary president of a medium-sized firm of reinsurance brokers, who are not, however, specialised in this sector. In that capacity, I ask the Minister to say a little more about the circumstances surrounding the reinsurance treaty, which does not appear to have performed satisfactorily. This factor was mentioned twice in Her Majesty's Government’s Statement.

I cannot pretend to have followed this saga with the attention that it may have deserved, but I think this is the first time that I have heard of a reinsurance treaty playing a part—perhaps a major part—in this unfortunate case. The simple question is why this treaty did not perform. If the noble Lord does not have the details at his fingertips, could he write to me? I am sure that his answers would be valuable to the whole sector.

My Lords, as with the noble Lord, I also have some experience of reinsurance, having been involved in establishing a reinsurance company in 2001, which subsequently went on to be listed on the New York stock exchange. I believe that this was in nature a time and distance policy, which did not involve appropriate risk transfer. As such, it failed to perform the purpose that was expected or claimed to be covered by the policy.

While not in any way wishing not to write to the noble Lord on this subject, he may find it helpful to read Lord Penrose’s report. It is a lengthy document that goes into this matter—finding 6 under the Parliamentary Ombudsman’s report—in excruciating detail.