§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Boswell.]
§ 10.7 pm
§ Mr. Michael Colvin (Romsey and Waterside)We shall need a bigger petition bag, Mr. Speaker. You were in the Chair when I made my maiden speech many years ago and it is my singular pleasure that you are in the Chair for the Adjournment debate this evening. I am sure that the House will join me in wishing you well in your retirement. You have fulfilled your office with great distinction over the years.
The subject that I wish to raise is the supervision by the Department of Trade and Industry of insurance companies, particularly in relation to home equity schemes. I shall keep my remarks brief as the hon. Member for Redcar (Ms. Mowlam) hopes to catch your eye later, Mr. Speaker, and both I and my hon. Friend the Minister for Corporate Affairs, who is to respond to the debate, hope that she will succeed.
In two sectors of finance—pensions and insurance—the Financial Services Act 1986 provides for self-regulation. Neither I nor the thousands of people—many of them pensioners—who have lost money and are at risk of losing their homes because of home equity schemes believe that the system of self-regulation is working as it was intended.
Originally the home equity scheme was based on a mortgage with a fixed rate of interest. The money borrowed was invested in an annuity to produce a fixed return for the rest of the pensioner's life. Such schemes enabled pensioners who were just managing to survive on their state pensions to release the capital tied up in their homes to provide extra income. The problem was that the rules on annuities ruled out those people between retirement age and 70, so the alternative investment bond scheme was devised, enabling money to be raised on remortgage and reinvested in a unit-linked investment bond—in other words, in the stock market.
Following the Wall street crash on black Monday in October 1987, high interest rates, falling stock markets and the collapse of the property market have meant that those stock market bonds were bound to be unable to provide the income to cover the costs of the mortgages. The result was that pensioners needed to use their capital to make the necessary payments. That compounded the problem. It ate up the capital and reduced the income in a rapidly increasing spiral which could exhaust funds within three or four years. Very often the client had no idea what was happening because of the inadequate information.
The schemes were designed not by rogue high pressure salesmen or by dubious companies, but by household names such as Royal Life, Guardian Royal Exchange, Norwich Union and Cheltenham and Gloucester, to name a few.
Throughout the late 1980s insurance companies increasingly deployed high pressure salesmen on a naive and financially unsophisticated public. The salesmen were given intensive courses in sales techniques, but little instruction in the intricacies of the financial services industry. Business cards and letter headings which pronounced them to be financial advisers and representatives of leading insurance companies gave them a cloak 945 of respectability, which made the public trust them, and they were set loose to earn their living on a commission-only basis.
When some turned out to be rogues, the insurance industry sought to hide behind the Financial Services Act 1986, arguing that the salesmen were not giving financial advice within the terms of the Act, or selling the companies' product. When the advice was bad or negligent, they argued that clients—financially unsophisticated pensioners, in the main—knew and understood the risks. They seriously suggested that pensioners would gamble their homes and risk losing all they possessed for £100 a month or less.
The failure of the schemes is leading to untold misery for tens of thousands of people who may lose their homes. I know of one person who committed suicide.
Following the Financial Services Act, the regulatory bodies, the Life Insurance and Unit Trust Regulatory Organisation and Financial Intermediaries, Managers and Brokers Regulatory Association—LAUTRO and FIMBRA—controlled by the Securities and Investments Board, and under the direction of the Department of Trade and Industry, were set up to prevent such problems and to ensure that when they occurred compensation could be paid without the need for expensive and prolonged litigation.
As recently as 6 March, the SIB announced new proposals for a common approach, involving FIMBRA, the solicitors indemnity fund, the insurance ombudsman and the building societies ombudsman. However, that approach does not apply to LAUTRO, which covers insurance company cases, and the proposals were unclear.
I have read the SIB's press release on its scheme and have discussed it with interested parties. No one understands it. It is unclear whether all the bodies would work together on FIM BRA's arbitration scheme or the ombudsman scheme, or whether it is merely an extension of the complaints system. That needs clarification.
Many of my constituents are affected by Royal Life and other hon. Members have informed me of similar problems among their constituents, especially in the south of Hampshire. I have met with those clients and with the group executive of Royal Life and the lawyers involved. I have arranged for leading lawyers in the field to meet my hon. Friend the Minister to explain their concerns, which I believe led to the SIB proposals. However, I regret that the problems with Royal Life remain unresolved some 16 months after my first involvement.
The Royal Life case involves investment bond schemes, based on the guarantee that people would not lose their homes but would have sufficient income to pay the mortgage and to produce an income. The schemes, which were also sold to people below retirement age, simply did not work. I do not believe that they ever could have worked. That must have been known to the companies and the lenders involved but, because of the misleading financial forecasts, investors did not see the inevitable high risks. Even though the schemes arose during the infancy of the Financial Services Act, the problems must have been detectable.
We now know that many of the advisers and salesmen were dishonest and have been sent to prison or await trial for fraud. How could those people have been allowed by the companies concerned to compound their fraud under a regulated system?
In the Royal Life case, I have evidence that, even after 946 complaints and compliance checks by Royal Life, the problems remained undetected. The complaints were sent by the company to the adviser for him to check. The compliance checks gave him the opportunity to choose the clients to be examined and even allowed him to sit in and prompt answers to difficult questions. The cavalier attitude adopted by large companies defeats the whole object of the Financial Services Act—that of protection —and leads to problems not becoming public until too late.
LAUTRO and FIMBRA are the main regulators—the former for company representatives and the latter for independent representatives. LAUTRO has issued an enforcement bulletin, No. 11, which laid out recommendations for compensation. However, on 31 May 1991, Royal Life responded through its solicitors as follows:
EB 11 does not support your client claims in the way you contend and we think it would be unfortunate if you were to raise your clients' expectations unfairly in this regard.In other words, it was a brush-off.In an example involving the Guardian Royal Exchange, the company even failed to have contracts of employment with its tied agents. It described that as "a technical offence." How can companies be allowed to take that cavalier and complacent attitude? It can only be supposed that it has something to do with the fact that the major insurance companies fund the regulators and also sit on their boards.
Although one might expect problems to arise in the early years of self-regulation, I am alarmed that they appear to be continuing. The claims against companies running "failed equity schemes" amount to hundreds of millions of pounds. Insurance companies and the lenders involved have followed a policy of delaying compensation or under-compensating in order, I believe, to avoid having to meet their liabilities. The regulators should have the power to order companies, including the lenders, to compensate fully and quickly. One company stands out as an example—Norwich Union, which has swiftly compensated nearly every victim. I am amazed that other companies have not followed its lead.
The solicitor handling most of the claims against Royal Life has obtained counsel's advice. I am satisfied that, in law, those claimants should have been compensated by being returned to the situation they were in prior to their dealings with the salesman. However, if writs are involved, an unholy war will break out between the lender, the insurance company, the salesman, solicitors and others as to who is liable. The only people to lose will be the innocent. LAUTRO has, once again, made recommendations that the insurance companies should compensate and claim any contribution from others later.
This whole sorry tale raises three questions. First, how could such schemes ever have been permitted to be sold? Secondly, under a regulated system, how can complaints be ignored and compliance fail? Thirdly, can multinational companies—household names—disregard regulatory bodies and fail to compensate adequately?
The Department of Trade and Industry has responded in part to FIM BRA problems, as evidenced by the SIB on March. I now want my hon. Friend to take urgent steps to ensure that all victims are compensated in accordance with the law and, further, that the whole system which allowed those problems to occur in the first place is reviewed to prevent a repeat.
947 I understand that a report on self-regulatory organisations, SROs, by Sir Kenneth Clucas, is due soon. If his report recommends a merger of FIMBRA and LAUTRO, or perhaps a super SRO, will the SIB be able to implement those recommendations or will that require legislation? I should like the Minister's opinion on that.
Suggested further action should include the compulsory raising of compensation funds for LAUTRO and FIM BRA through a levy on each policy written or upon premiums, backed up by compulsory indemnity insurance for salesmen. Secondly, a totally independent regulating authority should be set up with compulsory membership. Thirdly, although this is not a big problem, I should like my hon. Friend to consult with the Inland Revenue on the question of tax indemnities from the insurance companies in respect of compensation payments made to bond holders.
I pay tribute to Nigel Hodkinson and Neil Stevens, the solicitors at the centre of this tragedy, and to Mrs. Jan Prowting, the secretary of Action Group South. They have done, and continue to do, much to help those who have suffered; I now want the Government to help, too.
§ Ms. Marjorie Mowlam (Redcar)I am glad that I have managed to catch your eye, Mr. Speaker. I have been here for a shorter time than the hon. Member for Romsey and Waterside (Mr. Colvin), but I wish you and your wife well in your retirement at the end of this term.
I shall be brief because the hon. Member for Romsey and Waterside has explained clearly not only the failure of the present regulatory system but also the origins of the problem in relation to home equity income plans, which is now well known. I should add that the numbers involved have been grossly underestimated. Age Concern England now estimates that the figure is about 40,000, and some specialist financial journalists such as Paul Cooper think that it is closer to 100,000. The stream of letters that I receive from pensioners who feel that they have been neglected shows that the figure is larger than we think.
I wish to add four questions to those asked by the hon. Member for Romsey annd Waterside. The hon. Gentleman mentioned the liaison committee of regulators of the Securities and Investments Board—the one-stop procedure for registering complaints. We welcome that, but it does not amount to a solution. When will the liaison committee reach decisions on the individual cases about which it now has information? We should like the Minister to answer that, for the simple and crude reason that many of the victims are elderly and cannot wait much longer.
Secondly, how far is it proposed that victims should be compensated? Are we looking at full restitution or the limits of the investors' compensation scheme? Thirdly, has the Minister any proposals to deal with the sharks operating schemes towards the end of their existence? Some of them had a history of dubious business deals and, although they are now banned from membership of FIMBRA, many still operate on a tied basis through some of the insurance brokers.
Finally, has the Minister any plans to resolve uncertainties about FIM BRA's financial viability? This is the flip side of the question asked by the hon. Member for Romsey and Waterside. If many of those cases are 948 resolved through the investors' compensation scheme, FIMBRA may be in danger of terminal financial problems, as we have seen in the past.
§ The Minister for Corporate Affairs (Mr. John Redwood)I too would like to add my best wishes for your retirement, Mr. Speaker, and my thanks for the courtesies that you have shown me and my hon. Friends over the years that I have been in this House.
My hon. Friend the Member for Romsey and Waterside (Mr. Colvin) raises some important issues. I am grateful to him for coming to my Department a little while ago to stress the urgency of the matter. As he knows, I then discussed it with the chairman of the Securities and Investments Board, and I am pleased that the SIB is taking the lead in bringing the regulators together to see how best those problems can be tackled. I also wrote recently to all hon. Members detailing the measures that are now being taken, and I hope that that was helpful.
Procedures for dealing with complaints about those schemes are already in operation. Both FIMBRA, which regulates independent financial advisers, and LAUTRO, which regulates the marketing of life offices and their tied agents, have effectively prohibited further unsuitable sales of investment-bond-based home income schemes to prevent recurrence.
The Financial Services Act regulators have also been working to secure redress, where appropriate, for investors who took up such schemes as a result of unsuitable advice. They are in contact with the building societies Commission, the building societies ombudsmanan and other bodies. Following my discussions with the chairman of SIB, they are making progress in bringing together those regulators and ensuring that there is effective co-ordination. I shall ensure that my hon. Friend's comments and those of the hon. Member for Redcar (Ms. Mowlam) about the liaison committee and the need for it to come to rapid decisions on how those matters will be handled are brought to the attention of Sir David Walker at the SIB following this debate, because I share their concern that justice should be seen to be done, and be done speedily, in those important cases.
Those investors who are facing difficulties with mortgage repayments as a result of investments in home income schemes no longer meeting all their requirements to service the debt should contact their building societies immediately, if they have not already done so, to discuss interest and repayment arrangements. I am sure that hon. Members will give that advice to their constituents when asked. The societies have stated that they are anxious to avoid repossession, and I renew the Government's plea to the societies that they should consider the cases sympathetically, understanding the background to them.
Those who invested through a reputable firm, such as a life office, and think that they should be compensated should in the first instance apply to that office, and to the regulator—LAUTRO, in the case of life offices, or their tied agents—if they are not satisfied with the result. My hon. Friend is right to say that the Norwich Union has led the way in giving compensation in many cases, which I also welcome.
Some firms selling home income plans have been declared in default by the investors compensation scheme —ICS—and in such cases investors may be eligible for 949 compensation through that scheme. Aylesbury Associates and Fisher Prew-Smith fall into that category. The relevant regulatory body will advise the customers of those former businesses, or hon. Members taking up their cases, if a claim on the ICS can be made and how to make one.
The hon. Member for Redcar asked how much compensation we are talking about. That depends on the procedure being followed and the case of individual constituents. If it is a claim on the ICS, it will be governed by the ICS rules and the maximum limits of the ICS scheme—the £48,000 allowed against the £50,000 claim. If the individual is seeking redress from the investing institution—the insurance company—different levels of compensation will be appropriate, depending on the agreement reached between the customer and his representative, and the company.
Some investors may not have been subject to gross misselling, but may have bought a product whose value has gone down, leading them to embarrassment. It may he that those values are only temporarily depressed, and such investors should seek specialist investment advice as to whether their investment value could increase again, thereby removing the problem, or whether they need to change the investment to try to recoup some of their losses or ensure that they do not have further losses. It is important that those investments that have been made and are still there should be well looked after, as the main solution for those customers would be for their money to be well looked after and therefore grow in the future.
My hon. Friend the Member for Romsey and Waterside mentioned a case involving Royal Life. I am advised that Royal Life has already made compensation following a number of claims, some of them involving substantial amounts. I am told that Royal is anxious to deal with all the outstanding cases as quickly as possible, and is devoting considerable resources to the matter. However, it has apparently experienced some difficulty in obtaining all the information it needs to deal with the claims.
LAUTRO has met, and is continuing to meet, both Royal and the solicitors acting for the investors to discuss progress. LAUTRO will continue to use its good offices to ensure a satisfactory outcome. Like my hon. Friend, I wish to see a prompt conclusion after all these months, and will ensure that LA UTRO sees a copy of the report of tonight's debate so that my hon. Friend's sense of urgency can be communicated to LAUTRO, which is trying to intermediate in those cases.
§ Mr. ColvinI am told that Royal Life has set aside a large amount of money—£12 million—for payments, and has so far paid out £3.5 million. In the southern group, which involves my constituents, there have been 270 claims, only 39 of which have been fully settled. I think that there is some dragging of feet.
§ Mr. RedwoodI am grateful for that information, which was why I worded my answer cautiously and said that I associated myself with my hon. Friend's wish to see matters dealt with as expeditiously as possible. I will, of course, ask LAUTRO to take account of that information, following tonight's important debate, as it is necessary that justice is dispensed with reasonable speed.
If investors remain dissatisfied with the outcome of their claim after Royal has dealt with it, they can raise the matter with the Insurance Ombudsman Bureau—a 950 recognised complaints authority for LAUTRO. The bureau provides an independent and impartial method of resolving disputes between insurers and complainants, and its services are free to the complainant. The ombudsman's decision is binding on the insurer but not on the complainant, and it does not affect the latter's right to take legal action afterwards. I believe that some complainants have already approached the ombudsman in this matter. It provides a safety valve if things have gone wrong in the preferred method of settling directly with the company.
My hon. Friend mentioned another case, involving a representative of Guardian Royal Exchange, and I know that other hon. Members are also interested in it. LAUTRO is looking into this case, and has been in touch with GRE. Some investors have already been compensated by the insurer, and other claims are being considered. I understand that LAUTRO's chief executive will be meeting investors' representatives next week to discuss the next steps. I repeat that I will ensure that LAUTRO sees the report of this debate; this matter too should be governed by the wish of the House that it should be dealt with expeditiously and fairly.
My hon. Friend said that he thought that some of these difficulties arise because we have a system of self-regulation. I cannot entirely agree. We do not have a system of self-regulation: we have a system of professional regulation under statute. There is practitioner involvement at board level, but the people doing the day-to-day regulation—those who have to go out and interrogate, investigate and bring suspicious circumstances to the public eye—are all full-time paid professionals who do this work and nothing else. [Interruption.] I do not know whether the hon. Member for Redcar wants to intervene. She seems to find this funny; it is not—it is a serious matter.
§ Ms. MowlamI was not amused by the subject matter. We have had correspondence from many people who are suffering as a result of all this. I am amused only by the change in the Minister's language since a year ago, when he upheld the idea of self-regulation. Now that all these problems for individual and corporate investors have emerged, he has changed his language—another example of the shifts in Government language that we have heard more and more as the election nears.
§ Mr. RedwoodThe hon. Lady is absurd. I have used the same language on this matter throughout my time in the DTI. I have always characterised what we have as professional regulation with practitioner involvement. I will look out speeches and press releases on the subject if the hon. Lady wants to challenge me further. We are talking about a group of professional regulators trying to do a difficult job and needing the support of those who want an honest market.
My hon. Friend the Member for Romsey and Waterside asked why such schemes were permitted in the first place. With the benefit of hindsight, that is a good question, but there was a legitimate purpose to many of the schemes—to enhance pensioners' incomes by pledging their assets. The problem was that bad investment advice was given to some, and things were even worse in some cases. Action is being taken to root out those abuses. In the interests of caution, regulators have now decided that many of the schemes are unsuitable, and they have learnt from what has happened in the past.
951 I do not believe that all the complaints were ignored. I do not believe that all the major companies are failing to compensate. My hon. Friend has mentioned one that has compensated reasonably quickly, and I have mentioned two others which will compensate or which have started to compensate. It is important that these steps be followed up.
I was asked whether the Kenneth Clucas report will require legislation. None of us knows what the report will recommend, but, as some press rumours suggest, were it to recommend mergers between the regulatory bodies, I understand that we are unlikely to require primary legislation to achieve that end. Two regulatory bodies recently merged without the need for statutory changes.
The hon. Member for Redcar asked me what action would be taken to deal with what she called sharks. She should well know by now that, if cases are established of malpractice, of criminal action or of abuse of the system, they will be pursued by the prosecuting authorities in the usual way. If she has evidence that will help the prosecuting authorities in their task, she should send it to them immediately, so that the right action can be taken. 952 My hon. Friend, who is well informed in these matters, told the House that some action has already been taken against some of these people, and rightly so. We want these problems to be dealt with in the right way.
Finally, the hon. Lady asked me about the future of FIMBRA and its financing. I suggest that she awaits, as I do, the final outcome of the Clucas review, but I know of no current financial embarrassments of FIMBRA, and I trust that the hon. Lady is not trying to create problems where there are no immediate problems on my desk.
There are a number of tragedies here which we have discussed tonight. Of course I wish to see action taken. I am grateful for the work that my hon. Friend has put into exposing the issue and his arguments on behalf of the many customers who have been upset by such schemes, particularly his constituents. I shall ensure that the content of the debate is relayed to the Securities and Investments Board and to LAUTRO so that they see the urgency of the problem and the wish of Members from both sides of the House who are here tonight, and who I think are representative of many others who are not here, to see solutions as soon as possible.
Question put and agreed to. Adjourned accordingly at twenty-five minutes to Eleven o'clock.