HC Deb 08 March 2004 vol 418 cc1251-75 3.59 pm
The Financial Secretary to the Treasury (Ruth Kelly)

With permission, Mr. Speaker. I would like to make a statement about Lord Penrose's report into the events at Equitable Life, which I can confirm is being published in full today. Copies are available in the Vote Office.

As the House will remember, following the closure of Equitable Life to new business and the cuts in policy values in July 2001, the Government established an independent inquiry under Lord Penrose on 31 August 2001. The terms of reference were: To enquire into the circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury ministers. I would personally like to thank Lord Penrose and his team for their hard work and dedication. The report presents a full and forensic account of events, covering some very complex issues and spanning a period of more than 30 years. The Government sympathise with the plight of policyholders who have suffered much worry and distress over the past four years and who have seen significant reductions in their expected income in retirement.

Lord Penrose says: I have interpreted the remit"— of the inquiry— as requiring me to focus on the events that explain the Society's fate. He also makes it clear that it was inevitable that hindsight would instruct much of the inquiry's work and many of its findings". Lord Penrose does not attempt to judge any person's actions. He says: It was not for me to measure any person's actions against accepted standards of conduct defining the legal duties of other people performing comparable duties in other organisations and other similar circumstances. He observes: Breach of duty, and the financial consequences of breach, are properly matters for the established courts of justice and for other appropriate tribunals in the financial sector. He adds: An open adversarial process such as would have been necessary to replicate the litigation process over the longer period and the wider range of issues would have been beyond contemplation…It would be unthinkable for an inquiry such as this"— non-statutory and non-adversarial— to have embarked on such a process. Moreover, he says: There was no mechanism that could have been devised and put into effect within a time scale that would have had regard to the wider public interest in obtaining the account of the developments of the Society's position. Lord Penrose argues that the judgment of the House of Lords in the Hyman case in 2000, which disallowed the society's practice of reducing terminal bonus to meet guaranteed annuity claims, precipitated a crisis, but was not—as some have claimed—solely responsible for it. He notes: Superficially claims of £1.5 billion should not have brought down a Society with funds of £32 billion. In Lord Penrose's own words, The Society's uniqueness lay in the approach adopted by its management, not in the essential characteristics of its business. Lord Penrose describes how a culture of what at various times he calls "manipulation" and "concealment" on the part of some of the company's previous senior management allowed a bonus policy to develop that led to the society's financial weakening—a policy left unchecked by its own board. It was the society's own actions that ultimately precipitated its financial crisis in the summer of 2000.

First, the report details how executive management failed to keep the board fully informed about the true state of the company's financial position, despite the clear responsibility placed on the appointed actuary to inform the board in that regard. Lord Penrose outlines how Mr. Roy Ranson, appointed actuary from 1982, and both chief executive and appointed actuary of the company between 1991 and 1997, did not inform the board of management decisions in the period 1983–93 related to the recovery of the cost of annuity guarantees from terminal bonus". He did not inform the board of the risks to which policyholders not entitled to annuity guarantees were exposed by the policies and practices adopted", and did not inform the board about the business risks inherent in the general actuarial management of the Society". That meant, Lord Penrose says, that the Board's understanding of the annuity guarantee issue was at best limited until the autumn of 1997, and some directors may not have had any understanding of the position". As a result, he says that the decisions of the board brought the Society to the position of weakness in which it found itself in 2000 and 2001 without full knowledge and understanding of the developing position. He does not offer judgment on Mr. Ranson's failure to keep the board adequately informed. In line with his interpretation of his remit, he says: I have not sought to form or express a view whether Ranson was in breach of duty…that is a matter for the courts and for his professional institute. But, in Lord Penrose's own words: The Board at no stage got fully to grips with the financial situation faced by the Society: information was too fragmented, their collective skills were inadequate for the task, and there were no effective arrangements for ensuring that there was detailed examination of, and onward reporting to the Board, on actuarial reports. He adds that the non-executive directors were so wholly dependent on actuarial input from the … chief executive/actuary that they were largely incapable of exercising any influence on the actuarial management of the Society. Lord Penrose also finds that there was Serious omission in communication to policyholders of relevant information about their prospective interests. He reveals how the differential terminal bonus policy was not disclosed to policyholders…in any way until 1996. Even when the company decided to inform policyholders about the terminal bonus policy in 1996, Lord Penrose argues that it was done badly—in his own words: Attempts were made to change expectations in 1996 and later years. These were ill-conceived, poorly expressed and confusing. The intimations to policyholders were generally uncommunicative. Lastly, Lord Penrose finds that the society concealed information from the regulators. Mr. Ranson was, in Lord Penrose's own words, "obstructive" of scrutiny and "dismissive" of regulators' concerns. The regulatory returns were, he says, "opaque and uncommunicative". The Society did not inform regulators properly about a series of particular valuation practices of dubious actuarial merit that were being used by management to sustain the society's capital position and prop up its solvency.

Lord Penrose reveals how, from 1992 to 2000, the Society never clearly communicated the nature of its quasizillmer adjustment to the Government Acturary's Department—an adjustment that, he says, was not a legitimate device…on the terms of the regulations. In relation to guarantees, Lord Penrose finds that Such references as were made…failed properly to disclose their nature and extent to the regulators. More recently,Lord Penrose observes the then appointed actuary, Mr. Christopher Headdon, wrote a crucial side letter relating to a reinsurance contract, which recorded that it would be cancelled, rather than renegotiated, in the event that more than £100 million was claimed. Lord Penrose notes that, if the Financial Services Authority had been made aware of that side letter, they 'would not have been prepared to accept the reinsurance arrangements as providing as much security for reserving purposes as was in fact taken."' Lord Penrose writes: Those involved at the Society were not in any doubt that a right for the reinsurer to cancel in these circumstances would undermine the regulatory value of the agreement. Lord Penrose says: These matters are potentially the subject of other proceedings, so I do not propose to comment on what may or may not have been the intention in writing the side letter or its legal effect. In short, Lord Penrose makes it clear that the society's former management adopted a series of "dubious" practices, many of which it concealed from its own board, its policyholders and the regulators. He argues that that led to the situation in which the society found itself in July 2001. Thus, as Lord Penrose says, the Society was able to over-allocate bonus beyond available assets at market value, and in particular to make payments on claims that exceeded the relative available assets at the time. That weakened the society so greatly that it was unable to withstand the claims on guaranteed annuities. Lord Penrose's central finding is that principally, the Society was the author of its own misfortunes. The House will be aware that Lord Penrose sent his report to the Serious Fraud Office. The Treasury followed up by passing the report to the enforcement arms of the FSA and the Department of Trade and Industry—all three are currently considering the evidence of the report.

As I have described, Lord Penrose lays the blame for events at Equitable Life at the heart of the society. He calculates that, by the end of 2000, as a result of the excess bonus declarations, the society's liabilities exceeded its assets and 1.8 billion had been lost to the fund as policies matured taking more than their fair share of assets. That past over-bonusing was a driving factor, he says, behind the need to cut policy values in July 2001.

The current management argue strongly that the cuts in policy values in 2001 reflected different factors. The House will appreciate that this is a complex legal, actuarial and accounting issue, which could ultimately be determined only by the courts. Lord Penrose himself makes it clear that he could not adjudicate on the policyholders' complaints and claims: that again is a matter for other proceedings". It was, however, important that the Government acted with due diligence to check with the FSA the potential impact of these complex issues on the society's current policyholders and on wider financial stability. That is why we have been unable to publish the report earlier.

The current board of Equitable Life will, together with the FSA, assess the impact on the society's liabilities and any risks to policyholders posed by Lord Penrose's findings. Those who have already seen limited extracts of the report on behalf of Equitable's board have concluded that it is in the best interests of policyholders to continue in business as before.

To conclude on over-bonusing, Lord Penrose himself makes it clear on claims that that again is a matter for other proceedings. The FSA will continue to monitor the society closely and take whatever action is needed to protect policyholders.

Lord Penrose raises a number of important issues about the deregulatory, light touch, reactive system in the decades before the creation of the FSA. It was a system, however, that in that period clearly reflected the will of Parliament. He finds that the lack of co-ordination of prudential and conduct of business regulation…was unacceptable and that the accounts did not reflect the realistic financial position of the office". In 1997, as soon as this Government came to power, they took action to put an effective regulatory system in place, setting up a single integrated regulator combining prudential and conduct of business regulation. A key part of the new regulatory regime was the creation of a comprehensive financial services compensation scheme and a single financial ombudsman service.

Since then, the FSA has proceeded to introduce risk-based insurance regulation and individual capital standards. It is also in the process of introducing realistic accounting by life offices, including a requirement to reserve for terminal bonus. In addition, the use of future profits implicit items is being phased out. The FSA is also removing responsibility for making key decisions on asset allocation and distribution in with-profits funds from the appointed actuary and transferring it to company boards, and it has brought forward proposals on better treatment of customers by firms and fuller transparency of with-profit funds.

Lord Penrose fully endorses the Government's actions since coming to power, saving that the FSA's reforms reflect a major, comprehensive reassessment 01 the requirements of an efficient regulatory system for the insurance sector". In particular, he welcomes the FSA's detailed proposals for realistic accounting, which, he says, are clear recognition of the importance of looking beyond a narrow concept of solvency". In summary, he argues that the FSA's work since 1997 has sought to anticipate many of the lessons that might be drawn by this inquiry and it should come as no surprise that it has largely succeeded. However, Lord Penrose's report deals with a time when a different regulatory system was in place, and a regulatory culture that was light touch, reactive and placed the responsibility for monitoring policyholders' reasonable expectations firmly on the appointed actuary of companies—a regulatory system that was argued for by Ministers and reflected the will of Parliament.

Lord Penrose notes that in 1973, during the passage of the Insurance Companies Act 1974, DTI Ministers resolved that action on the basis of policyholder s' reasonable expectations would be reactive to what was found in he annual regulatory returns so as to restrict the workload that a less restrained approach would involve. Lord Penrose argues that the system n was not updated to take account of developments in the industry, particularly the trend toward terminal bonuses. He notes that aspects of the regime were reviewed, but that no proposals for change were pursued by Ministers. He writes: Virtually no primary legislation in the regulatory area for which DTI was responsible was taken forward by Ministers…there were specific proposals for change that Ministers did not pursue. In particular, a proposal was made in 1988 to update life insurance regulation, but in Lord Penrose's own words, the Minister"— the right hon.Member for Bromley and Chislehurst (Mr. Forth)— did not regard the subject as a high priority for legislation. Lord Penrose notes that senior regulatory officers argued to him that the Government required a 'light touch' approach to regulation, and allocated resources accordingly. He says: I was urged to take into account the political climate that prevailed for most of the 1990s when the Government's objective was to deregulate, to reduce regulatory burdens on business, to avoid interference in private companies, and to let market forces prevail. Lord Penrose goes further. He says that Ministers argued against reform in the early 1990s—a critical time of development in the industry—when the third life directive was being negotiated in Brussels, maintaining that the reactive approach to monitoring policyholders' reasonable expectations based on regulatory solvency was sufficient. According to Lord Penrose, the DTI believed that forcing insurance companies to reserve for terminal bonus would have been "over cautious". And Lord Penrose adds that the UK delegation "led the resistance" to measures requiring more cautious valuation techniques.

Lord Penrose says: As for the regulatory system, I do believe it has failed policyholders in this case. However, he emphasises: Regulatory system failures were secondary factors", and argues that it was the system that failed to provide the regulation that changing circumstances in the industry required, not that there was failure to implement what was fundamentally a satisfactory system. That system was one that Ministers and Parliament intended.

Lord Penrose makes no recommendation for the payment of compensation. His central finding is: Principally, the Society was the author of its own misfortunes. And when he itemises specific findings about the regulator, he is clear that these are matters that are not for him, but for the courts. Nor does he conclude that economic loss was caused to policyholders by the regulatory system. However, as Lord Penrose says in his own words: The deficiencies are not so obvious as some are inclined (or wish) to believe. And…it is not enough in this case, to infer from the coincidence of systems deficiencies and loss that one caused or contributed to the other. He stresses that he examined the regulators with the benefit of hindsight and that they were operating under a system different in its approach, resources and values from that applying today. The misfortunes of the society were caused primarily, he finds, by deep-seated management problems that began as early as the 1980s.

Lord Penrose makes no allegation of maladministration or of negligence against the regulator. He clearly establishes, with the benefit of hindsight, that the "light-touch" approach to regulation was inappropriate. It was not updated to meet the requirements of the industry, but it clearly reflected the will of Ministers and Parliament. He says: Ministers resolved…that scrutiny would continue to be based on the examination of the regulatory returns, and that action on the basis of policyholders' reasonable expectations would be reactive to what was found in the returns". So, it is a question of the laws that Parliament enacted and the context in which Ministers resolved how those laws should be implemented that Lord Penrose criticises rather than the discrete actions of the regulators themselves. Indeed, Lord Penrose accepts that it cannot be the role of the regulator to prevent all failures. The costs of regulation are paid ultimately by the consumer rather than by the institutions themselves.

Lord Penrose also accepts that even had a different, proactive regime been in place earlier, no regulator can guarantee to protect consumers against what he at various times calls concealment and manipulation. Indeed, the losses suffered by policyholders are attributed by Lord Penrose to decisions that were made by the management of the society from the early 1980s onwards. He observes: by appearing to insulate consumers entirely from the risk inherent in the selection of an investment product such an approach could give rise to perverse economic incentives for both consumers and providers. That position is, I know, shared widely across the House. In July 1995, the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), said: I should like to remind the House of an important point. No regulatory system can provide a 100 per cent. guarantee against…failure, especially where there is a deliberate intention on the part of individual traders to conceal or deceive, combined with inadequate management controls. In cases such as this, it is important that lessons are learned quickly and promulgated widely, so that all parties, including the management of other financial institutions, can learn from the unfortunate example".—[Official Report, 18 July 1995; Vol. 263, c. 1457.] The Government sympathise with all policyholders who were deceived by a company that Lord Penrose says manipulated and concealed information from them. Although we will do all in our power to stand behind policyholders in difficult times, we cannot, in a financial services industry, like any other industry, underwrite each and every company whose managements and boards make fundamental mistakes and questionable decisions. In dealing with the issues, we have a responsibility, too, to the needs of taxpayers now and in the future.

Many people have drawn parallels between Equitable and Barlow Clowes. It has been put to us that as the then Government provided redress in the Barlow Clowes case, we should do so with respect to Equitable, but there are major differences between the two cases. Barlow Clowes had ceased trading; Equitable is still trading. In the case of Barlow Clowes, there was a finding of maladministration; for Equitable, there has been no such finding. At the time of Barlow Clowes, there was no compensation scheme; now there is the financial services compensation scheme. Those who continue to argue that what happened for Barlow Clowes should also happen in the case of Equitable Life have got to take into account both the existence of a compensation scheme and no finding of maladministration.

In the event that Equitable were to be subject to insolvency proceedings, there is now a statutory safety net, which was recognised as not being available at the time of Barlow Clowes, to protect investors, provided by the financial services compensation scheme, which would pay out 90 per cent. of guaranteed policy values. Further, the Government have also provided for a single financial services ombudsman to consider individual complaints. I understand that he is currently considering the cases of a number of different categories of former policyholder who have made claims for redress, for which the society has already made provisions. I want to make it clear to the House that we stand ready, if requested, to assist the financial ombudsman in expediting the resolution of those complaints. As I have made clear, Equitable's current board stresses that the company is solvent and policyholders' interests are best served by it remaining in business.

In his report, Lord Penrose raises a number of issues concerning the unlimited liability status of Equitable Life. I can announce that the Government intend, at the earliest opportunity, to publish and consult on draft legislation to protect policyholders in the event that that were ever to become material.

In line with his interpretation of his remit, Lord Penrose does not set out a comprehensive list of recommendations for the Government. Nevertheless, he does make a number of observations that merit further action. I have no doubt that Committees of this House that have taken an interest in these matters will wish to examine what further can be done, but the principle that the regulatory system—even one so recently updated—should be subject to constant review is one that we accept.

I can announce a programme of work to build on Lord Penrose's findings. The Government accept the need to re-examine the corporate governance arrangements applicable to mutual life offices in the light of the experience at Equitable Life. I can announce a review of the governance of mutual life offices, to be led by Paul Myners, so that the boards of mutual life offices are as accountable to their members as those of comparable companies are to their shareholders.

Lord Penrose also offers a number of criticisms of the actuarial profession. He says: The profession resisted prescription. The individual judgement of the appointed actuary prevailed. He adds that the guidance offered no standards of performance that might reflect generally accepted principles or rules of conduct such as one might have expected of a professional body. I can announce that Sir Derek Morris will lead a review of the actuarial profession with a particular focus on considering how best to modernise the profession and to ensure that high standards are delivered in a more open, challenging and accountable professional culture.

I can announce also that I have asked the independent Accounting Standards Board to initiate a study into the accounting for with profits business by life insurers. The study will have a particular emphasis on identifying ways of improving the transparency of reporting.

Lord Penrose also argues that there is a clear responsibility on Government to inform and educate consumers about the nature of the financial system. This Government were the first in the world to incorporate consumer education as a key statutory objective of the financial services regulator. The FSA has recently stepped up its work in this area, with the launch of the financial capability steering group, which will examine the approach to consumer education from first principles.

I have set out Lord Penrose's account of events leading to the situation in which Equitable Life found itself in July 2001. Lord Penrose finds that the first and most significant failure identified in this report lay at the heart of the Society". However, he adds that a key lesson from the report is that it is important to ensure that the continued relevance of the regulatory tools is regularly assessed in the light of a constantly developing industry, and to ensure that those tools are diligently and intelligently applied". It seems not unreasonable to suggest", he says, that those in control of any supervisory regime have a duty…to take steps to ensure that the systems of regulation that are in force and enforced remain relevant to the changing requirements of the industry". We made those changes. Inevitably, certain key issues arising from Lord Penrose's report, as he recognises, can be resolved only in the courts. Nevertheless, as a result of his findings we will publish and consult on draft legislation to remove any possible concerns relating to unlimited liability potentially facing Equitable Life and some other policyholders.

We stand ready, if requested, to assist the financial services ombudsman in the resolution of any consequential issues before him and his staff. The FSA is working intensively to ensure that all its current policyholders are treated fairly.

Looking forward, there will be a programme of comprehensive reviews on corporate governance of life mutuals, actuarial standards or performance and accounting standards. These, alongside the FSA reforms welcomed by Lord Penrose, are developing the architecture of the life assurance industry for present and future policyholders.

It is now for the Serious Fraud Office and the companies adjudication branch of the DTI to decide whether a prosecution should follow.

Mr. Howard Flight (Arundel and South Downs) (Con)

I am grateful to the Financial Secretary for giving us a copy of her statement at 3 o'clock this afternoon and access to the report previously at 1.30 pm. I and my colleagues cannot claim to have absorbed every detail of the 818-page report during the past two and a half hours. Manifestly, over the course of the next few days, we shall need to study the report in great detail. It deals with matters that are of huge importance to many of our fellow citizens whose lives have been so badly affected by the Equitable saga.

The Opposition do not wish to make party political points about the grave substance of the matter for so many citizens. To say the least, I am surprised that the Financial Secretary has focused almost exclusively on the society itself and on the pre-1997 regulatory regime. That was no doubt meant to deflect criticism for regulatory failure after 1997. Surely, however, that is not an appropriate or a grown-up way for the Government to respond to a report of this nature. We should not allow ourselves to indulge in the childish game of making competing attributions of blame. We should rather work together to seek to address the harm done to innocent people, many of whom are vulnerable and elderly—[Interruption.]

Mr. Speaker

Order. Please allow the hon. Gentleman to speak. Mr. Ronnie Campbell, you are usually quite noisy and I sometimes tolerate it, but you are being even noisier than usual.

Mr. Flight

Many different groups of people are involved, each with their own tale to tell: annuitants, policyholders who are not yet annuitants, those with guarantees, those without guarantees, those who joined early and those who joined late. I am sure that we will need to make distinctions in how we respond, because each group of people has been affected in a different way.

I hope that the Financial Secretary will agree with us on two points. First, it is not appropriate for the taxpayer to make good the losses suffered by savers when those losses arise from ordinary business risks. Secondly, it is appropriate for the Treasury to make good those losses that are directly attributable to negligence or to incorrect interpretations on the part of the regulatory authorities.

I hope that the Financial Secretary will also agree that it is important, when the state is shown to be directly at fault, that people can trust the Government of the day always to do the decent thing by those who have suffered. That was the view taken by the present Chancellor when he responded to the statement on Barlow Clowes in the House at the end of 1989. The Financial Secretary has drawn our attention to the differences between Barlow Clowes and Equitable Life, but there are striking parallels. In 1989, the present Chancellor said: I welcome … this … payment to Barlow Clowes investors". But it is somewhat ironic that he went on to ask the House 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.] I cannot think that the Financial Secretary or the Chancellor would want, in government, to apply standards different from those that they applied to the Government when they were the Opposition.

There can be no doubt that this report, even on a first reading, provides unambiguous and compelling evidence of regulatory failure at operational level, despite the Financial Secretary's efforts to avoid that conclusion. In paragraph 240 of chapter 19, Lord Penrose tells us: There was a general failure on the part of the regulators and the Government Actuary's Department. In paragraph 158 of chapter 19, he describes the Department of Trade and Industry and the Treasury as "ill-equipped" and the Government Actuary's Department as complacent.

In paragraph 171 of chapter 19, Lord Penrose describes the regulator's failure to appreciate that a change of valuation assumption … had real implications". In paragraph 187, he describes short-term objectives related to support of solvency that should have alerted regulators to the Society's weakening position. In paragraph 209, he tells us that information was not used to form a realistic appraisal of the Society's financial position", and in paragraph 228, he tells us: Unsatisfactory answers were accepted without follow-up. In paragraph 232, he expresses his concern that the FSA and GAD did not have sufficient independent knowledge and understanding of the Society's business", and in paragraph 236, he tells us that regulators and GAD also failed to identify and question the adequacy of disclosure". I believe that the Financial Secretary is bound to accept that that is a comprehensive series of findings against the regulators at operational level. I remind her that at the time of Barlow Clowes the present Chancellor said, in the face of similar operational failure on the part of the regulators, that the need for compensation is agreed"—[Official Report, 19 December 1989; Vol. 164, c. 204.] I hope that the Financial Secretary will now tell us what she did not tell us in her statement—that she will find a way of allowing the parliamentary ombudsman to investigate the operation of the Government Actuary's Department and other regulators to establish the extent of maladministration so that the question of compensation can be properly addressed. I hope that she will tell the House that she is willing to join hon. Members from other parties and the professional parties involved so that we may together consider how best to address the issues arising from the report.

As responsibility for the events is shared, so should solutions be, not least because pensions and the savings that give rise to them, as well as the associated liabilities, are long-lived items that must inevitably be addressed over the span of several Parliaments. When a crisis of this kind affects a large number of people, it is of the utmost importance that we forge political consensus on the appropriate remedies so that the steps that are taken can be maintained with consistency over a long period.

The implications of the episode are deep, because it raises issues of trust, not trust in this or any other Government, nor in this or any other organisation, and not even in this or any other particular regulatory regime, but of the trust of the ordinary family in the pensions industry, which lies at the heart of our financial system. Ultimately, it is a question of trust in capitalism and the fulfilment by the financial system of obligations that, whatever their legal status, have great moral, social and economic importance. I hope that the report's receipt will be the beginning of a process that leads to the restoration of a trust that has been sorely and dangerously diminished in recent years, and that the Financial Secretary will join us and others in a common effort to achieve that common aim.

Ruth Kelly

It thank the hon. Member for Arundel and South Downs (Mr. Flight) for his most reasonable response and shall try to deal with his points in turn. First, however, he ought at least to acknowledge the fundamental reforms that the Government introduced in setting up the Financial Services Authority. Those reforms were long overdue, and the notion that the Government have not done everything that they can to overhaul regulation, protect policyholders and keep the system up to date is ludicrous.

We, too, sympathise with the plight of Equitable Life policyholders, some of whom have suffered tremendous hardship. The hon. Gentleman cannot, however, argue on the one hand that the Government do not have responsibility for underwriting business failure up and down the country and fail, on the other, to acknowledge that Lord Penrose firmly pinned the blame on the society in this case. Lord Penrose said that the problem started and continued there, and was born of the society's policy. It was founded on a mistaken strategy by the society and was concealed by its officials from its own board and policyholders and the regulators.

Lord Penrose makes it clear in this case that principally, the Society was the author of its own misfortunes". At the heart of the society there was, as Lord Penrose says, "a self-perpetuating oligarchy" that "aggressively pursued growth" with "missionary zeal". They failed to inform the policyholders of the position of their company. They buried and concealed information from the regulators. Even their own board was kept in the dark about essential financial information, including the impact of guaranteed annuities, until 1998.

The hon. Gentleman raises questions about the regulatory system in place. I dealt with those in my statement. Lord Penrose says regulatory system failures were secondary", but a system failure there was—one that the hon. Gentleman's party cultivated and over which the Leader of the Opposition presided when he was a financial services Minister. As Lord Penrose states, Conservative Ministers, in an attempt to minimise the work load involved, resolved…that scrutiny would continue to be based on the examination of the regulatory returns, and that action…would be reactive to what was found in the returns". As a result, he says—a point that the hon. Gentleman picked up—the DTI insurance division was ill-equipped to participate in the regulatory process—a deliberate decision of his Government when they were in power, and one that reflected the will of Ministers and of Parliament.

When proposals were made to update life insurance regulations, they were rejected. In 1997 when we came to power, we inherited a light-touch, under-resourced, reactive regulatory system that lacked challenge, and we moved quickly to set up the FSA—a system that Lord Penrose calls.

a major, comprehensive reassessment of the requirements of an efficient regulatory system for the insurance sector I shall deal with each of the specific points that the hon. Gentleman raised, but first. I shall quote Lord Penrose. He says: I have not qualified my comments by reference to professional standards current at the time that the events occurred: that is a matter for the courts and professional bodies exercising disciplinary functions. Further, I have the benefit of hindsight … in seeking material from which lessons can be learnt for the future it would be impossible to restrict oneself to what individuals knew or ought to have known at any time in the past. The hon. Member for Arundel and South Downs argued that the DTI was under-resourced and that it could not monitor policyholders' reasonable expectations. Lord Penrose says it was it was resolved by ministerial decision that PRE would be monitored from the annual regulatory returns. Up until the FSA was in force, he says regulators were never in a position to form a view on the issue". The hon. Gentleman quoted Lord Penrose on future profits and the fact that the FSA allowed the society to take out an implicit future profits item. Perhaps if he read further, he would see that Lord Penrose notes it appears that in the context of current guidance and the regulatory framework in force, regulators could not have done otherwise". The hon. Gentleman argued that the point about subordinated debt should have been picked up by the regulators. If he further, he would see Lord Penrose says: I do not criticise any of the formal steps taken of the propriety of the order granted". Lord Penrose makes it clear that guaranteed annuities were not the cause of the society's weakening. He accepts that the presentation of the issue was disjointed and opaque, and that even the society's own board did not fully understand it until 1998. The regulators—the Treasury, in this instance—took strong action against Equitable throughout 1998 and 1999. Equitable threatened judicial review. The regulators threatened regulatory action. In the end the regulators' view prevailed and Equitable reserved in full.

The hon. Gentleman raised the case of Barlow Clowes. In that case, there was a finding of maladministration. The company was not trading. No compensation scheme was in place. In the case of Equitable Life, there is no finding of maladministration, the company is still trading, and a comprehensive compensation scheme is in place. The hon. Gentleman asked whether the parliamentary ombudsman should be asked to investigate the Government actuary service. He failed to notice that we have just set up a review of actuaries, including the Government Actuary's Department, under Sir Derek Morris. I wonder what else he had in mind.

There is no new evidence in the report to suggest any allegation of maladministration or negligence. Lord Penrose does not pin the blame on individuals who, he says, have in the main operated in good faith and to the best of their abilities within the system as they found it. Principally, he says, the society was the author of its own misfortunes. Regulatory system failures were secondary factors.

The hon. Gentleman made a last plea about trust in financial services. Perhaps I should go back to the Penrose report for a last time. Lord Penrose himself says: If the proposals in hand for the future of the new regulatory system are implemented and if they are effective in practice, the major criticisms of the earlier regulatory regime will have been addressed both in relation to the general approach to regulation and in relation to the particular issues arising from the discussion of regulation of the Society.

Dr. Vincent Cable (Twickenham) (LD)

I, too, thank the Minister for early sight of the massive report. Clearly, I have not read all of it, but I have read enough to see that there are considerable discrepancies between what it actually says and the way in which she has interpreted it to us.

I want to deal with three specific points. First, on whether there was a regulatory failure, the key sentence in the summary, which the Minister quoted and on which she hinged her whole argument, was: As for the regulatory system, I do believe that it has failed policyholders in this case. She interpreted that as being a criticism of the system as a whole, and as meaning that there was therefore a failure of the previous Government and the wicked, incompetent Tories, who failed to put the proper legislative framework in place. I do not need any persuading that the Tories are wicked and incompetent, but anyone who reads the report carefully will see that that is only part of the truth. Why did she not read the whole paragraph in which that sentence was embedded? The concluding sentence starts with the word "but", which is crucial: But I do take the view that the system itself was not overseen … was not kept up-to-date, and operated in an ineffective manner. There is specific reference to a major scandal that arose when the Department of Trade and Industry was overseeing Equitable Life, when the DTI commissioned as its own auditor the chief executive of the company that it was supposed to be regulating. If that is not negligence, what is? Clearly, there was a system failure, but there was also negligence.

Secondly, let me turn to compensation. The Minister said that Lord Penrose did not advocate compensation. Of course he did not, because it was not in his mandate, as paragraph 77 of the conclusions makes clear. Why did the Minister not quote a key paragraph in the conclusion in which Lord Penrose introduced the discussion on compensation: However, whatever the position on compensation might prove to be in the end of the day, it is clear that many Equitable policyholders have suffered much worry and distress, and many have been and will continue to experience real financial hardship, as a result of seeing the returns they had expected from their savings very dramatically reduced"? That happened as a consequence of failures of regulation of the company.

The Minister stated that the fundamental difference in respect of Barlow Clowes—I want to pursue in a little more detail the point made by the Conservative spokesman—was that there was no finding of maladministration in that official inquiry. That is simply untrue. The finding of maladministration came in a subsequent report by the ombudsman. Indeed, in a particularly trenchant paragraph, the current Chancellor of the Exchequer, commenting in Parliament in 1989, confirmed that point precisely: I must ask why we have had to rely on the ombudsman to confirm … mismanagement, maladministration and incompetence".—[Official Report, 18 December 1989; Vol. 164, c. 204.] That is why we and members of the society now expect a follow-up report by the ombudsman to interpret Lord Penrose's findings. If that is not possible, why cannot Lord Penrose be asked to spend an extra three months extending his mandate to look specifically at compensation, which he was precluded from doing before? If his findings are as the Government think, they need have no worry that they will be asked to sign any cheques, so why cannot they ask him to examine that dimension?

My third and final comment relates to the future of the society, about which the Minister said very little. As I understand it, her only practical recommendation to policyholders is that they should pursue mis-selling claims. Is she not aware that Equitable Life's policies were essentially sold by its salaried staff, not by commission agents? Any attempt to pursue a mis-selling claim must necessarily involve raiding the society's residual funds—less, of course, very large fees for the lawyers. The only recourse that she is offering is for the lenders to sue themselves. This is a hopeless outcome, and one that is totally unworthy and unsatisfactory. Not Penrose, but the Minister's interpretation of Penrose, will be alarming and demoralising to the million people who have policies with the company, and it will have very damaging long-term effects on the savings culture for millions of others.

Ruth Kelly

The hon. Gentleman has fundamentally misread the central findings of Lord Penrose's report. He made a point about regulatory failure. I accept that there was a system failure of regulation, as Lord Penrose says. That failure was the policy pursued by the previous Government, implemented according to the will of Ministers, and accepted by Parliament. Lord Penrose is specific in saying that the coincidence of system failures in this case did not lead to loss.

The hon. Gentleman made a point about the combination of the role of chief executive and appointed actuary. If he reads deeper into the report, he will see that there was no law that could have prevented the situation from occurring at that time.

The hon. Gentleman talked about Barlow Clowes and the fact that no compensation scheme was in place at the time. The parliamentary ombudsman made a clear finding of maladministration in that case. The previous Government did not accept liability but said that they would pay compensation out of respect for the offices of the parliamentary ombudsman, recognising that there was no other way that distress could be alleviated among the Barlow Clowes victims. Now we have a comprehensive financial services compensation scheme in place, and it pays out 90 per cent. of guaranteed policy values.

The hon. Gentleman asked whether Lord Penrose could now investigate whether compensation should be payable, but if he had listened to my opening statement, he might have heard Lord Penrose's own words: There was no mechanism that could have been devised and put into effect within a time scale that would have had regard to the wider public interest that could have allowed him to investigate those issues.

The hon. Gentleman made a point about the future of Equitable Life itself and its policyholders. Yes, they had a very difficult time and I sympathise with their plight, but the question now is what is the right thing for the Government to do. Lord Penrose identifies a prolonged and sustained period of over-bonusing in the society. His estimate is that more than £3 billion was paid out to policyholders in the 1990s. He says that that issue can ultimately be resolved only by the courts.

Mr. John McFall (Dumbarton) (Lab/Co-op)

The Financial Secretary will be aware that the Treasury Committee has invited Lord Penrose to give his views on his report next week. Surely it sounds the death knell for the post of appointed actuary. The report's conclusions are bitter for the many hundreds of thousands of Equitable Life policyholders. We have had prudential regulation, conduct of business and realistic reporting improvements, but all that, for Equitable Life policyholders, sadly, is locking the stable door after the horse has bolted.

The big question today is how we can improve transparency to ensure that there is no rerun of this scandal and fraud by future managements and that when people put their money in savings they can have confidence in the system. How will the Minister and the Government work to ensure that we restore confidence in the long-term savings market?

Ruth Kelly

My hon. Friend draws attention to the appointed actuary system that was in place for a prolonged period during the 1980s and 1990s. The Financial Services Authority has decided to abolish that system, to remove from the appointed actuary responsibility for making key decisions about asset allocation and distribution in respect of with-profits funds, and to place that responsibility firmly on the board.

My hon. Friend asks how we can restore confidence; the way to do so is to take the action required. We have made the changes that Lord Penrose thought essential to regulating the life insurance industry, and we will continue to make them. That is why we have set up a review of the mutual sector and the actuarial profession, and we are reviewing the accounting treatment of with-profits funds. My hon. Friend will know that if there are aggrieved policyholders, as undoubtedly there are, they are at liberty to pursue any claims that they feel are rightly theirs through the financial ombudsman service, which this Government put in place for the resolution of such complaints.

Mr. Kenneth Clarke (Rushcliffe) (Con)

The Minister seemed with approval to quote me from the time of the Barings bank collapse, when I said that there was no failure on the Bank of England's part in respect of regulations that could protect against a rogue trader who deliberately deceived and obscured the truth. She also reminded us of the occasion on which the previous Government accepted a finding of maladministration against the Department of Trade and Industry, in the case of Barlow Clowes, and paid compensation to the innocent victims.

Will she, therefore, clear up the seeming ambiguity in her comments on the regulators in this case? She attacks the DTI's actions before 1997 with considerable vehemence when she is making party political points, but she defends its actions when resisting the claim for compensation. She is totally silent about the Financial Services Authority and the Government Actuary during the period after 1997—the three years that led up to the revelation of the true facts about Equitable Life. Is she saying that the DTI, as regulator, made no errors or misjudgments before 1997 under the existing regime, and that after 1997, the FSA or the Government Actuary made no errors or misjudgments? When she answers that clear question—she has yet to do so—will she bear it in mind that 800,000 policyholders will not welcome party politics on this subject, and that they will want a clear description of where fault lay, including with the regulators, if part of the blame did indeed lie there?

Ruth Kelly

The right hon. and learned Gentleman makes an important point about Barlow Clowes, but unfortunately it is not right. There was a finding of maladministration, but the previous Government did not accept it. I quoted him deliberately, because in 1995 he accepted the point that no regulator can guarantee against a company that is intent on concealment, manipulation or deception. In this; case, Lord Penrose sets out clearly a litany of occasions on which the regulators were not given full information, and on which the company concealed information from the policyholders and from its own board.

The right hon. and learned Gentleman asks me to distinguish between the operation of the regulatory system and the regulatory policy. Lord Penrose is absolutely clear: there was regulatory system failure. There was a failure of policy by the right hon. and learned Gentleman's Government, in that they failed to regulate the life insurance industry appropriately. Indeed, when they were offered the opportunity to do just that in 1994, they rejected it.

The right hon. and learned Gentleman asks about individual instances after 1997, so let me give him the details. Lord Penrose questioned, for example, whether the FSA should have granted a reinsurance treaty. On taking a closer look at the report, however, it is clear that he accepts that the company wrote a side letter that withheld information from the regulator. The FSA has said that, in such a situation, in no case would it have accepted a reinsurance treaty. The claim is made that the regulators should have taken action when the company asked for a subordinated debt agreement, but in the next paragraph Lord Penrose says that he does not criticise any of the formal steps taken, in terms of the propriety of the order granted. He accepts—and I must accept some failure here—that the FSA should have handled late joiners in a slightly more sensitive way. That criticism, too, was made by the parliamentary ombudsman when she reviewed the case, and the FSA has already accepted that it could have handled the situation more fully. However, the company has already admitted liability in that case, and a reserve for late joiners. There is no issue after 1997 in Lord Penrose's report that has not been considered by the parliamentary ombudsman, and she has cleared the Government of all cases of maladministration.

Mr. Frank Field (Birkenhead) (Lab)

I thank the Minister for the announcement about the Paul Myners inquiry and the inquiry into the actuarial profession. Given the strategic importance of actuaries to the long-term delivery of our pension schemes, will the House have some say in the terms of reference of that inquiry? Do the Government accept that, whatever final decision the House may come to about compensation in that respect, there is a clear distinction between people like me, who voluntarily saved in an organisation that gave us bad advice, and the 60,000 people who, as a condition of their employment, were made to save in a company pension scheme and now find that all or most of their pension has been lost?

Ruth Kelly

I thank my right hon. Friend for his insightful comments on the actuarial profession. Although we have published terms of reference for that review today, I assure him that they are extremely broad. I am sure, too, that Paul Myners will be interested to learn of my right hon. Friend's interest in the subject of his review, and I shall refer my right hon. Friend to him. My right hon. Friend spoke of the 60,000 pensioners in the ASW case and others. He will understand that as a result of their position the Secretary of State for Work and Pensions has made it a priority to put in place a pension protection fund, through the Pensions Bill now passing through the House.

Mr. John Redwood (Wokingham) (Con)

What would the Minister say to a constituent of hers, or mine, who has lost a lot of money and has been hanging on in the hope of something from Penrose, or Government compensation, but who now faces a very mean retirement because of those losses? Is she really saying that such people should spend what little money they have left on good lawyers, that they should just sit and hold on, or that they should get out? That is what my constituents need to know. They have been extremely badly done by, and they want an answer.

Ruth Kelly

The right hon. Gentleman must understand that it is the Government's responsibility to act on the basis of what Lord Penrose has said in his report. Of course, I entirely sympathise with the distress of individual policyholders who have suffered loss over the last four years as a result of the actions of the society. However, I can perhaps give some words of assurance about the fact that the Government have introduced the comprehensive financial services compensation scheme, which is ready, were problems to materialise in a company, to pay out 90 per cent. of guaranteed policy values. Apart from that, the financial ombudsman service is also there ready to offer help, without the expense of lawyers, to individuals who feel that they need redress.

Tony Wright (Cannock Chase) (Lab)

Is this not the story of a period when this country was in the grip of an ideology that said that people would be more prosperous and freer to the extent that the state did not interfere with their lives? Are not the Equitable Life policyholders now being asked to pay a terrible price for that ideology? More specifically, my hon. Friend has made an important distinction between regulatory failure and regulatory maladministration, but I am sure that she will agree that that is a proper distinction for the parliamentary ombudsman to examine, in so far as it is within her jurisdiction, and that she will want to make her own judgment on the matter.

Ruth Kelly

My hon. Friend makes some important points. Lord Penrose's report provides a cautionary tale for all hon. Members on both sides of the House. His main recommendation is that the regulatory system should be constantly reassessed and kept up to date in the light of changing developments in the industry. We set up the FSA immediately on coming to power, and alongside it we are prepared continually to review and update its effectiveness to make sure that adequate protection is in place. My hon. Friend draws a distinction between regulatory failure and operational failure, and it is one that Lord Penrose himself draws in the report. Lord Penrose is clear that the fault principally lay at the heart of the society and that regulatory system failures were secondary factors.

Norman Lamb (North Norfolk) (LD)

May I declare an interest as a former policyholder? I draw the Minister's attention to the report's key findings, which identify not only a systems failure but a specific failure by regulators operating within the system. Is it not remarkable that she failed to mention that at all in her statement and that she concentrated only on the systems failure? Her statement is a recipe for years of litigation, which will enormously benefit many lawyers but which will be at the expense of all those who have suffered enormous hardship, and will do nothing to address the crisis of confidence in the industry. It is time for a proper process through either the parliamentary ombudsman or a further remit to Lord Penrose to identify the loss resulting from the regulatory failure—not system failure—identified by Lord Penrose, so that compensation can be paid.

Ruth Kelly

The hon. Gentleman's interpretation is not correct. Lord Penrose's main finding is that there has been systematic and sustained over-bonusing in the society over a matter of decades, and perhaps even longer. As Lord Penrose says, the issue could be determined only by the courts. He specifically rules out any attempt to give him extra powers to deal with consequential issues and says that such issues could be determined only by the statutory process.

The hon. Gentleman points to particular issues about the regulatory system and leads me to examine Lord Penrose's central findings and conclusions. Lord Penrose says that "the system lacked challenge", and he also says why. The system was set up by deliberate ministerial decision to lack resources. In 1999, 70 regulators supervised 800 life insurance companies while 400 regulators supervised 600 banks, which was a complete bias in the system. This Government have doubled the resources going into life insurance regulation and made sure that the system is set up in such a way that it now has sufficient to do the job properly.

Mr. James Plaskitt (Warwick and Leamington) (Lab)

May I refer my hon. Friend to the Treasury Committee's interim report on Equitable Life? We found that the Treasury asked the Government Actuary's Department to survey life offices in 1998. When Sir Howard Davies gave evidence, he told us that the case of Equitable Life stood out among all the others. Equitable Life did not like the regulator's comments and threatened the Treasury with judicial review. Although Lord Penrose rightly says that the society was the author of its own misfortune, does my hon. Friend think that the pre-FSA regulatory vacuum aided that situation?

Ruth Kelly

My hon. Friend makes an important point. Regulators became aware of the guaranteed annuity issue in 1997, and, in effect, the regulators and Equitable Life had a running battle over the following two years. Equitable threatened the regulators with judicial review; the regulators threatened to take regulatory action and shut the company. In the end, the regulators' view prevailed and the company reserved in full. The reason that situation did not materialise earlier is, as Lord Penrose says, that the system was not set up to allow the regulators to pick up any impact on policyholders' reasonable expectations.

Mr. Graham Brady (Altrincham and Sale, West) (Con)

I, too, have a small interest to declare. The Minister refers to the statement by Lord Penrose that insulating policyholders from any kind of risk would provide a perverse incentive. On the other side of the account, does she accept that leaving people suffering loss and hardship in their retirement also provides a perverse incentive? What is her assessment of the damage that could be done to confidence in the industry and of the danger that people will simply stop saving for their pensions?

Ruth Kelly

The hon. Gentleman makes an important point, and it was one that Parliament considered when it set up the financial services compensation scheme, which acts as a comprehensive safety net for individuals in a case of insolvency. Were Equitable to become insolvent—I stress that the company thinks that it is still solvent—the financial services compensation scheme is there to meet individuals' needs and would pay out 90 per cent. of policy values. However, in addition, the financial ombudsman scheme is available, whether a company is solvent or insolvent, to pay out on the basis of individual policyholder complaints. It is to that scheme that individuals should look in the first instance if they feel aggrieved.

Mr. Nigel Beard (Bexleyheath and Crayford) (Lab)

Equitable Life is the oldest insurance society in Britain and, in many people's eyes, was the gold standard of the life insurance industry. What are the implications for the rest of the life insurance industry?

Ruth Kelly

Lord Penrose says that the FSA, in its reforms, has anticipated many of the lessons that could have been drawn from his report. He says that it has "largely succeeded" in that. The lessons for us as a Government are to keep his report in mind to ensure that the regulatory process is constantly updated and to ensure that policyholders have the most effective system possible in place. At the same time, we must acknowledge that no regulator can guarantee against a deliberate and particular intention to conceal and manipulate by a company. No regulator could guarantee to prevent that from happening.

Richard Ottaway (Croydon, South) (Con)

Millions of policyholders listening to the Financial Secretary's statement this afternoon will be dismayed by its content and tone, and the way in which everybody seemed to be to blame except the Government. I remind the Minister of the guidance in the letter of 18 December 1998 from the Treasury's insurance directorate, which condoned, confirmed and accorded with the accounting practices of Equitable Life. That guidance was slaughtered by the House of Lords in its judgment of July 2000. However, the Treasury has always stood by that guidance and never suggested that it was wrong. Will she now take this opportunity to admit that the guidance was wrong and that Equitable Life did not operate in accordance with proper procedures?

Ruth Kelly

I have already said to the Treasury Committee, when the issue was last considered, that with hindsight it probably would have been better not to have issued that guidance. I can only cite Lord Penrose who, when he looked at the issue, accepted that the regulators' view of the guidance was that it was neutral. Indeed, he accepted that the regulators thought that the guidance could act as a warning shot across the bows of Equitable. He accepts that that is the case, and that was the view that was held by regulators at the time.

Mr. Harry Barnes (North-East Derbyshire) (Lab)

There is the widest possible distinction on the issue of regulation between the former and current Governments—I hope that we will hear less bleating from the Conservatives about red tape—but Governments are a seamless whole as far the public are concerned. Do we not often have to clear up the mess that was created by the Conservatives? That needs to be taken into account in connection with the Equitable Life policyholders, and we may have some responsibility to deal with their problems.

Ruth Kelly

The distinction is fundamental, and it is essential for the Government of the day to get it right. There is a clear separation between policies, which are dreamed up and implemented by Ministers of the day, with Parliament's support—effectively representing the will of Parliament—and the operation of a regulatory system that can lead to circumstances in which policy is not effectively implemented and does not represent the wishes of Ministers and Parliament. That is a distinction that Lord Penrose makes when he says that in this case the problem was regulatory system failure: it was the policy that was the cause of the problem.

Mr. Mark Field (Cities of London and Westminster) (Con)

Will the Government find a way to enable the ombudsman to investigate the serious regulatory failure of the Government Actuary's Department, which was identified in Lord Penrose's report?

Ruth Kelly

The ombudsman has already considered the position since 1997 and found no evidence of maladministration. The hon. Gentleman should look more carefully at the Hansardreport of my original statement. I pointed out that Lord Penrose himself made serious criticisms of the actuarial profession—not least the fact that one appointed actuary was reluctant ever to criticise the opinion of another appointed actuary. Lord Penrose also said that the profession was set up in such a way that there were no standards of discipline of the type that are normally accepted as applying to any professional body. That is why the Government have set up an independent review to examine the actuarial profession, and it will include the Government Actuary's Department.

Mr. George Mudie (Leeds, East) (Lab)

I genuinely commend the Minister and other Treasury Ministers on dealing with the political and technical aspects of the problem, but I genuinely put down a marker on my concern about the humanity of the position. This is the second time in a week that the House has debated the plight of ordinary pensioners who now have to face life on reduced pensions. That is their reward for doing exactly what the House has urged them to do—to put money aside and save for pensions. I acknowledge that the Minister has set out an able case against compensation, but the prospects for Equitable Life pensioners now hinge on succeeding in legal action against the directors and auditors. That will take years and will enrich only the lawyers. It will in no way help the ordinary pensioners who are now living on reduced pensions.

Will the Minister and other Treasury Ministers speak to the FSA to establish whether it can do something similar to what it did last week to the split capital investment industry—by knocking some heads together? They should try to bring some help not only to people affected by Equitable Life, but to the pensioners we spoke about last week, who look to us not for technical or political arguments, but for help to maintain their standard of living.

Ruth Kelly

I understand my hon. Friend's empathy for the policyholders in Equitable Life and I share it. It is difficult to see people suffer financial hardship and stress, but my hon. Friend must also be aware of the scale of the problem that we face. Lord Penrose identified a problem that was driven primarily by management failure at the society itself. That is what led to £3 billion extra being paid out in bonuses than the society could afford. Of course the Government stand ready to help where we can and where appropriate in that context. Indeed, I have personally spoken to the financial ombudsman to see whether there is any more we can do to help people as they pursue any consequential claims through his office. The reason we set up the financial ombudsman service was to provide an avenue for people to seek speedy resolutions of their complaints.

Chris Grayling (Epsom and Ewell) (Con)

Is it not curiously ironic that the one person who was successful in extracting money from Equitable Life pension funds after 1997 was the Chancellor of the Exchequer? When the company was pulling the wool over the eyes of the regulator in the early 1990s, the system was supposedly to blame; but when the company was still pulling the wool over the regulator's eyes at the end of the decade, the post-1997 Labour-introduced regulatory system was entirely blameless. Does the Minister honestly believe that the policyholders will think that that is credible?

Ruth Kelly

The hon. Gentleman suggests that the society was pulling the wool over the eyes of the regulator, but in fact Lord Penrose set out a litany of ways in which the company failed to disclose information to the regulator. For example, it failed to disclose in 1992 with the quasi-Zillmer adjustment—and it went on from there. It also failed to disclose information about a side letter written on reinsurance agreements under the stewardship of the FSA. However, the Penrose report found no maladministration or negligence by the regulator and also states clearly that no discrete actions by the regulators led to loss. It was not the regulatory system that was responsible for policyholder loss, but the action of the society itself.

Alan Howarth (Newport, East) (Lab)

Wherever responsibility may lie for the disasters that have so devastatingly affected Equitable Life policyholders, does my hon. Friend agree that it may have contributed to a dangerous undermining of confidence in pensions more broadly, and that there is an urgent need to rebuild that confidence? Over and above the regulatory improvements that the Government have already brought in, will the Treasury act to improve incentives for savers who are not high earners, perhaps by replacing tax relief with grants, for example? Will the Treasury also offer incentives to employers to contribute more generously to the pensions of those who work for them, as well as to provide financial education and financial planning advice in the workplace?

Ruth Kelly:

My right hon. Friend makes an important point. That is why in 1997 we took immediate action to set up the FSA. We also set up the comprehensive financial services compensation scheme, and the financial ombudsman service to help people with speedy resolution of their claims. Confidence in the financial services industry will be restored by an effective regulatory system that is updated adequately to reflect movement in the industry. As for the subjects that my right hon. Friend mentioned, workplace advice, for instance, is very close to my heart. We are consulting on ways to make that work better so that employees can receive appropriate advice in the workplace. We shall keep under review—as, indeed, will Adair Turner as head of the Pensions Commission—all ways of promoting pensions in the workplace.

Mr. Henry Bellingham (North-West Norfolk) (Con)

I represent a large number of victims, many of whose lives have been ruined as a result of this matter. The shadow Chief Secretary asked the Minister about the Government Actuary's Department, which saw Equitable's returns and gave it a solid rating every year—both before 1997 and for four years after that, at which stage the deterioration in the company's balance sheet became apparent. Surely the Government Actuary's Department is to some extent culpable. How much responsibility should it carry?

Ruth Kelly

The Government Actuary's Department acted as advisers to the regulator. I have already set out the inadequacy of resources given to life insurance regulation over a prolonged period. It was natural that the regulator, when completely under-resourced, should rely on 20 Government actuaries for support. The hon. Gentleman also asked about the case after 1997. We took immediate action as a Government to set up the FSA; we have doubled the resources to life insurance regulation; we have increased the skill levels for carrying out life insurance regulation; and we stand ready to make any changes on the back of Lord Penrose's recommendations.

Mrs. Betty Williams (Conwy) (Lab)

Like many Members, I have waited a long time for this report to be announced to Parliament. I welcome my hon. Friend's announcement today of an independent review. I believe that I have understood her point about the failure of the regulatory system pre-1997, but for the benefit of Conservatives Members who were in government before then will she once again reiterate—I know that she has done so several times already—the point about the regulatory system? I am very angry on behalf of the constituents who have written to me when I hear such an announcement and what Lord Penrose said in his report.

Ruth Kelly

As a result of Lord Penrose's report, the House will want to take time to reflect on whether it was appropriate to have a light-touch regulatory system for the protection and care of long-term pensions held by millions of people in this country. Lord Penrose says: I do not pin that blame on individuals, who in the main have operated in good faith and to the best of their abilities within the system as they found it. He adds that, primarily, the company was the author of its own misfortunes", and that regulatory system failures were secondary factors.

Mr. Andrew Love (Edmonton) (Lab/Co-op)

Did my hon. Friend have a chance to read theFinancial Timesover the weekend, in particular the comments of its respected City analyst on pensions? He said that despite the problems, the return on an Equitable pension might be no worse than on one bought through any other poorly-performing life offices. Many life offices are paying zero bonuses, so Equitable policyholders may be no worse off than some of those with the competitors … If that's a case for compensation, I can't see it. That is the voice of a reputable, independent expert from the City. Would my hon. Friend care to comment?

Ruth Kelly

I hear what my hon. Friend says, but he must agree that Lord Penrose's central finding was that the company was the author of its own misfortunes. It paid out £3 billion more in bonuses than it could afford over a prolonged period. Thai has clearly had a differential impact on policyholders, depending on when they joined or left the company. In this case, however, it is very much the society itself that is under the spotlight.

Mr. Barry Gardiner (Brent, North) (Lab)

Lord Penrose has accused the management of the company of manipulation, concealment and serious omission. Is not that just another way of describing the current state of the actuarial profession? I am sure the whole House will welcome my hon. Friend's announcement of the report by Derek Morris on the actuarial profession. Can she tell us when she expects to receive that long overdue and much to be welcomed report?

Ruth Kelly

I cannot agree with my hon. Friend's detailed point, although Lord Penrose suggests that the actuarial profession is in need of review. However, I can tell him that the review process should be completed by spring next year.