Equitable Life Inquiry (Hansard, 24 March 2004)

§ The Financial Secretary to the Treasury (Ruth Kelly)
The House will recall that the origin of the Equitable Life inquiry carried out by Lord Penrose was the financial crisis experienced by the society in July 2001, when it closed to new business and cut policy values. The inquiry's terms of reference were to inquire into the circumstances of the Equitable Life assurance society, taking account of the relevant life market background, to identify the lessons to be learned for the conduct and administration of life assurance business, and to give a report thereon to Treasury Ministers.

§ Richard Ottaway (Croydon, South) (Con)
On the lessons learned, the Financial Secretary will be aware that Lord Penrose found that regulatory failure was the fundamental reason for, if not the primary cause of, the company's financial crisis. Is it now Government policy never to consider compensation where there has been regulatory failure of any sort?

§ Ruth Kelly
If the hon. Gentleman were to acquaint himself in greater depth with the contents of the report, he would see that Lord Penrose says specifically that regulatory system failures failed policyholders in this case. He does not point to operational failure. However, I shall deal with that point later.

§ Mr. Eric Forth (Bromley and Chislehurst) (Con)
Further to the question from my hon. Friend the Member for Croydon, South (Richard Ottaway), can the Financial Secretary envisage any circumstances in which there would be a case for the Government to pay compensation to policyholders? Or would she rule out the payment of compensation in any circumstances that she could foresee?

§ Ruth Kelly
I have considered in great depth the contents of Lord Penrose's report. Lord Penrose makes no recommendation for compensation. He finds no instance of maladministration by the regulator, nor does he make any allegation of negligence by the regulator. The Treasury has also examined the contents of its report. We see no reason to think that the regulator was negligent or that there was any maladministration at any time while the society was being regulated by the Treasury or, indeed, under the previous regime.
Clearly, the Treasury cannot underwrite every business in the country. No regulator can ever provide a 100 per cent. guarantee against failure. However, Lord Penrose says that blame would have to be apportioned through the court system. 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. 977 He considers that 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. That is not my analysis, but the analysis of Lord Penrose himself. He finds that, from the early 1970s, the society embarked on a growth strategy that resulted in the progressive financial weakening of the society, such that its ability to meet the long-term expectations of its policyholders was in doubt from the late 1980s onwards.
Lord Penrose describes how the company deliberately ran down its inherited estate and then, in the 1980s, moved into deficit to keep up bonus levels and win market share. According to Lord Penrose, sustained growth became an independent objective pursued with something approaching missionary zeal. He adds: Bonus policy became central to achieving the Society's marketing objectives and that the surplus published by the Society became a function of the desired level of bonus. He outlines how, in 1973, the society introduced the concept of a terminal bonus and then, in the 1980s, progressively shifted the bonus mix away from annual guaranteed reversionary bonuses towards terminal bonuses, which were not covered by reserves. That allowed the society to inflate bonus levels to a level higher than available assets would have implied.

§ Mr. John Redwood (Wokingham) (Con)
Does the Financial Secretary accept that the financial condition of Equitable Life was much worse in 1997, 1998 and 1999 than it was some years earlier and that that gave the regulators a much greater opportunity to intervene and take action to try to protect policyholders in the late 1990s than at any time earlier?

§ Ruth Kelly
I could quote from Lord Penrose's report on that point, but I shall quote from the independent authority of the ombudsman, who considered that specific period. She says: There is no doubt that in late 1998 the Treasury had briefed FSA in considerable detail about Equitable's weak regulatory solvency position and had indicated a possible need for the regulator to intervene … it is very evident … the prudential regulators' stated approach to their role … could not be criticised for a lack of concern about Equitable and the position of their policyholders nor could their approach in respect of Equitable be described as 'passive
Lord Penrose writes: By disregarding accrued terminal bonus, 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". By 1989, according to Lord Penrose: the Society deliberately distributed a high proportion of the available return for market-related reasons, and entered the 1990s with a negative estate accordingly. The society was therefore unable to withstand the financial implications of the House of Lords judgment in the Hyman case.
Lord Penrose says: Superficially claims of £1.5 billion should not have brought down a society with funds of £32 billion.

§ Mr. John McFall (Dumbarton) (Lab/Co-op)
My hon. Friend will know that Lord Penrose appeared before the Treasury Committee last week and said that the society was largely the author of its own misfortune. However, on the very point made by the right hon. Member for Wokingham (Mr. Redwood), I hope that my hon. Friend will be aware of Chris Headdon's interview on Radio 4 this morning, when he said that Lord Penrose did not find any evidence of concealment. She will also be aware of the financial reinsurance product—the side letter—that Chris Headdon had, of which the Financial Services Authority was not aware. Indeed, the FSA has said that, if it had been aware of the side letter, it would not have guaranteed anything with regard to the society. Does that not raise questions about a deliberate policy of concealment on behalf of the executive in Equitable Life?

§ Ruth Kelly
My hon. Friend makes some very interesting points. Of course it is not for me to comment on any action that may be taken by the FSA, the prosecution wing of the Department of Trade and Industry or the Serious Fraud Office, although he will be aware that Lord Penrose has forwarded his report to the SFO. Lord Penrose is clear that a unique situation was developing at Equitable Life. He states: The Society's uniqueness lay in the approach adopted by its management, not in the essential characteristics of its business.
With regard to the reinsurance treaty, Lord Penrose is absolutely clear as well that Those involved at the society were not in any doubt that a right for the reinsurer to cancel in those circumstances would undermine the regulatory value of the agreement.

§ Mr. Jim Cousins (Newcastle upon Tyne, Central) (Lab)
Did the regulators not require the reinsurance provision, and was not the response of the people who then had control of the society to threaten to sue the regulators?

§ Ruth Kelly
Again, my hon. Friend makes an extremely valid point. Reinsurance treaties were granted relatively routinely, but he draws attention to, in effect, the difficult relationship that existed between the regulators and the society over quite a long period, under the stewardship of the FSA, the Treasury and, indeed, the DTI before that, particularly in relation to guaranteed annuity rates.
I should make it clear to the House that the Government sympathise with the plight of policyholders who have suffered not only much worry and distress over the past few years, but significant reductions in their expected income in retirement as a result of those issues. As I outlined to the House in my statement on 8 March, Lord Penrose finds that that weakening of the society was made possible by a culture of manipulation and concealment on the part of the company's previous senior management. The report details how executive management failed to keep the board fully informed about the true state of the company's financial position.

§ Mr. Mark Francois (Rayleigh) (Con)
The Financial Secretary will be aware that hundreds of thousands of people around the country are suffering as a result of 979 that extremely unfortunate situation. Those people acted in good faith and have done nothing wrong. What have the Government got to offer them, other than sympathy?

§ Ruth Kelly
The key conclusion to draw from Lord Penrose's report is not only the one to which my hon. Friends have pointed— Principally, the Society was the author of its own misfortunes"? as Lord Penrose says—but that, as he also says: If the proposals in hand for the future of the new regulatory regime 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 discussion of regulation of the Society.
So policyholders throughout the country, both in the society and in other life assurance societies, as well as in financial services more generally, can be reassured that Lord Penrose himself concludes that the FSA reforms introduced by this Government, which started in 1997, were the ones that have put the regulatory system on to a fair basis and that can address these issues.

§ Mr. David Ruffley (Bury St. Edmunds) (Con)
Although Lord Penrose states that the society was the author of its own misfortunes, he goes on to say: Regulatory systems failures were secondary". Does the Minister accept the proposition that a secondary cause can none the less be a significant issue? The fact that a cause is secondary does not mean that it is non-existent. Should not the Government take some responsibility for that secondary cause, which was a failure?

§ Ruth Kelly
I shall deal with the regulatory system failure in great detail later in my speech. Profound lessons for the House arise from Lord Penrose's report, and I am sure that when the hon. Gentleman reflects on its contents, he will also reflect on his role in these affairs.
Lord Penrose states: Substantial amounts of technical and financial information were provided to the Board…These failed fully to present the overall financial position of the Society, and in particular the risks inherent in the policies that were pursued in relation to bonus allocation". He finds 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. He also states: Arguably the first and most significant failure in this report lay at the heart of the Society…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.
Lord Penrose notes that there were executive directors with relevant actuarial qualifications but little or no relevant experience". 980 As for the board's non-executive directors, he notes that they 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". Furthermore, he finds: None of the non-executive members of the Board had relevant skills or experience of actuarial principles or methodologies". He states: the non-executive directors generally had a poor understanding of the Society's developing financial position. He goes on to describe the board as a self-perpetuating oligarchy amenable to policyholder pressure only at its discretion.

§ Mr. David Drew (Stroud) (Lab/Co-op)
The issue of the role of non-executive directors is not limited only to Equitable Life. We have seen numerous reports on what needs to happen with regard to that role. Are the Government now looking seriously at the matter, not necessarily in terms of legislation or regulation, but to seek to find some arrangement with the City so that we can sort things out once arid for all?

§ Ruth Kelly
My hon. Friend makes a good point. The Department of Trade and Industry recently discussed in the course of preparing the Companies (Audit, Investigations and Community Enterprise) Bill the respective responsibilities that non-executive directors should be expected to have. The Government are actively taking that issue forward.
Lord Penrose describes how the management also failed in its obligations to disclose full information to its own policyholders and to the regulators. He finds that the management of the society fixed on the differential terminal bonus policy as early as 1983, but did not inform policyholders for more than a decade. He says: The policy was not disclosed to policyholders by direct communication, in any way, until 1996…Failure to disclose this intention must be regarded as a serious omission in communication to policyholders of relevant information about their prospective interests from at least 1988, and arguably from the time in the early 1980s that management first took that decision.
Even when the company decided to inform policyholders in 1996, it was done badly. Penrose states: 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.
As for the society's approach to the regulators in that period, Lord Penrose notes that Mr. Ranson, the appointed actuary from 1982, and both chief executive and appointed actuary of the company between 1991 and 1997, was "frequently aggressive" in his dealings with regulators, "dismissive" of regulators' concerns and "obstructive" of scrutiny. The regulatory returns were, Lord Penrose says, "opaque and uncommunicative", and failed to identify in value the growing guaranteed obligations that resulted from a combination of falling interest rates and lightening mortality. 981 Lord Penrose therefore argues that primary responsibility for the society's problems lies with the society and its former management, saying: Principally, the Society was the author of its own misfortunes.
Lord Penrose makes it clear that Equitable Life was unique. As I told my hon. Friend the Member for Dumbarton (Mr. McFall), Lord Penrose says: The Society's uniqueness lay in the approach adopted by its management, not in the essential characteristics of its business. That unique management approach led to the fundamental weakening of the society, as its inherited estate was run down and ultimately became negative. Nevertheless, Lord Penrose's verdict on the regulatory system is perfectly clear.

§ Mr. Andrew Love (Edmonton) (Lab/Co-op)
Does my hon. Friend agree that the fact that the managing director, who directed the society, was also the appointed auditor led to a clear conflict of interest that should not have arisen?

§ Ruth Kelly
My hon. Friend is right that a conflict of interest arises in that situation. It is precisely to avoid such a conflict of interest that reforms to the Financial Services Authority have been introduced to remove responsibility from the appointed actuary and place it firmly on the board of insurance companies, where it should properly be.

§ Mr. Edward Garnier (Harborough) (Con)
I declare an interest as a former policyholder with Equitable Life. I still have one school fees policy, for the good that it does me.
The Financial Secretary is giving us a précis of the Penrose report, which we can all read for ourselves, but she has not told us what the Government are going to do, having read the report. Will she do so, and if so, at what stage?

§ Ruth Kelly
I shall tell the House about the way forward very shortly, but I thought it important to expose the contents of Lord Penrose's report to the House, as he makes some profound comments about the operation of the regulatory regime before the FSA was set up.
Lord Penrose's verdict on the regulatory system is perfectly clear, as he says: the regulatory system failed policyholders in this case". However, he adds: regulatory system failures were secondary. He clearly states 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. He makes no allegation of maladministration or negligence against the regulator or individuals, and says: I do not pin the 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. 982 Nor does he suggest that any individual regulatory decision led to economic loss by policyholders. Specifically, he notes that 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". The House should reflect carefully on the lessons that he draws about the nature of the reactive and underresourced regulatory system in place before 1997 and his key message that the regulatory system must be kept up to date to take account of industry developments. Lord Penrose states: It seems not unreasonable to suggest 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.

§ Chris Grayling (Epsom and Ewell) (Con)
The Financial Secretary is being careful to pin the blame on the regulatory regime before 1997, but is it not the case that in 1998 and 1999, after discussions had taken place in the Treasury and in the FSA about the financial viability of Equitable Life, Equitable Life salesmen were still visiting my constituents and selling them with-profits policies which ultimately caused them substantial loss? How can she therefore claim that all was well after 1997, after the reforms that her Government introduced, when palpably for my constituents that was not the case?

§ Ruth Kelly
As Lord Penrose himself recognises, it is not possible to introduce a fundamental overhaul of a regulatory regime overnight. If the hon. Gentleman cares to consult the Penrose report he will see that it states that the regulators persisted in a reactive stance in respect of PRE"— that is on page 722 of the report at paragraph 215. I quote further: In day-to-day regulatory practice, officials operated within the constraints imposed by the existing system, and they had no alternative but to do so. The regulatory regime was in the process of being overhauled.
As Lord Penrose says, the Equitable case argues strongly for a closer merging of prudential and conduct of business regulation and he says that while setting up the FSA the need for greater regulatory resource had been identified for the Treasury. The House will no doubt be interested in the fact that whereas before 1997 there were 70 supervisors supervising 800 life companies, compared with 400 staff regulating 600 banks, that figure for the regulation of life companies has been doubled by the reforms that the Government introduced. The FSA has not only doubled the resources allocated to life insurance regulation, but significantly upgraded the personnel devoted to that task.
Today I want to concentrate on the way forward, drawing on Lord Penrose's conclusions on the lessons learned from his investigation. We are continuing the process of regulatory reform that we began in 1997, pushing forward in particular the specific changes in the life insurance sector that the FSA has in train. In addition, we are acting on Lord Penrose's suggestions 983 for change in the areas of accounting standards, corporate governance of mutuals and the actuarial profession. Lord Penrose welcomes the FSA's regulatory reform, which, he says, has sought to anticipate many of the lessons that might be drawn by this enquiry and it should come as no surprise that it has largely succeeded.
Let me remind the House what has been achieved in this area over the past six years. On 20 May 1997, the Government announced major changes to the structure of financial services regulation in the United Kingdom. Those were implemented by means of the Financial Services and Markets Act 2000, which created a new framework for the regulation of financial services, providing clarity, fair competition and protection for consumers. The Act established the Financial Services Authority as the single regulator for the financial services industry, operating under a single coherent legislative framework, replacing nine different sectoral regulators. It also introduced a single ombudsman scheme to resolve consumer complaints and a single financial services compensation scheme. The major reforms that the FSA has since launched are in many cases changes that have been possible only because of the move to a fully integrated regulator combining prudential and conduct of business regulation.
The main changes that the FSA has already introduced—apart from increasing the resource devoted to life insurance regulation—are first, moving to a single risk model to determine the allocation of the FSA's own resources, and secondly, breaking down the barriers between different types and areas of supervision. The largest companies are now supervised, whatever their principal line of business, on a group basis, so the major insurance groups are now handled by the FSA's major financial groups division, rather than by its insurance division.
Moreover, the FSA has proposed significant changes to the role of the appointed actuary, some of which I have already outlined to the House. The FSA is also introducing, from this year and next, realistic reporting by life offices. The requirement to report assets and liabilities on a realistic basis includes a requirement to provide for accrued terminal bonus. Lord Penrose welcomes those proposals as clear recognition of the importance of looking beyond a narrow concept of solvency".

§ Bob Spink (Castle Point) (Con)
That is all well and good, but my constituents want to know what the Government will do to give them the compensation that they both want and need. Lord Penrose said to the Treasury Committee that he did not consider it in his remit to discuss administration and compensation; he considers that to be the Government's remit. When will the Government come forward and offer the victims of Equitable Life some hope?

§ Ruth Kelly
Lord Penrose definitely did not say in his evidence to the Treasury Committee that that was the Government's responsibility. He was clear that he accepted the conclusion that this was regulatory system failure, not operational failure. But as I outlined to the House, and have been outlining to the House, we have 984 set up a structure in which consumers have recourse, if they believe that they have an individual grievance, to the financial ombudsman service.
Let me make it clear to the House that the issue that has been identified by Lord Penrose is not a simple one. It is an extremely complex legal and actuarial issue—about £3 billion of bonuses being paid out more than the company could afford over a period of 10 years or even longer. Lord Penrose says that his estimate is "crude", but he also says that the amount and whether this would lead to claims could be determined only by the courts. He is absolutely clear in his report on that point.

§ Mr. James Plaskitt (Warwick and Leamington) (Lab)
Does my hon. Friend recall that when Lord Penrose gave evidence to the Treasury Committee a few days ago, he said that in order to prove blame it was essential to demonstrate breach of duty, and that that in his view was clearly the business of the courts?

§ Ruth Kelly
My hon. Friend makes an extremely valuable point.

§ Mr. Garnier
How does the Financial Secretary expect the damaged policyholders of Equitable Life to afford to get to the court?

§ Ruth Kelly
The first point to make is that Lord Penrose considers this to be such a complex issue that it can be determined only by the court. He is absolutely clear on that point. I have described the structure set up, which includes the financial ombudsman service to adjudicate on individual policyholder complaints, and if people feel that they have an individual grievance, they could take advantage of the structure that we have set up to present their claim. It would then be up to the financial ombudsman to decide whether it was an issue that he could consider, or whether it would be better determined directly by a court of law.

§ Mrs. Angela Browning (Tiverton and Honiton) (Con)
I realise that the Financial Secretary may not wish to comment on the solvency of Equitable Life at the moment. It says that it is solvent, but if all the policyholders follow the route that she suggests through the ombudsman, she must surely address the question, which is very real, that Equitable Life may not remain solvent if it has to meet all those demands. What is her assessment of the impact that that will have not just on Equitable Life, but on all the other life companies that may well have to contribute to the fund that will be needed to pay out?

§ Ruth Kelly
Equitable Life—it is an important point—has made it clear that it disputes entirely the analysis and the factual basis of the content presented by Lord Penrose on the over-allocation of bonuses throughout this period. It is an extremely complex legal and actuarial issue, upon which different actuaries will undoubtedly have different views. Equitable Life is clear that it is currently solvent and the FSA has no basis on which to override that view.

§ Mrs. Jacqui Lait (Beckenham) (Con)
Will the Financial Secretary address herself to the issue of how this matter will get to the court? Who will be able to afford to take a case to the courts?

§ Ruth Kelly
Clearly, it is up to individuals and categories of individuals to decide what they want to do on the basis of the analysis presented by Lord Penrose. As I have said, there are different interpretations both about the facts and the interpretation of those facts leading to his analysis that £3 billion of over-bonusing took place within that time scale. He says that the issue is so difficult that only the courts can determine it, but policyholders must decide on the basis of advice what is in their best interests.

§ Sir Peter Tapsell (Louth and Horncastle) (Con)
The paradox of the situation is that the policyholders would be better off if the society became insolvent, in which case, as I understand it, the Government would have to pay them 90 per cent. of their promised benefits. Is that not the case?

§ Ruth Kelly
I was about to come on to the proposals set down by the Financial Services Authority, which are currently out for consultation, to ensure better treatment of customers by firms. The hon. Gentleman makes a point about what is currently in the best interests of customers, and the society is absolutely clear that its continuing in business is in the best interests of current policyholders. As I have said, the society is confident that it is solvent.
From next month, firms must also publish a statement of their principles and practice in financial management, setting out how they manage their with-profits funds.

§ Mr. Redwood
I am grateful to the Minister for giving way, because many people are concerned about the matter. Is it not the case that what she now says—that the company is solvent and that, as the regulator, the FSA is happy with it—means that she does not think that anybody has a legitimate claim against the company, and that she does not think that anything wrong has happened, because the Government are still not taking regulatory action?

§ Ruth Kelly
I have said nothing of the sort. I have set out the facts as presented by Lord Penrose, who says that his estimates are necessarily "crude". Lord Penrose has also said that the issue could be determined only by a court of law. I do not want to pre-empt a judgment by a court of law or, indeed, any judgment made in another setting.

§ Mr. Andrew Tyrie (Chichester) (Con)
The Minister says that the policyholders who have been hit should consider going to court. Let us suppose that they go to court and win: who would pay the bill and where would the money come from? In that case, the money would come straight from Equitable Life, so, in other words, it would be robbing Peter to pay Paul. Is she not, therefore, holding out false hopes to hundreds of thousands of policyholders?

§ Ruth Kelly
I am not holding out false hopes; I am not saying anything of the kind—I am presenting the situation as Lord Penrose found it.

§ Dr. Vincent Cable (Twickenham) (LD)
Before the Minister develops her points about the need for litigation, is she aware that all the policy makers who were members of the with-profits scheme in February 2002—in other words, the people who ratified the scheme—were required to sign away their right to go to court or the financial ombudsman? None of those members has any possibility of pursuing legal action.

§ Ruth Kelly
Although I do not like to get involved in legal matters—as the hon. Gentleman is no doubt aware—there are various legal interpretations of that point.
I am confident that the root-and-branch reform of insurance regulation that I have described will result in the industry becoming more transparent and accountable, and with the financial resources to meet fully the reasonable expectations of its policyholders. I am also confident that the introduction of the stakeholder suite of more simple and transparent saving and investment products, which the Treasury is currently developing in conjunction with the FSA, will provide the life industry with products that are attractive to consumers and that will also help to improve the transparency and accountability of the industry.
The reform of the regulatory system has been strongly endorsed by Lord Penrose, who said: If the proposals in hand for the future of the new regulatory system are implemented, and if they are made effective in practice… the major criticisms of the earlier regulatory regime will have been addressed". Speaking of the FSA's response to the lessons learned from Equitable Life, Lord Penrose said in his recent evidence to the Treasury Committee: my clear impression is that the approach now being adopted is a very considerable improvement on what there was before".
Looking ahead, Lord Penrose points to the need to reform accounting standards for the life assurance sector, and states: The fundamental problem with the statutory accounts of any life office is that the accounting professions have failed to develop acceptable accounting standards for the preparation and presentation of accounts of long-term business that require realistic accounting on a consistent basis…what is required are practical standards of general application.
As I announced on 8 March, I have asked the Accounting Standards Board to carry out an urgent study of accounting for with-profits business within the accounts of life insurance companies. The study will address the accounting framework for with-profits business, including provision for disclosure of terminal bonus. The study is particularly timely, as it will enable an assessment to be made of with-profits accounting against the background of recent developments in realistic accounting within the FSA regulatory regime.
Although, as Lord Penrose pointed out, the problems at Equitable Life arose as a result of particular circumstances in place during the inquiry period, the report raises important questions for the governance of mutual life offices in general. The Government see no reason in principle why boards of mutual life offices should not be as accountable to their members as those of comparable companies are to their shareholders. On 8 March, I announced that I have asked Paul Myners to 987 lead a review into the corporate governance arrangements applicable to mutual life offices. The review's terms of reference are to: Consider the governance framework for mutual life offices in comparison with that for comparable companies (and, where relevant, for listed companies). Where appropriate, bring forward recommendations to ensure that boards of mutual life offices are as accountable to their members as boards of comparable companies are to their shareholders.

§ Mr. Love
I welcome the Myners review. My hon. Friend will be aware that the articles of Equitable reflected company law in that 10 per cent. of the members were needed to requisition special business, but that was an impossible task because its membership was so large. Its memorandum and articles meant that it had a self-selecting board of directors. Does my hon. Friend agree that we need to ensure that policyholders are protected and that they are consulted before actions are taken in the society?

§ Ruth Kelly
Although I do not want to prejudge the results of Paul Myners's inquiry into the accountability of mutual life offices, my hon. Friend draws attention to a particularly important point. We need to ensure that mutual life offices are as accountable to their policyholders as possible.
The review will consult as widely as possible, taking into account the recent experience of other mutuals in this respect in developing its conclusions and recommendations. As the governance of mutual life offices has much in common with that of other mutual societies, the review may, where appropriate, develop general governance principles for other types of mutual, taking into account the particular characteristics of other parts of the mutual sector. The review will deliver a report, with recommendations, by the end of 2004.

§ Mr. Geoffrey Clifton-Brown (Cotswold) (Con)
Will the Financial Secretary give way?

§ Ruth Kelly
I must continue with my speech.
Actuaries play a vital role in the financial services industry and, as a profession, have placed admirable emphasis on high standards of technical ability, knowledge and integrity. However, Lord Penrose makes it clear in his report that it is not enough to rely on that. He makes a number of general criticisms of the actuarial profession, drawing on his findings in relation to Equitable Life. Clearly, a modern professional or regulatory framework is necessary. As I announced on 8 March, Sir Derek Morris will lead a wide-ranging review of the actuarial profession. It will start on 1 May, following his retirement from the Competition Commission. The review's terms of reference are: Consider what professional and/or other regulatory framework would best promote recognised, high-quality and continuously developing actuarial standards, openness in the application of actuarial skills, transparency in the professional conduct of actuaries, accountability for their actions and an open and competitive market for actuarial advice in the UK.

§ Mr. Clifton-Brown
Will the Financial Secretary give way?

§ Ruth Kelly
On the subject of actuaries, I give way for the last time.

§ Mr. Clifton-Brown
One of the items that Penrose identified was the obstructive nature of the actuary at Equitable Life. He also identified the paucity of function of the non-executive directors and the problems involving the auditor. Clearly, there were service failures by the regulator in relation to Equitable Life. Have the Government considered whether, instead of a protracted court procedure, it might be better to have a one-off payment for affected policyholders on the basis that the regulator would not be held liable?

§ Ruth Kelly
I do not think that those were the conclusions drawn by Lord Penrose's report. He is absolutely clear that this is not a question of individual regulatory failure, but of regulatory system failure and the policy that prevailed. The House should reflect carefully on what Lord Penrose has written in that regard.
Lord Penrose's report provides a full and detailed account of the developments at Equitable Life over a long period. In doing so, it has provided us with a clear explanation of how the society got itself into financial difficulties, and clear pointers to the way forward. One of the key lessons that he draws from his work, with the benefit of hindsight, is that the regulatory system in place before 1997 was inadequate and unable to keep pace with changes in the financial services industry. Since 1997, this Government have radically overhauled the regulatory system that we inherited. We will ensure that that system remains fit for the purpose.

§ Mr. Oliver Letwin (West Dorset) (Con)
I do not think that the many hundreds of thousands of people who have been adversely affected by this saga will take much comfort from what we have just heard. I shall begin by declaring an interest, as the member of a family that is among those affected. I intend to pursue this issue over the coming months and, for the avoidance of doubt, if at any time, now or under a future Government, any compensation becomes payable to my family, it will go to charity.
I have to enter a note of surprise and regret that the Chancellor is not here this evening. It is a pity that he has not chosen to speak in this debate, and that he is not here to listen to it. It is also a pity that he has not taken any part in the proceedings, and that he has never been willing to have anything to do with the subject. The people who have suffered from these events will take their own note of that.

§ Mr. Plaskitt
While we are on that point, will the right hon. Gentleman tell us why he was not here to reply to the statement on this matter?

§ Mr. Letwin
I was here throughout those events, after about the first three minutes. I have chosen to reply to the Minister today precisely to indicate that we treat this matter with the greatest possible seriousness, although all my hon. Friends on the Front Bench are more than capable of answering the Minister. Indeed, my hon. Friend the Member for Chichester (Mr. Tyrie) will be 989 winding up. The Treasury Bench appears to have only one Minister interested in the subject; I believe that she will also be winding up. That is a disgraceful state of affairs, on which the hon. Member for Warwick and Leamington (Mr. Plaskitt) should reflect. [Interruption.] The Chief Secretary should not rumble from a sedentary position, as he was yesterday being remote controlled by the Chancellor, although not very effectively.
The Minister has made an argument, of which I take note, and I shall recapitulate it briefly. Putting together what she said today with what she said in her statement, we see that the shape of that argument is perfectly clear. She argued that this failure happened primarily because of management, and that regulatory failure was therefore only a secondary cause. She then argued that all such regulatory failure was pre-1997, and that it was entirely due to a light-touch regime rather than to any operational failure. She argued that there was therefore no need for Lord Penrose, the ombudsman or anyone else other than the courts to look at the question of maladministration, and that there was therefore no need for anyone other than the courts to investigate whether anyone was owed compensation.
As the courts will only award compensation against other policyholders and—as a fascinating earlier exchange revealed—people will probably need a lawyer to discover whether they can go to court in the first place, there is very little chance of their obtaining any compensation. The Minister has repeatedly argued in her statement and in public that all of that is utterly different from Barlow Clowes because there is now a compensation scheme. That is the Financial Secretary's argument, although it did not take me 40 minutes to put it to the House. That is all that she has ever said.
Let us go through that argument step by step. Is it true that the Penrose report reveals that the primary cause of the failure was management? Yes. I hope that the Financial Secretary will take comfort from that; it is the one part of her argument that is perfectly accurate. Secondly, is it true that the Penrose report concludes that the regulatory failure was only secondary? No, it is not. The Penrose report indeed indicates that it was secondary, but what does it mean by secondary? It is very clear: had the management not mis-performed and had the society been in good shape, the existence of a regulatory problem would not have been a difficulty for policyholders. We accept this, of course.
If a fragile piece of glass is not broken, the fact of its fragility is not a problem, but in this case the glass was broken and fragile. The reason, in part, for that fragility was regulatory failure. The regulatory failure was a necessary—[HON. MEMBERS: "System failure."] I shall come to the system question in a moment. I hope that Labour Members hold their fire, because they are about to hear what Lord Penrose has to say about that. Regulatory failure in this case contributed to the problem and it was a necessary cause of the problem. Had regulation been perfect—had it even been good—in Lord Penrose's view the outcome might have been different.
Lord Penrose does not—in this, the Financial Secretary is quite right—say how much regulatory failure contributed to the appalling problems that arose or how responsible those problems are. He goes on to explain that that is because he was precluded from 990 making those judgments. That is very different from him having concluded that it was not of importance; he was precluded from considering that question.
Next, is it true—this is the most dull and tedious of all the Financial Secretary's arguments—that all the failure was pre- 1997? No, that is not what Lord Penrose says. In relation to 1998, he says GAD's approach over this period seems to me to have been persistently naive". In relation to 2000, he says that in the specific circumstances of the Society at the time one might reasonably have expected that more would have been done to test the assumption that the profits would emerge. Again in relation to 2000, he says that the FSA and GAD were incapable of making an independent assessment of the Society's prospects of sale because of their lack of knowledge and understanding of the totality of the Society's business. Finally, in relation to January to July 2000, he says that little was done by the FSA in relation to the court case between the Court of Appeal judgment in January and whispers of the possible outcome in June and July of the House of Lords' hearings.
Those are all events post-1997. Do I therefore conclude that this Government are the object of criticism? No, because unlike the Financial Secretary I have no interest here in playing politics. Do I conclude that pre-1997 there were no failures? I do not. I accept that there were failures before 1997. This is a failure of British government and a failure, regrettably, of government under two separate Administrations. On this, the only clean hands in the House, alas, belong to those who sit on the Liberal Democrat Benches, because they have not been in government. Very likely, had they been in government, they also would have been responsible for this failure, but I have to admit that they did not get the chance to be responsible.

§ Mr. Nigel Beard (Bexleyheath and Crayford) (Lab)
Does the right hon. Gentleman not recognise that Lord Penrose speaks of a system failure, not a failure of the operators, and that the system was put in place by the Government he supported and was supported by the majority in Parliament, who were Members from his party? That shows the barrenness of the philosophy of light-touch regulation, which did no service to the Equitable policyholders or to the financial services industry generally.

§ Mr. Letwin
In a moment or two, the hon. Gentleman will regret those remarks. Let me deal with both in turn, because they indeed relate to the next point in the Financial Secretary's argument, and both are false.
I will read the hon. Gentleman some passages from the report—there are many—that indicate that Lord Penrose, in clear and absolute contradiction to the Financial Secretary, repeatedly points to operational failures as opposed merely to system failures, though he indeed believes that there were also system failures for which our Government were partly responsible. I am not playing politics; I am telling the hon. Gentleman and his colleagues what is in the report, rather than inventing a further version of it. 991 At paragraph 240 in chapter 19, Lord Penrose tell us: There was a general failure on the part of the regulators and GAD". At paragraph 158 in chapter 19, he describes the Department of Trade and Industry, the Treasury and the Government Actuary's Department as "complacent".
In paragraph 171 of the same chapter, he describes the failure of the regulator to appreciate that a change of valuation assumptions 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". In paragraph 228, he tells us that unsatisfactory answers were accepted without follow up".
The hon. Member for Bexleyheath and Crayford (Mr. Beard), whom I have encountered on various occasions in the House, is intelligent and honest enough to recognise that those are operational failures. They occurred partially under our regime, and partially under the regime of the Financial Secretary and her colleagues. They were operational failures, however, not ministerial failures, and not parliamentary failures.

§ Mr. Redwood
Does my right hon. Friend accept that the Financial Secretary contradicted herself, because she said that this was a system failure by regulators? She then said that Equitable Life was unique it was the only one that went wrong, it was the only problem child. It is beyond belief that there could be a serious system failure of regulation, over a period of 10 years or more, and only one casualty. Surely it must be the case that the main regulatory failure was specific regulation failure of that company.

§ Mr. Letwin
My right hon. Friend, as always, makes an extremely powerful point. Another fascinating point emerged today for the first time, I think. The Financial Secretary lauded the Government for having improved the personnel who were regulating. Why would it be necessary to improve the personnel who were regulating if there were no failures on the part of the personnel who were previously regulating? Those are obviously operational failures—[Interruption] The hon. Member for Warwick and Leamington chunters from a sedentary position about system failure. According to the Financial Secretary's statement, if personnel were implicitly not up to the job, that indicates that they were doing something wrong at the operational level.

§ Ruth Kelly
The right hon. Gentleman is making a very interesting argument about operational failure. In the context of his remarks, however, can he explain to the House this quote—I do not paraphrase—from Lord Penrose, who says 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"?

§ Mr. Letwin
The problem with the Financial Secretary's argument is that because she is playing party 992 politics, she refuses to acknowledge what is clear, and what I have acknowledged: there were system failures. Were I denying that there was a system failure, she would have something to say. But I have not denied it. There was system failure, and operational failure, and I have just listed six cases in which Lord Penrose points specifically to operational failure.

§ Mr. Plaskitt
Will the right hon. Gentleman give way?

§ Mr. Letwin
No, I am going to answer the other part of the point made by the hon. Member for Bexleyheath and Crayford, if I may. The next thing that he said was that it was all light-handed regulation that was at fault, which the Financial Secretary has said on repeated occasions. The fact that it was light-handed may have partially been at fault. It is therefore of great interest that the right hon. Member for Darlington (Mr. Milburn)—not a Conservative Member, and not a Minister in our regime, but a Minister at the time in the Financial Secretary's Government—said about the nature of the regulatory regime on 28 June 1999, at column 39: There will be a light touch where possible…The Bill avoids over-burdensome regulation that would serve only to stifle innovation and to increase consumer costs. Instead…the FSA will be under a duty to demonstrate that the burdens that it seeks to impose are proportionate to the benefits that will result."—[Official Report, 28 June 1999; Vol. 334, c. 39.] It does not therefore pay to insult the many hundreds of thousands of people involved by engaging in the petty party politics of claiming that light-handed regulation, which may have been partly to blame, and system failure, which was certainly partly to blame, is exclusively the problem of one Government or the other.

§ Mr. Letwin
The truth is that there was system failure, which occurred under both Governments, and there were operational failures, which occurred under both Governments. That is the conclusion to which any ordinary person reading the Penrose report would come.

§ Mr. Barry Gardiner (Brent, North) (Lab)
Does the right hon. Gentleman want the Government to compensate Equitable Life policyholders? Is that his party's policy, and what does he think it would cost?

§ Mr. Letwin
That is the point I was coming to—the question of maladministration. As I have said, the Financial Secretary's assertion is that because, as she wrongly asserts, there was no operational failure and because, as she wrongly asserts, it was all a long time ago, there is, in her wrong estimation, no reason for an investigation into whether there was maladministration, and hence no need for anyone to ascertain whether compensation is payable. Our view is that there should be such an investigation, that there needs to be such an investigation, that Lord Penrose did not conduct such an investigation because the remit under which he was operating specifically precluded him from doing so, and that it is therefore appropriate for the parliamentary ombudsman's remit to be extended to include the 993 Government Actuary's Department so that she can conduct a proper investigation and identify whether there was maladministration, or for the Government to ask Lord Penrose to extend his remit to engaging in an investigation. or for the Government to find another suitable means of conducting it.
This is the Financial Secretary's position. She does not know whether there was maladministration, because she did not ask Lord Penrose to find out so he did not feel enabled to tell her, and she does not want to know whether there was maladministration because she does not want to know whether following maladministration there would be compensation. The reason she has been put up to present the specious argument that she has presented is that the Chancellor does not want to find out whether compensation would be payable.

§ Ruth Kelly
How does the right hon. Gentleman react to a statement made by Lord Penrose to the Treasury Committee only last week? He said I do not identify any respect in which I recognise limits on what I was able to do.

§ Mr. Letwin
What is odd is that in the report Lord Penrose makes it perfectly clear that he had not the remit to investigate maladministration.

§ Ruth Kelly
What about the courts?

§ Mr. Letwin
We will return to the courts in a moment. As the Financial Secretary well knows, the courts are not an answer.
Let us test the Financial Secretary's bona fides in a perfectly straightforward way. If it is the case that Lord Penrose was perfectly able to investigate maladministration and if the Financial Secretary has nothing to fear from an investigation of maladministration, will she now—by making a small change in a statutory instrument—allow the parliamentary ombudsman to investigate maladministration?

§ Ruth Kelly
It cannot be done.

§ Mr. Letwin
Ah! The Financial Secretary says, from a sedentary position, that it cannot be done. We will provide the Financial Secretary with the means of doing it in the House, and see whether she accedes to that. The fact is that the Financial Secretary and her colleagues do not want an investigation of maladministration, and I think that that is a disgrace.

§ Mr. Garnier
The Library briefing paper on the matter reports The Inquiry board did not have as part of its remit the responsibility of making recommendations about compensation, indeed the remit is quite narrowly restricted to, as Ruth Kelly's letter made clear: identify any lessons to be learned for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury Ministers. The Financial Secretary's letter was written to thank Lord Penrose for taking on the job of holding the inquiry.

§ Mr. Letwin
I am grateful to my hon. and learned Friend, who with his normal forensic ability has pointed to the relevant evidence. 994 Finally, let us turn to the question of compensation and Barlow Clowes. This is one of the most extraordinary features of the Financial Secretary's argument. In fact, it is so extraordinary that as far as I could make out, although she spoke for a long time, she did not include it today. She included it in her original statement, however, and she has been making it in broadcasts repeatedly. It is the argument that somehow we need not worry about whether there is maladministration and we need not have an investigation into whether compensation is due as a result of maladministration, because there is a compensation scheme now in existence. Well, there is a compensation scheme now in existence, and it relates to insolvency.
The effect of compensation following insolvency is to restore people to the position that is absolutely guaranteed to them, which is a great way below what people have a reasonable expectation of otherwise receiving. The Financial Secretary knows that very well, and she therefore knows that unless horrors strike the society, the existence of the compensation scheme is a complete irrelevance to the many people whose reasonable expectations have not been fulfilled. That, I fear, is another disgraceful aspect of the Government's position.

§ Mr. Forth
Is it not the case that if policyholders followed the Financial Secretary's advice, they would end up, in effect, suing themselves?

§ Mr. Letwin
Suing themselves or suing one another, which is not fair, right, just or decent. If there was regulatory failure and there was, because Lord Penrose shows it—and if there was operational failure, which Lord Penrose also shows, and if those occurred through two Administrations, as they did, it is reasonable that there should be a proper investigation of maladministration.

§ Mr. Letwin
I shall not give way because I am just concluding.
It is reasonable and possible to have a proper investigation into maladministration, and such an investigation would establish whether there were or were not grounds for compensation because it would establish the extent to which the maladministration caused the defect for policyholders. The Financial Secretary cannot reasonably debar that further investigation, and I hope that in some months' time, with whatever kicking and screaming, she will accede to that request.

§ Dr. Vincent Cable (Twickenham) (LD)
I express my appreciation for having the opportunity to speak on this subject on a somewhat more level playing field than we had at the time of the Minister's statement—she had then had 11 weeks to peruse the report, whereas we had had a couple of hours. I should like to say at the outset that I identify myself with the Conservative shadow Chancellor's comments on the absence of the Chancellor of the Exchequer. This is an important issue, 995 and he should be here. That is no reflection on the Financial Secretary, who is an able Minister who clearly understands the subject and debates the points well, but my point is that the Chancellor should be here.
The Chancellor has shown a selective interest in issues of financial regulation. I recall responding to a statement that he made on Sandler products, which was not exactly at the front rank of public controversy on financial regulation, and when in opposition, he took a close interest in matters of financial regulation in relation to the BCCI and Barlow Clowes. His absence today suggests one of two things: he is very embarrassed, or he is not interested. Either of those reasons is unacceptable.
Before we plunge further into the technicalities of Penrose, it is important to reinforce the basic message that we are talking about human beings who have suffered much distress and loss, many of whom are perfectly ordinary constituents. It works out on average that we all have about 1,500 affected constituents, many of whom were not sophisticated investors or they would not have been in Equitable Life in the first place. Equitable Life's reputation as a secure, reliable fund was what drew many people to it who wanted a source of security.
The Penrose report raises two fundamental issues, and the right hon. Member for West Dorset (Mr. Letwin) dealt with one of them at length, very clearly and correctly. That is the distinction between the failure of the regulatory system and the operational failure of regulation. It is abundantly clear on any reading of the report—it was clear when the report was first published—that both are involved. We could debate endlessly whether their relative involvement was 50:50 or 75:25, but both were clearly involved. In the penultimate paragraph of the report, in which Lord Penrose brings his thoughts to a conclusion, he brings both those concepts together, making the point in one paragraph with admirable clarity. It says, and this was the point that the Financial Secretary made: As for the regulatory system, I do believe that it has failed policyholders in this case. The system failed—Lord Penrose is absolutely right. However, he then goes on to make a point that clearly has weight in his mind, because these are almost the last words in the report: But I do take the view that the system itself was not overseen, and in particular was not kept up-to-date, and operated in an ineffective manner. The system operated ineffectively—there was operational failure. The word is the same.
The second key insight of Penrose, to which the right hon. Member for West Dorset did not refer, but which needs to be stressed, was that the main failure was not the failure created by guaranteed annuities in the House of Lords, although many of us had assumed all along that that was the ultimate source of the problem. The problem that Penrose and some action groups identified was that of prolonged large-scale over-bonusing. In effect, there was a pyramid selling scheme. I am not an expert in finance, but those who are tell me that there is a technical phrase for it: a Ponzi pyramid selling scheme. In terms of the broader argument, the significance of 996 that is that one can argue that it was just about understandable that the management—and certainly the regulators—did not guess correctly which way the House of Lords would jump in a highly contentious ruling. In fact, Penrose does not argue that case, but he could have. However, it was completely unforgivable and unacceptable for the management and those who were supposed to be overseeing and regulating the scheme to administer what was a pyramid selling scheme for 10 years.
To reinforce the point that has already been made, the report is replete with references to operational failure. I need not read it in detail; rather, I shall pick out a few key summary passages, some specific and others general. I shall read verbatim one key conclusion from the final chapter, because it captures its spirit: There was a general failure on the part of the regulators and the GAD to follow up issues that arose in the course of their regulation of the Society, and to mount an effective challenge of the management. How can that possibly be interpreted in any way other than as concluding that there was an operational failure? It is an explicit and completely unqualified conclusion.
There are numerous instances of the Penrose report's picking up on particular operational failures on the part of the regulators. For example, it refers to the regulators failing to pick up on the company's admission that it was not reserving for its guarantees. It refers to a serious lapse in regulation…Any reasonably diligent inquiry would have elicited the necessary information. The report proceeds to discuss the episode following the period in which the regulators had been alerted to the existence of the annuities guarantee. It says that they knew about the problem in 1993, and states that the approach of the GAD and regulators remained the same", even when they were aware that the Society's financial position was weak and that there was a need for vigilance in scrutiny and supervision. This is all about operational matters and the way in which regulation was conducted; it is not about the system.

§ Mr. Plaskitt
The report does indeed make these individual observations, but what does the hon. Gentleman makes of Lord Penrose's statement in paragraph 29 of chapter 20? He stands back and sums it all up as follows: The thrust of my criticism is that…it was the system that failed to provide the regulation the changing circumstances in the industry required.

§ Dr. Cable
I am not disputing that. Both the Conservative spokesman and I fully acknowledged at the outset that the system clearly failed, but it is also true that there were many incidents of very specific, as well as general, negligence. The issue is the importance of that in the overall scheme of things. We shall come later to the question, which has already been raised, of who is to decide whether that in its totality amounts to maladministration, because we have yet to reach that point.

§ Chris Grayling
The hon. Gentleman is absolutely right to make that point, and in that regard I was 997 astonished by the Financial Secretary's intervention on my right hon. Friend the Member for West Dorset (Mr. Letwin). The hon. Gentleman will be aware that Lord Penrose says the following in the postscript to his report: Many readers of this report will be frustrated that it has not provided answers to two questions: who is at fault for the problems encountered by the Society, and who deserves redress as a consequence. It has been no part of this inquiry to attempt to answer either question. Surely that alone puts a stamp of endorsement on the request from all sides for the ombudsman to look at this issue.

§ Dr. Cable
Yes, although I am not sure that the ombudsman constitutes the right mechanism, the logic of what the hon. Gentleman says is right.
Certain issues relating to regulatory failure were not even covered in the Penrose report because there was so much material around. One such issue was drawn to my attention by a consultancy company called Thesys, which attempted to brief Lord Penrose but did not succeed. It made the point that a series of insurance laws and regulations were issued in 1958, 1973 and 1983, as a result of which "schedule 5" provisions were established. Those provisions were an arrangement whereby the Department of Trade and Industry collected data with the specific purpose of enabling independent assessments of whether insurance companies were actuarially sound.
In the early 1990s, the schedule 5 forms stopped being filled in. The regulators decided that it was inconvenient or too onerous to collect that information. If one wanted to be party political about it, one could say that Lord Heseltine was the Secretary of State for Trade and Industry at the time and so was somehow responsible for what happened. Indirectly, I suppose that he was. Clearly, however, an operational decision was taken to stop collecting data that were crucial to identifying the failures that subsequently emerged. It was essentially an operational failure—one that even Lord Penrose has not detected.
We then come on to the question of maladministration—what it means, and its significance. I have been careful—I note that the right hon. Member for West Dorset was also careful—to make it clear that we are not asking the Government to get out their cheque books and sign blank cheques to large numbers of people because of their losses. That would be inappropriate, because we first need to establish whether maladministration has taken place. I do not yet know whether it did; the report did not reach a conclusion on that.

§ Mr. Gardiner
I am trying to follow the hon. Gentleman's argument carefully. Would he not have to show not only that there had been maladministration, but that that maladministration had been relevant to the failure? It is not enough to say that there were operational errors in which those applying the regulations failed to apply them properly. It is necessary to show that they failed to apply relevant regulations in such a way as to precipitate the position with which we now have to deal.

§ Dr. Cable
I would not dispute that perfectly sensible point. That would be the purpose of the next stage of the 998 inquiry—to establish whether the maladministration was indeed relevant and central to the failure or otherwise. I entirely accept the hon. Gentleman's valid point.
We must be absolutely clear—the Financial Secretary was not—about Lord Penrose's assessment of his own role. At the end of the report, Lord Penrose clearly states: The jurisdiction to adjudicate on regulatory failure in duty is not mine. He makes it absolutely clear that that was not his job. He has not exonerated the government—I mean with a little "g"—of maladministration; he did not reach a decision on it.
There are different ways of following the report through. The normal procedure would be to go to the parliamentary ombudsman, which is what the right hon. Member for West Dorset suggested. That is what has happened in the past, but there are some practical reasons for not doing that. It would certainly take up much of the parliamentary ombudsman's time: the Barlow Clowes case took more than a year, and as the Chancellor said at the time, it took a year to establish what was already known. The ombudsman has already looked into this problem, but not with great success—indeed, many of the key points were subsequently contradicted by Penrose. I believe that there is a simpler way of dealing with it.

§ Mr. Beard
Has not the parliamentary ombudsman said that she could find no instances of maladministration? That is why she found as she did. Surely that demolishes the elaborate case that the hon. Gentleman is attempting to build up.

§ Dr. Cable
As I recall it, the parliamentary ombudsman was examining the period covered by the Baird report with respect to the role of the Financial Services Authority. Most of the maladministration seems to have occurred in the early and mid-1990s. That is the period that someone would have to investigate. If it were not to be the parliamentary ombudsman, who would it be?
My suggestion is simple and practical. The Chancellor or the Financial Secretary could simply write to Lord Penrose, asking him—because he was immersed in the subject—to provide a judgment on whether or not maladministration took place. He could be asked to respond within three months. If the Financial Secretary is right, I suspect that he would reply, "I don't need three months. I don't need to spend my time and your money because I don't believe there is any maladministration." Why cannot the Financial Secretary take that small additional step to clarify and prove her point?

§ Ruth Kelly
If the hon. Gentleman had spent more time on the concluding chapters of the report, he would have seen that Lord Penrose said: 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. 999 He also said that, if he had gone down the route that the hon. Gentleman suggests, he could not have concluded his inquiries within a time scale that had regard to the public interest.

§ Dr. Cable
It is difficult to understand why Lord Penrose would have been constrained, as all the information is in the public domain and is set out at great length in the report. That is the raw material that would have been available to the parliamentary ombudsman, who also would not have been able to call on further information.

§ Mr. Garnier
Is the hon. Gentleman not puzzled by the Financial Secretary's intervention? She has suggested that people should take their disputes to court, but would not that mean that she was multiplying—in spades—the adversarial nature of any inquiry that a court would engage in, not to mention the costs involved?

§ Dr. Cable
The hon. and learned Gentleman is right, and I asked about the court in an earlier intervention. The Financial Secretary replied that that was a complicated legal argument that she did not wish to get into. The legal argument may be complicated, but Equitable Life has sent out a very large number of letters on this matter. I shall read an extract from a letter sent to my hon. Friend the Member for Cheadle (Mrs. Calton). The extract covers Equitable Life's response to the proposal that the matters be taken to the court and to the financial ombudsman.
I suspect that the Minister is not entirely familiar with the idea that the financial ombudsman is a mediator who cannot mediate unless both sides are willing. The letter makes very clear the view of Equitable Life about litigation and the financial ombudsman. In respect of legal action, it states: The issue you raise was…dealt with under the Scheme of Arrangement, also known as the Compromise Scheme, which applies to all with-profits policyholders with policies in force on 8 February 2002. Following approval of the Scheme by the members and the Court, certain rights were given up in exchange for an uplift in policy values. As a result, your claim cannot be upheld. Also included in the Scheme was the removal of your rights to pursue such complaints by legal or other means, including the Courts and the Financial Ombudsman Service.
From the outset, Equitable Life denied that it would be willing to engage in any form of mediation through the financial ombudsman service. It made it clear that it had already covered itself in respect of action through the courts. The invocation of the courts is therefore a completely false trail, which would cost many people large amounts of money to no effect at all.
Another issue in relation to compensation needs to be clarified.

§ Mr. Gardiner
If it is a completely false trial, why does the hon. Gentleman think that Lord Penrose commented on it in his report?

§ Dr. Cable
The report's conclusion is unsatisfactory in that respect. Lord Penrose does not suggest that he was aware of what Equitable Life had said about the limits of litigation but, if the hon. Gentleman knows the reference, I should be happy to take it.

§ Mr. Gardiner
I do not know the reference, but I hope that the hon. Gentleman is not suggesting that Lord Penrose was not aware of the arrangement made between policyholders and Equitable Life about giving up their legal rights.

§ Dr. Cable
I do not know whether he was aware of that or not, but he seems to have urged a course of action that the overwhelming majority of policy holders would not be able to pursue in any circumstances. To that extent, the recommendation—if that is what it was was not terribly helpful.
The issue of the money is also important. If a compensation claim were to be made, through the courts or, in some other way, through the ombudsman, a basic question must be answered. How much have the policyholders lost—a lot, or a little? Penrose was clear that the loss had been substantial. He said: 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…will continue to experience real financial hardship". How great is that real financial hardship? I tabled a question to the Financial Secretary some weeks ago to see whether she could put in the public domain some estimate of the costs. It is clear how they could be calculated. One would look at particular groups of policyholders on the basis of all the evidence that is now available, taking into account the different maturities and types of policy, and compare them with the average. I know that the Financial Secretary was happy, in principle, to put that information into the public domain.
I have now been told that the information cannot be disclosed for reasons of commercial confidentiality invoked by Equitable Life. I was sufficiently concerned by that conclusion to ring the chief executive this lunchtime and ask him why the information could not be made available. I was told that it would be too difficult to provide it. However, it was not too difficult in the golden days when Equitable Life was outperforming the rest of the industry.
The company is no longer willing to disclose the information, which leaves two worrying conclusions. It might be that there were no serious losses, which is possible but implausible. Certainly Lord Penrose did not think that. The alternative is that the current management is so embarrassed by its performance that it is not willing to release the information. However, that information is crucial to the policyholders in making their case, whether for a further inquiry by Penrose or the ombudsman, in the courts or by some other means. That is a serious dereliction of duty by the company now, let alone in the past.

§ Chris Grayling
I agree that it is a dereliction of duty by the company. Moreover, an organisation that is no longer open for new business, and is therefore not 1001 trading in the conventional way that other companies and organisations in the sector are trading, should not use commercial confidentiality as a defence, because it does not apply as it would to any other organisation competing in the financial services industry.

§ Dr. Cable
That is a good point that I had not thought of, and it may be an avenue to pursue through the FSA or directly through the Financial Secretary. I thank the hon. Gentleman for that intervention.
An important point was raised by the hon. Member for Tiverton and Honiton (Mrs. Browning), when she suggested that the company could now slide towards insolvency. I was worried when the Financial Secretary made her original statement, because on more than one occasion she referred to the possibility of compensation by that route. It would certainly be an easy way out for the Government if compensation had to be paid by the industry and not by the Government. However, it is important to reflect on the implications.
If the industry scheme were to be brought into effect and had to provide substantial compensation in the event of insolvency, we have to ask where the money would come from. In principle, it could come from shareholders' funds in the insurance industry, but some of the leading insurers are mutuals and do not have any shareholders. Whatever happened, many individual policyholders in the insurance industry would end up footing the bill for the disaster. That would come at a time when some participants in the industry are struggling themselves with much tougher insolvency rules imposed by the FSA. My final thought is purely speculative. The Government think that they have drawn a neat line under the episode, but if they force the industry to fund compensation, we could see a cascade effect that caused far greater damage than the original Equitable Life disaster. That is why the Government must think much more constructively about examining the question of maladministration and the consequences of that.

§ Mr. James Plaskitt (Warwick and Leamington) (Lab)
I have had quite an interest in the Equitable Life issue for some years, not only as a member of the Treasury Committee, but from my constituency experience. All hon. Members probably have constituents who are affected by this affair. I do not know how many of mine are affected, but about 50 of them have given the details of their cases to me, and I have found that information very helpful in pursuing the matter through my membership of the Treasury Committee.
It is important to bear in mind the individual stories that lie behind what we are discussing. Many of the people involved do not have considerable means, but they invested significant sums in what they thought was a highly reputable company, and they are now in retirement in much reduced circumstances. Those people are closely following not only the Treasury Committee's deliberations, but what we say in the House. Many of them have been waiting for Lord Penrose to report. So we have reached a critical juncture in trying to unearth exactly what happened. 1002 Lord Penrose appeared before the Treasury Committee on 16 March—I think that it was the first time for about 40 years that a judge had appeared before a Select Committee—and he gave us extremely important evidence. Of course we wanted to know whether, in his view, he had been given the right terms of reference, and he told us: I was the tool that I was given to do the job. In other words, he set his own terms within his given remit. He has certainly not indicated to us that he was in any way restricted in undertaking the research and investigation that he was asked to do.
Lord Penrose's report enables us to identify key moments in the history of the Equitable Life saga. He shows us that the company was using "actuarial techniques" to create what he calls "apparent surpluses" in the 1970s, that the Society did not again get back to a position of having an excess of assets over the realistic policy values in the early 1990s, and that the accumulation of all that, over 20 or 30 years, led the company to have a £3 billion shortfall by the end of 2000.
After the Treasury Committee took evidence from members of Equitable Life when we opened our inquiry two years ago, we concluded: Equitable Life's risky decision in 1993 not to build up a reserve to cover the costs of guaranteed annuity rate liabilities was a crucial turning point. So it is natural to focus on what Lord Penrose tells us in his report about regulatory system failure. When he was before us last week, commenting on his report, we asked him about regulatory systems failure and he said in evidence: One has a growing divergence between what the regulatory system required in the way of information in the annual financial statements of life offices and what the life offices themselves were actually doing in the conduct of their business. He continued: There would be no reaction to growing terminal bonus if terminal bonus was not a focus for regulatory attention…I think that critically is what went wrong.
In considering the focus of Lord Penrose's report, the additional comments that he has made in summary form in evidence to the Treasury Committee help to clarify the situation as he finds it, and they bear out exactly what he says at paragraph 69 in chapter 20 of the report: the thrust of my criticism is that for the most part it was the system that failed to provide the regulation that changing circumstances in the industry required".
When Lord Penrose was before the Treasury Committee last week, we wanted to ask him to expand on the occasions during this story when key opportunities to reform the regulatory system were missed. The evidence increasingly focuses on the period 1990 to 1994, and discussions of the European Union's third life directive. When Lord Penrose appeared before the Treasury Committee, I put it to him that that was probably an important chance to align the regulatory system with developments in the industry. He answered with the simple word "Yes". He also added that the original formula made it an obligation to make proper provision for terminal bonuses. 1003 In this debate, it will be interesting to look briefly at the way in which the third life directive evolved. Lord Penrose gives all the evidence in his report. In 1990, when the original regulation was first put before the committees that dealt with it, it stated: the valuation method shall take into account, either implicitly or explicitly, future bonuses of all kinds, in a manner consistent with the other assumptions on future bonuses of all kinds, in a manner consistent with the other assumptions on future experience and with the current method of distribution of bonus. Subsequently, there were four years of argument before the directive finally emerged and took its place. It in interesting to see how the wording changed. This was the wording that finally appeared in the directive in 1994: The amount of the technical life-assurance provisions shall be calculated by a sufficiently prudent prospective actuarial valuation, taking account of all future liabilities as determined by the policy conditions for each existing policy". That represents a very significant watering down of the directive between 1990 and 1994, so one has to ask how it came to be watered down, and why it emerged in that form and not in the form in which it originally entered the negotiations. In the very chapter in which Lord Penrose looks at the evolution of the directive, he reminds us that it was the United Kingdom delegation that led the resistance to the original wording.
That gives us strong evidence to support the view that there was unnecessarily light-touch regulation at that time, and it clearly points the finger towards why, in the 1990s, an important opportunity to bring the regulation into line with what was happening in the industry was missed.
We have heard the suggestion, or accusation, that after 1997 and the change of Government, the Treasury was passive in relation to all these issues. It is hard to find the evidence to back up that suggestion. The ombudsman, from whom the Treasury Committee heard evidence, said that the Treasury was in no sense passive. He reminded us that in 1998, quite a vigorous battle went on between the Treasury and Equitable Life, with the Treasury threatening to close Equitable Life down, and Equitable Life threatening to take the Treasury to judicial review. That does not suggest that there was passivity on the part of the Treasury.
When the Treasury Committee began to look into the matter back in 2001, it heard evidence about what had been happening immediately after 1997. The prudential insurance regulator became concerned about levels of reserves for the guaranteed annuity rate policies in 1997. The Government Actuary's Department subsequently undertook a survey, and it told us in evidence that Equitable Life stood out among all the other life assurance companies. Immediately afterwards, red letters, as they were called, circulated between the Treasury and the company, raising issues about Equitable Life's potential solvency.

§ Mr. Letwin
The hon. Gentleman has certainly done his homework. Is he really arguing that if his current disquisition leads to a conclusion that all the failures occurred before 1997—he knows that I deny that that is the case, but we shall let that be for a moment—and if 1004 it emerges that there was both systemic and operational failure before that time, it would affect in any way the issue at stake—the entitlement of current and lost policyholders to possible compensation if there was maladministration? Why does it matter whether the failure occurred before 1997 or afterwards?

§ Mr. Plaskitt
What matters is unearthing exactly what happened, and that is what Lord Penrose was asked to do. It is essential to look at the totality of his findings, and he helps us to do so by standing back in the final chapter of the report, having looked in detail at events that took place over many years, and asking what basic conclusion one can draw about the causes of the problem. He says, as we know, that the company was first and foremost the architect of its own misfortune, and regulatory system failure played a secondary role.

§ Mr. Letwin
Why does it matter when that took place? If the hon. Gentleman is making a serious argument about the possible rights of policyholders, is it not incumbent on him to address the question of whether the failure was partly operational, as the hon. Member for Twickenham (Dr. Cable) and I have amply shown is demonstrated in the report? Why does the date matter to the hon. Member for Warwick and Leamington (Mr. Plaskitt)—other than as a party political point?

§ Mr. Plaskitt
I am not making a party political point at all. I am trying to extract from the dense, 800 page-plus Penrose report the essence of its findings, because that is what my constituents and the constituents of other right hon. and hon. Members affected by the affair want to know. They want to know what happened and how it happened.

§ Mr. Harry Barnes (North-East Derbyshire) (Lab)
Surely the question to which our constituents, including the 50 who have been in touch with my hon. Friend, want an answer is: what is to be done now? It is important to understand the analysis and accept that the Conservatives and Equitable Life were to blame, but now we must decide what is to be done to get out of the mess that other people have created. There are avenues available to the Government that might assist with that process.

§ Mr. Plaskitt
My hon. Friend is absolutely right. My constituents, and, I am sure, his constituents and others, want to know what happens now. However, unless we understand fully the history of how things happened, we cannot work out correctly what must happen next. That suggestion was put to Lord Penrose as part of his terms of reference. He was asked to advise on what lessons should be learned, and what action should be taken. Action is under way—the ombudsman is undertaking work and there may be court actions. Lord Penrose himself suggested that the situation would eventually lead to litigation. That will be a lengthy process, but without the facts and the history before us, we could never determine what the next steps should be.
One important step is getting the regulatory system right, and the Financial Services Authority has introduced significant changes. Again, we asked Lord Penrose for his view because, having looked into the matter and unearthed important evidence of regulatory 1005 system failure, he could judge the current regulatory system against previous shortcomings and determine whether things have improved. In his evidence he was clear that they have, and pointed to resource improvements. For example, there are now twice as many regulators working on the regulation of life insurance companies. I reflected on that when Opposition Members intervened on this subject—I wondered whether the bowler-hatted bureaucrats who feature in their party's recent campaign efforts included the additional regulators who were appointed. If they are suggesting that those people should be removed again, we will slide back to the excessively light-touch regulation that contributed to the problem in the first place.
Secondly, Lord Penrose acknowledges that the organisational structure of regulation is now far better. Different skills are working together and are located in the life offices—a complete change from what happened before. Lord Penrose welcomes the regulatory system changes referred to as the "twin peaks" arrangement—traditional paper-based solvency investigation and measures allied to the broader factor. When he looks at the regulatory system in place now, he concludes: My clear impression is that the approach now being adopted is a very considerable improvement on what there was before. That will reassure constituents who want to know whether the lessons have been learned from the whole tragic affair.

§ Chris Grayling
The hon. Gentleman should go back and talk to his constituents who have been affected. I have no sense that constituents who have written to me have the slightest concern about the regulatory system. What they want to know is what is being done about their position. The Penrose report specifically states that compensation was not an issue that he considered or was asked to consider. If the hon. Gentleman is arguing that regulatory failure contributed to what happened—he is now explaining why the improvements that he says his Government introduced have made a difference to that—does he not therefore think that a proper investigation into the question of maladministration would now be appropriate?

§ Mr. Plaskitt
We have had an investigation conducted by Lord Penrose into the regulatory system failure. The other questions are entirely separate. We have rehearsed many times in the course of this discussion how those will be taken forward. The hon. Gentleman is right. Our constituents want to know that, but I do not think he is suggesting that there should be a Government-underwritten compensation scheme. If he is suggesting that, he needs to explain how we will overcome the moral hazard issue that such a scheme would raise.
To conclude, we have a story of manipulation, concealment and misrepresentation by Equitable Life. We have evidence of a domineering and manipulative chief executive, an inert board and institutional laziness and complacency, all underpinned by an inadequate regulatory system that was itself endorsed by policy decisions designed to prevent appropriate regulation coming into place. In the course of reading Lord Penrose's report one comes across a paper written by Mr. Ranson of Equitable Life delighting in the title, 1006 With Profits Without Mystery". From the perspective of Equitable Life's policyholders, it is more a case of "with losses without honesty".

§ Chris Grayling (Epsom and Ewell) (Con)
Despite the differences of emphasis in the debate tonight, hon. Members in all parts of the House are united in the view that the case of Equitable Life has been a tragic state of affairs that has caused problems not just for those who have lost money as a result of what happened, but for the whole country. The entire financial system on which the pensions of the future and the security of many of our people depend has been challenged and weakened by what happened with Equitable Life.
I agree with the hon. Member for Warwick and Leamington (Mr. Plaskitt) that lessons need to be learned. We need to understand what went wrong and ensure that it cannot happen again. To that extent we may agree, but as for the rest of his comments, and the comments of the Minister and other Labour Members, I find it depressing and disappointing—and I know that my constituents who have suffered in the affair will find it equally depressing and disappointing—that the Government's only real response in the wake of the Penrose report is to try to focus the criticism on the regulatory regime before 1997, and thus on the Conservative Government.
We need to set aside party politics, understand what went wrong and explore still further the questions that remain unanswered. We must provide real responses that our constituents will understand and that will leave them with a sense that their anxieties, questions and complaints are being properly addressed and not, as I fear, left to one side. As I listen to Labour Members, I am left with the sense that my constituents' concerns are being left to one side.
I received a letter just this morning from one of my constituents and it is difficult to argue against the simplicity of what he says. He writes: Equitable Life was at one time highly respected being the oldest mutual life office in the world. The management certainly made mistakes and behaved in an arrogant manner but it is up to the Regulator to protect the Public's interest. It is after all what he is there for! It is clear that the regulator, in whatever shape, form or system, did not fulfil that remit. Ultimately, as I said to the Financial Secretary in my intervention, even up to the latter days before the House of Lords judgment, even when discussions were taking place between the Treasury, the FSA and Equitable Life, my constituents and others around the country were still being sold policies that would quickly turn into a disaster for them.
The reality was that, throughout the process, from start to finish, people were let down by the system and the regulation, as well as by the management of the organisation itself. That the Financial Secretary should set her face against the simple question of whether there was maladministration is extraordinary and inexplicable. I cannot for the life of me see how she believes that she will benefit politically. Out there are thousands of people who are waiting upon her decisions, waiting upon the views and decisions of the House, who 1007 believe that it would be right and appropriate for there to be an investigation into whether there was maladministration, and it is simply not happening.
Lord Penrose is clear in what he says. The Financial Secretary intervened on the hon. Member for Twickenham (Dr. Cable) and quoted the last sentence of paragraph 77 of chapter 20 of the report, but at the beginning of that paragraph Lord Penrose states: Many readers of this report will be frustrated that it has not provided answers to two questions: who is at fault for the problems encountered by the Society, and who deserves redress as a consequence? It has been no part of this inquiry to attempt to answer either question. He goes on to say: The first inevitably involves issues of the scope of duty and of breach of duty that I was not asked to consider and that I would have been unwilling to consider as part of an inquisitorial process. So not only was Lord Penrose not asked to deal with, and did not deal with, those issues, he believed that that aspect of what went on should not have been part of his remit. Surely, if nothing else, he is arguing in support of the requests of my right hon. Friend the Member for West Dorset (Mr. Letwin) and of others inside the House and outside it for a simple process that asks the question: was there maladministration?
There has been debate over the ombudsman's ability to provide a proper assessment of what happened. It has been suggested that the Government Actuary's Department is not within the ombudsman's remit and therefore there is nothing that the ombudsman can do. But as my hon. Friend the Member for Chichester (Mr. Tyrie) has made clear, the reality is that, if the House were united, those changes, adjustments to the system and changes to the remit of the ombudsman, could be pushed through quickly. The disappointing thing, of course, is that that united support does not exist within the House.
I want to press the Financial Secretary on her challenging of the regulatory regime that existed before 1997. I looked back today at the letters that I have received from constituents about their experiences of what went wrong and I have read carefully the sections of the report that walk us through what happened after 1997. It is clear that discussions were taking place within the Treasury when it took over the role of regulator after 1998, and then within the FSA when it took over the job of regulation shortly after that. There were robust debates and serious questions were being asked about the solvency of Equitable Life.
When the Minister made her statement to the House a couple of weeks ago, she referred several times to discussions that took place in the years up to 2000–01. She will remember referring to information about reinsurance being withheld from the regulator, which she said took place in the latter days of the last decade. That happened under the new regime, albeit in its infancy as an alternative system. Such questions as, "Where did the regulatory system fall down?" must, by definition, apply as much to what occurred after 1997 as to what took place before 1997. 1008 I have read various sections of the report, which the Minister will know better than I do. Chapter 17, page 611, specifically refers to a meeting called at HMT's request to discuss the Society's approach to the annuity guarantees and the solvency implication of reserving for them. The Government Actuary's Department addressed the solvency issue shortly afterwards in a document produced in December 1998, saying: While this is reassuring it should be realised that publication of such a low solvency position is likely to severely undermine the company's reputation in the market and could threaten its survival as an independent entity.
At that point in 1998, serious discussions were taking place within the Treasury about whether Equitable Life was founded on stone or sand. Yet, when I read the letters from my constituents, I found that a significant number of them began their involvement with Equitable Life at that time. Those people did not take out policies in the 1970s or 1980s but were sold policies right up until the turn of the decade, and even beyond, and they lost money.
Among those letters, I found an example of a constituent who challenged some of Equitable Life's operational practices. He made a number of claims about how policies were sold to him, and, indeed, denied ever signing contracts with Equitable Life. None the less, he was placed under heavy selling pressure by Equitable Life salesmen in 1999 who were trying to persuade him to take up business with them. Some 25 to 30 per cent. of the people who wrote to me to complain took out policies at the end of the 1990s, and I cannot understand how the Minister can turn round to them and say, "There was a dodgy regime in place before we took office. We did something about it, and that is the end of the matter." That is essentially the message that the Government have given to my constituents. I ask the Minister to think again about the sole message that this House is sending to all the people affected in my constituency, her constituency and those of other hon. Members: "The regulatory regime did not work. We have changed it so it will all be fine for the future."
There is also the question whether operational failure led directly to financial loss. I must say that I was surprised by Lord Penrose's comment that there was no direct connection between regulatory failure and financial loss. If that were the case, why, when the Treasury and the FSA were discussing the solvency of Equitable Life, was the society still permitted to go out and sell policies to my constituents, who, within a very few years, suffered substantial financial loss as a result? The Minister may shake her head and smile, but my constituents will not understand why the regulator was not involved in what happened to them. Surely the House has a duty to see the matter through to the end. We have a duty to all those who lost money to look in every corner for what may or may not have happened. They are asking us to send the case back to the ombudsman for a proper investigation into whether there was maladministration. Is there really any reason why the Government should not say yes to that investigation?
I suggest to the Minister that there is a danger that, as she sits in her office in the Treasury considering regulatory issues, she may take her eye off the real ball— 1009 the fact that thousands of pensioners out there have lost money and their retirements will not be the same. We have a duty to them to see this through to the end by granting the investigation to determine whether there was maladministration and whether they have a case for compensation. If she fails to do that, she will let down not only those people, but this whole place and the whole reputation of politics and Government. She must change her mind, she must send them the right message, and she must do it now.

§ Mr. Adrian Bailey (West Bromwich, West) (Lab/Coop)
Like every other Member, I have constituents whose pension plans and retirement aspirations are much reduced as a result of the Equitable Life fiasco. I have an interest as a representative of those constituents and a further interest as chair of the all-party group on building societies and financial mutuals.
I join the Minister and other Members in expressing sympathy for those people affected by this fiasco. That was brought home to me today when I had coffee with a distinguished member of the local business community, who confided in me that he was still working only because Equitable Life had not delivered on his pension and, in turn, his retirement plans.
On compensation, the Government's response is consistent with that which took place following other pension fiascos and, on some occasions, scandals. Nobody can argue that the Government cannot underwrite risks, then say that Equitable Life is a special case, given that Penrose himself blames the company, not the regulators. I look back to the Maxwell scandal at theDaily Mirror. I appreciate that the pensioners affected by Equitable Life have been badly hit—in some cases, the impact has been devastating—but it was exactly the same for theDaily Mirror pensioners. There were huge issues of corporate governance in that case, too, but the Government did not rush in to compensate.
Another such episode, and another sorry legacy of the former Tory Government's regulatory regime, was that of pensions mis-selling. On that occasion, the industry itself had to compensate people who were sold pensions on false pretences. If the Government were to step in on this occasion, I wonder whether the companies that paid out that compensation would come to them to demand that they underwrite the bad management and mis-selling that took place all those years ago.

§ Mr. Letwin
Of course, everybody recognises that in many cases no question of compensation arises, but does the hon. Gentleman recognise that the distinction lies in the question of whether there was maladministration? That distinction was recognised by Parliament and by the current Chancellor in relation to the Barlow Clowes case, in which compensation was payable because maladministration was ascertained.

§ Mr. Bailey
Penrose says that there was no maladministration in this case. Frankly, many of the constituents whose perspective Conservative Members have assumed will not understand the subtleties and refinements of whether that is so. The fact is that they took up schemes that, one way or another, did not deliver on their pension aspirations. 1010 My hon. Friend the Member for Edmonton (Mr. Love) made a valuable point about the statement made earlier this month, when he noted that theFinancial Times expert had said that, even after all the problems, some of Equitable Life's returns were no worse than those of some other companies, so how could we justify compensating those pension holders and not those in other companies that had failed to deliver for totally different reasons? That would be difficult to justify.
I want to deal with my concerns about the mutual sector. It has been pointed out on a number of occasions that the problem at Equitable Life related to management. The quote often given from the Penrose report is that The Society's uniqueness lay in the approach adopted by its management, not in the essential characteristics of its business. Central to that was the fact that the chief executive officer was also the actuary, and that the company pursued a policy of failing to keep adequate reserves, overpaying bonuses and failing to keep the board informed of the position and the risks involved.
The report also makes it clear that the critical responsibility for valuing liabilities, assessing the liability implications of new products and identifying risk was discharged by a discrete part of the organisation that was not subject to effective scrutiny or challenge. Obviously, monitoring needs to be improved, and improvements are also needed in corporate governance. We must be clear, however, that because this organisation was a mutual, policyholders did not see their obligation as one of scrutiny, as might be the case for a shareholder in a conventional plc. This distinction was pointed out in Penrose. Most policyholders who take out a policy in a mutual see their obligation as simply to pay a premium, but to have no extra responsibility.
Under the articles of Equitable Life, the policyholders were effectively powerless. My hon. Friend the Member for Edmonton made the point about their registration under the provisions of the Companies Act 1989, which provide for a 10 per cent. vote to get a special meeting. That is, of course, impossible if there is no adequate register or access to a register for policyholders. Mutuals have to find a means whereby they can provide for policyholder participation.
I welcome, as do other mutuals, the Treasury initiative set up by Sir Paul Myners to look into corporate governance and policyholder representation in mutual life offices. The Minister has already set out the terms of reference, so I will not go over them again. It is fair to say that the mutual life assurance industry accepts the need to take action to improve representation by policyholders. We must make it clear, however, that the situation at Equitable Life arose not because it was a mutual but because the management policy was bad and, indeed, not even compatible with the basic principles of mutuality.
The initiative raises the challenge to ensure that the corporate governance of mutual life offices provides the necessary checks and balances to ensure that a saga such as this is never repeated. I am sure that there will be a dialogue between Sir Paul Myners and the mutual sector to ensure that steps are taken to prevent any such repetition. 1011 I want to conclude by making these particular points. Equitable Life has reached this situation because of poor management, not the structural issue with mutual ownership. That could happen with plcs. Independent Insurance went bust, despite the fact that it was a plc. There is no guarantee, even with a plc, that shareholders will bail it out and there are plenty of examples of shareholders letting a plc collapse.
The mutual life offices recognise the fact that this episode highlights issues of governance and involvement of policyholders, but we must make it clear that it is a one-off. Equitable Life is not representative of the mutual industry as a whole and it is as anxious as anybody to ensure that its rules and procedures prevent any repeat of this with a mutual company.

§ Mr. Edward Garnier (Harborough) (Con)
If the only pension arrangements people have are with Equitable Life, they are likely to think that it is representative of the mutual system, so I am not at all sure that the perhaps not intentionally but none the less effectively complacent attitude with which the hon. Member for West Bromwich, West (Mr. Bailey) finished provides us with a helpful analysis of where we are.
I want, if I may, to pick up, but not too seriously, a point made by the hon. Member for Warwick and Leamington (Mr. Plaskitt). He thought that Lord Penrose was the first judge to appear before a Select Committee for 40 years. I was on the Home Affairs Committee in 1992-93 and judges regularly appeared before it. Of course, judges chair Select Committees in the House of Lords.
If this were the Court of Appeal, and it is not, and Lord Justice Letwin as opposed to my right hon. Friend the Member for West Dorset (Mr. Letwin) had given judgment as opposed to having made a speech, I could say, "I have heard what Lord Justice Letwin says and I have nothing further to add." However, he has not given judgment. We are in the House of Commons and I am here to represent my constituents and to say what I believe ought to be done in a political sense as a consequence of this fiasco.
I have already declared my interest as the former holder of a number of Equitable Life policies. I continue to hold, I think, one further policy with it, so clearly I have been affected, and may continue to be affected, by what has happened. I have not yet reached the stage at which I am prepared to be as generous as my right hon. Friend in the event of compensation being provided, but I put that to one side.
Many of my constituents, like those of other hon. Members, have been affected by this disaster. Some are members of the Equitable members action group and some are not, but all have been adversely affected. The number runs into the hundreds—we are not talking about just one, two or three isolated individuals.
The dilemma that my constituents face is exacerbated when one considers that those people are not in a position to repair the damage done to them. They are, by and large, at the end of their working life or have finished it, so they do not have the economic ability to 1012 get another job to refill their pension pot. I accept that not every injury commands a remedy. Plenty of people suffer accidents, be they financial, commercial or physical. Those do not require compensation, but we are considering rather different circumstances.
I can say on behalf of my constituents that all who have been affected by this disaster welcomed the setting up of the Penrose inquiry and, to a greater or lesser degree, they have welcomed its findings. However, where they, and I on their behalf, complain is in respect of what the public authorities have done and propose to do. What they—my constituents—say about the management of Equitable Life is unprintable. Disquiet is growing, however, about the Government's response, and I regret, as I have huge respect for the Financial Secretary, that that disquiet will be in no degree lessened by her response in her statement on 8 March or in her opening speech today.
The appearance—I can put it no higher than that—which comes not only from the Government but from other agencies, is that all is well, all the mistakes were in the past, and that that is all that needs to be done about it. I note that the Financial Services Authority's press release, which enclosed the letter that the chairman, Mr. McCarthy, wrote to the Financial Secretary on 8 March, says, under "Notes for editors": The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal. My constituents are entitled to ask whether the FSA, in its handling of this affair, has come up to its remit.
The chairman of the FSA, in his letter to the Financial Secretary, says that Lord Penrose makes clear that the issues on which he comments can be settled definitively only by resolution in the courts or by some other adjudicator. Some other adjudicator, as was pointed out by my right hon. Friend the shadow Chancellor and the hon. Member for Twickenham (Dr. Cable), could mean a reborn Penrose. He has already found facts, and he is tremendously well placed to be that other adjudicator. I am depressed, however, that the chairman of the FSA thinks it appropriate—as does the Financial Secretary, I fear—to require our constituents to go to court to seek redress.

§ Mr. Barnes
Does the hon. and learned Gentleman feel that the Government could be involved in a compensation scheme that was in some way based on need? Different people are in different sets of circumstances—I am not sure whether I want to see him compensated, but numbers of his constituents might be much more deserving cases because their pensions and future provision have gone, and they might therefore be reasonably considered by the Government to be on a list for some percentage of compensation.

§ Mr. Garnier
I was simply making my personal interest clear, and I do not wish to personalise this debate at all. I can see that there is some argument to be 1013 made, and the telling question from the Labour Benches was that asked by the hon. Member for North-East Derbyshire (Mr. Barnes): what are the Government going to do? Were it to involve some form of means-tested compensation scheme, let us look at it. That is an advance from him, however, which we have not yet heard from his right hon. and hon. Friends on the Front Bench. At least he is addressing his mind to the real moral and political questions which this debate throws up, and which I fear that the authorities and the Government are ignoring.
It seems to me that the Government are hiding behind the Penrose report. The Financial Secretary quoted large chunks—she spent about 20 or 30 minutes doing so—of the report at the beginning of her speech. That is not difficult. The more difficult political and moral question is to ask what flows from the findings of fact that Lord Penrose has made. I have heard nothing from the Government other than that my constituents are urged to go to court, but this Government have removed access to legal aid, and therefore access to the courts, for these much-put-upon people. Any court case would take years to prepare, and if not a year, certainly months to reach a conclusion at trial.
We need only look at the current court case involving the BCCI scandal, which took place some years ago, to realise that. It will take the High Court many months to dispose of that case—and given that one party is bound to be dissatisfied with the result, it will go to the Court of Appeal and, no doubt, to the House of Lords. So we are not looking at an easy way out, however easily the words "go to court" trip off the ministerial tongue.
What else did the Minister say? She said "We have set up the Myners review and the Morris review." I should have thought that the House was fed up with hearing the Government talk about reviews. They have had more "reviews" than Raymond. It is time that they started to do something rather than pushing issues over the political horizon.
We are all immensely grateful for what Lord Penrose has done, but what a judge cannot do is provide a Government with political answers. We saw that with the Scott inquiry and the Hutton inquiry, and we are seeing it with the Saville inquiry. We have four judges who have held, or are in the process of holding, well-organised and well-designed inquiries, and they do their job; but they do their job as finders of fact rather than as providers of political and economic answers. It is wrong of the Government to say "Penrose has reported: we need do no more."
I believe that this saga points to a need to do away finally with the compulsory annuity system. The Minister and I debated that at some length last year, and I might remind her that my Retirement Income Reform Bill achieved a Second Reading by a majority of 101—not bad for a private Member's Bill, if I may say so.
What this whole saga demonstrates is that the Government are failing to get a grip on the underlying problems of financial provision for the elderly. I have a number of elderly constituents who will be financially severely embarrassed as a consequence of this disaster. It highlights the need for liberalisation of the way in which people can invest for their retirement. The Government insist that people should be forced to buy annuities with their pension pot at 75. If the public are 1014 no longer prepared to trust financial institutions, for goodness' sake let them choose their own means of saving and investing for their retirement—and while they are about it, I urge the Government to listen very carefully indeed to what has been said by my right hon. Friend and the hon. Member for Twickenham. There they may find an escape route, and I urge them to burrow into it.

§ Mr. Barry Gardiner (Brent, North) (Lab)
I know that others wish to speak, so I shall curtail my remarks.
Rarely does the failure of a company have an impact on so many lives in such a personal way as has the mismanagement at Equitable Life. More than I million policyholders have been affected, and the reputation of a whole industry has been tarnished. The constituents of mine who were unlucky enough to be policyholders tell me of the financial difficulties that they suffer as a result of Equitable Life's mismanagement, and the financial insecurity that that brings them. Many had saved solely with Equitable Life because it had a good name and they believed that the Government of the day had put in place an effective regulatory system. In fact, as with many investors, they were wrong. Despite rapid change and evolution in the market, the then Government failed to make substantive changes to the regulatory system.
In his detailed report, Lord Penrose notes that in 1988, nine years before the current Government took office, a Department of Trade and Industry Minister—the right hon. Member for Bromley and Chislehurst (Mr. Forth)—made a conscious decision not to update the regulation of life insurance. It was just one of a catalogue of decisions to continue that Government's light-touch regulatory system, which was in the end to have such a disastrous effect on my constituents and so many others throughout the country.
The 1988 decision was compounded by decisions in the early '90s that saw Conservative Members lobbying against changes that would have made the Equitable fiasco at least remote, if not impossible. The Government of the day lobbied against a Brussels directive that would have placed a statutory responsibility on companies to set aside reserves for terminal bonuses. The then Government viewed that as overly cautious, and suggested that a tougher regulatory system would have created too much red tape. Perhaps Conservative Members could therefore explain to my constituents, who are indeed cautious and save diligently, what would have been over-cautious about offering them protection and asking companies to abide by the most basic process of reserving.

§ Mr. Barnes
My hon. Friend is correct in pointing to the previous Conservative Government's errors and omissions. However, if the Conservatives were still in office now that Penrose has revealed all these errors, what would have to be done, and would that Government not be obliged to move towards compensation? What difference is there because we have a Labour Government? We have to pick up the mess that the Conservatives left us in.

§ Mr. Gardiner
My hon. Friend makes his own points, but I would hazard that if it were the case that 1015 Opposition Members were now on the Government Benches, we would never have had a Penrose report, because they would have known full well what it would show.
In some cases, it is possible to say that hindsight makes our vision somewhat clearer, but I do not believe that that was the case in the regulation of the financial services industry.

§ Mr. Gardiner
I shall not give way, because I need to make progress. The right hon. Gentleman has had plenty of time to make his points this evening, and he was not as generous as my hon. Friend the Financial Secretary in taking interventions.
I do not believe that that was the case with the regulation of the financial services industry, because it would be too generous to say that Tory failures properly to regulate the financial services industry could be explained only with hindsight. I say that because other financial services organisations had already realised the need for more effective regulation. By 1986, regulation was already in place to support the wish of the Association of Friendly Societies to offer a voluntary compensation scheme. That scheme, which guaranteed 90 per cent. of a guaranteed policy, was already operating successfully and could have been used as a role model, yet the then Government decided not to move forward with a similar scheme. I am pleased to say that the current Government saw the need for such a scheme and introduced the financial services compensation scheme as part of the Financial Services and Markets Act 2000. That scheme protects consumers if companies become insolvent now.
In 1997, this Government inherited a hotch-potch of a regulatory system from the previous Government, who favoured cutting red tape over protecting consumers. Neither I nor this Government want more red tape, but I do want effective regulation. Conservative Members play a devious game when they portray all regulation as red tape, as they have recently in the Chamber. As someone who spent 10 years running a successful business, I understand the impact that red tape can have on a business and how it can stifle a company's competitive edge, but I also understand that with ineffective regulation it is usually the big firms that benefit, not the small consumers. Large investors can spread their risk and hedge their bets; small investors cannot and do not.
In his report, Lord Penrose concluded: Principally, the Society was the author of its own misfortunes. That was because the regulatory system that the Conservative Government had in place was weak and ineffective. Without an effective regulatory system, the rules were not there for Equitable to break, and there were few mechanisms to alert the authorities to Equitable's failures. The primary problem was not that the regulator did not implement existing regulations properly, but that the regulations that existed were not the proper ones. 1016 The Opposition's position is fundamentally this: they want to parade themselves as the champions of the policyholders, but they do not want to find themselves committed to compensating those policyholders should they ever be in government. That is why they have suggested the device of an inquiry to establish whether there was maladministration and whether compensation is therefore due. That, however, is a specious argument, which does them no credit—and I make my points because of the logic of the shadow Chancellor's own arguments. The Opposition claim not merely that there was an inadequate regulatory system, but that the operation of such a system as there was, was itself inadequate. If they are convinced that operational failure occurred, why do they not follow their own logic and say that there was also maladministration, and that compensation is therefore due? The answer is that it is difficult for them to justify a commitment to spending upwards of £3 billion in compensation to policyholders when they are already committed to cutting £18 billion off the police, defence, housing and education budgets.

§ Norman Lamb (North Norfolk) (LD)
I should begin by declaring an interest as a former policyholder. I was one of the lucky ones: I did not have all my eggs in one basket, but the hon. Member for North-East Derbyshire (Mr. Barnes) has reminded us today of the many people who suffered great losses as a result of this debacle. As recently as this week, I received an e-mail from a constituent—he is of modest means—reminding me that he had lost 23 per cent. of his pension, with another 10 per cent. still to go.
I want to draw attention to what many consider to be the misleading nature of the Government's response to the Penrose report, and to look at where we go from here. The Financial Secretary said in her statement to Parliament: Lord Penrose makes no recommendation for the payment of compensation. The implication of that is that compensation should not flow from Lord Penrose's findings, but in fact the position is very different: such an outcome was simply beyond his remit. He was not asked to consider it, and he did not consider it. The Financial Secretary then said: Nor does he conclude that economic loss was caused to policyholders by the regulatory system."—[Official Report, 8 March 2004; Vol. 418, c. 1258.] She then prayed in aid the report, which states that 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.
However, when Lord Penrose appeared before the Treasury Select Committee, I said to him, but saying you cannot infer one from the other crucially is not the same as saying that you do not rule it out. It is simply not part of your remit". Lord Penrose replied: That is so. I then said, So you cannot rule out the possibility that compensation does flow from failures of the regulatory system? 1017 That, of course, is the very issue that we are discussing this evening. Lord Penrose replied: I have sought to avoid adjudicating one way or the other. In other words, the question remains to be asked, considered and determined.
In her statement to Parliament, the Financial Secretary made great play of the fact that the regulatory system failures were secondary factors—an issue that the Conservative spokesman raised during his contribution this evening. The Financial Secretary pointed out the report's conclusion that the Society was the author of its own misfortunes. Indeed, she repeated that point in her evidence to the Select Committee. But as Lord Penrose confirmed to the Committee, it is almost inevitably the case that regulatory failure is secondary. The initial problem is a company that is not behaving properly. It is then for the regulator to sort out that problem, and such action is secondary to the original problem. So to assert that regulatory failure is a secondary factor is merely to state the obvious. The conclusions that the Financial Secretary draws from the Penrose report are therefore not justified.
What does the report tell us? It tells us that there were systemic failures, and it clearly points to a failure to modernise the system of regulation. But it also points in many paragraphs to failures on the part of regulators within a flawed system: in other words, operational failure. Mention has been made of several such examples this evening, and I shall not discuss them given the lack of time, save for one. In talking about the Government Actuary's Department, Penrose says that the standards of scrutiny still impress me as complacent, lacking challenge and hesitant in criticism and in following up on any criticism made. That is a pretty damning criticism of how the Government Actuary's Department operated—a matter to which I shall return later.
What has been the Government's response to the key issue of what should be done for policyholders? The hon. Member for North-East Derbyshire constantly reminded us of the centrality of that issue. The Financial Secretary referred to the financial services ombudsman, whose role is to consider individual claims, but also, crucially, to consider individual complaints of misselling. That process is wholly irrelevant to all those who have no specific complaints about mis-selling, but have simply suffered a substantial loss as a result of what has happened over the last few years. The more successful the claims pursued through the financial ombudsman service, the more likely it is that the company will be driven into insolvency.
It seems to me that the Government could be accused of being reckless in standing by and allowing that to happen. Should the company become insolvent, the financial services compensation scheme will come into play, which will result in the rest of the industry—particularly the policyholders of other life companies—bearing the cost of this debacle. Is that any fairer than the taxpayer picking up the tab? It seems to me that the one option is no fairer than the other. The Government's response is a recipe for years of litigation and years of claims being made through the financial ombudsman service, with lawyers and no one else being 1018 the beneficiaries. Surely it would be better to find a more ordered way forward than that suggested by the Government's response.
To establish what job is now required, I go back to what Lord Penrose said in his evidence to the Select Committee. He talked about the gates that one has to go through in law to establish compensation flowing from failure. He talked about establishing a duty of care—first establishing that a breach of that duty had taken place, then establishing what should flow from it. That is what now has to happen. We should attempt to determine what, if any, compensation flows from the regulatory failures identified by Lord Penrose. That is the essential next step, so how can we best achieve it?
The Financial Secretary refers only to the courts as the place where those issues should be considered, but that is simply not an option for most policyholders. We can therefore reflect on three other options. First, the parliamentary ombudsman. It is already clear that in many respects the report already published on a narrow time period has been substantially undermined by Lord Penrose's findings. The parliamentary ombudsman should be prepared to recognise that now, and to reopen her inquiry.
It is my belief that the Government Actuary's Department is arbitrarily excluded from the scope of the parliamentary ombudsman. There is no case in logic for its continuing exclusion. The report is riddled with findings of negligent regulatory failure in respect of how the Government Actuary's Department carried out its functions. That should be remedied by the Government without delay. Not to do so is a cynical exercise designed simply to prevent any challenge to the GAD's exercise of its functions.
My hon. Friend the Member for Twickenham (Dr. Cable) referred to the second option of an extended remit for Lord Penrose. That should be seriously considered. Let us face it, he understands the subject, so he is in the best possible position to look again into the problem of compensation on the basis of the findings of fact that he produced.
Finally, there is the proposal from Peter Martin, a former non-executive director of Equitable Life. He has put forward the possibility of a mediation process involving a retired Law Lord or Court of Appeal judge. In respect of the Penrose report, he suggests that that person would conduct an 'early neutral evaluation' of the legal liability aspects of its findings of fact and expressions of view with the purpose of bringing all parties into discussions to effect an overall disposal of all claims. This would have to be strictly confidential to the parties but all would have to 'buy in"'— and by that he means policyholders, the Equitable Life Assurance Society, the Treasury, the FSA, Ernst &Young and the former directors.
Surely, that process deserves proper consideration. In the Treasury Committee last week, I asked the Financial Secretary two or three times whether she ruled out such an approach. She did not do so, and I hope that she will consider that option seriously, as it seems to me to be a way of avoiding years of uncertainty. Unless we find an orderly way forward, the impact of the Equitable Life disaster—on its victims, and on confidence in the industry in general—will be very severe.

§ Mr. Andrew Tyrie (Chichester) (Con)
The only interest that I wish to declare is that I have a large number of constituents who have been deeply affected by this matter. Quite rightly, they remain in close touch with me about it.
Tonight, we should be working out what is to be done for those who have been affected, and how to restore trust in the industry and in Britain's savings culture. We should do that together, and the debate should have been largely non-partisan. However, the problem for the House—and not just for those on the Opposition Front Bench—is that the Government, through their response to the report, have rejected working together to sort the matter out. I very much regret that.
The Financial Secretary is an intelligent and thoughtful woman, and I was very surprised and disappointed by the disingenuity of her statement on 8 March. This evening's debate has restored some balance, and it is worth going through some of the key points that have been raised.

§ Mr. Plaskitt
The hon. Gentleman is dwelling on when the regulatory system failed, but what does he make of Lord Penrose's comment in paragraph 162 of chapter 19? There, he says that, in the 1980s and 1990s, there were specific proposals for change that Ministers did not pursue. Why was that?

§ Mr. Tyrie
That is probably right. I do not know: I have not looked into enough of the detail in the back papers to be sure. Neither has the hon. Gentleman, as he is only reading Lord Penrose's conclusions. Further on in the report, he will find a litany of regulatory failure that happened after 1997. There are pages and pages of that, and failure at the operational level. The hon. Gentleman is making exactly the sort of partial and partisan remarks that do him and his party no credit. The hundreds of thousands of people who have been affected by the firm's collapse will take note.
Opposition Members do not dispute Lord Penrose's conclusions about the early 1990s. It would be helpful if the Government abandoned their denial of the shortcomings of the regulatory system and of the operational regulatory failure evident after 1997.
Secondly, the Financial Secretary sought to insert into the debate the question of light-touch regulation. She tried to attribute blame for the Equitable Life crisis to the light-touch approach of the previous Conservative Government. That may or may not be true, as the issue is very complicated. What is certainly not true is that the Labour Government abandoned that approach for something different when they came to power. On the contrary, as my right hon. Friend the Member for West Dorset (Mr. Letwin) has said, the 1020 right hon. Member for Darlington (Mr. Milburn), when he was Chief Secretary, endorsed light-touch regulation. He did not do so when he arrived at the Treasury and while he worked out what to do: he did so a full two years after Labour came to power. He said, in an even more forceful statement than that cited by my right hon. Friend, that the Financial Services Authority will operate according to a philosophy based on light-touch regulation with protection where necessary and fairness throughout. The Bill"— the Financial Services and Markets Bill— will reduce regulation".—[Official Report, 28 June 1999; Vol. 334, c. 35.] That does not sit squarely with the Financial Secretary's earlier portrayal of the Government's approach to regulation.

§ Mr. Gardiner
Does not the hon. Gentleman appreciate the distinction between a light touch in a system of regulation that is wholly inadequate—as I am sure he would accept the previous system was—and a light touch in a system of regulation that is robust?

§ Mr. Tyrie
I am afraid that I find that question incomprehensible. I shall look at it inHansard and have another go at it, but for the moment I shall move on.
The remarks by the then Chief Secretary sound like an endorsement of a regulatory system that failed. Indeed, that is exactly what the Financial Secretary appears to say about the regulatory system before 1997. The only problem is that it is a description of the system after 1997. Sleight of hand is everywhere. The Financial Secretary looks puzzled, but puzzlement is probably preferable to the knowing understanding of the issue that she has adopted so far.

§ Mr. Gardiner
The hon. Gentleman is being partisan.

§ Mr. Tyrie
We have been forced into making such remarks by the presentation of the Penrose report by the Financial Secretary on 8 March. On the compensation scheme, she told the House 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. Several policyholders thought that that might help them, but the truth is that it is not a new scheme but an amalgam of two existing schemes. Moreover, it will not help existing Equitable policyholders, as the Financial Secretary well knows, because it underwrites only the guaranteed amount of any policy, not the terminal bonuses that have been lost. She held out false hopes to many people with those remarks. Some of them have written to me and I expect that they will write to her in due course.
The hon. Member for Warwick and Leamington (Mr. Plaskitt) raised the issue of whether Lord Penrose could consider compensation. The Financial Secretary said Lord Penrose makes no recommendation for the payment of compensation."—[Official Report, 8 March 2004; Vol. 418, c. 1270, 58.] 1021 Of course he did not do so: he was not asked to. Furthermore, he said only last week in Scotland that he did not make any recommendations about policyholder compensation because it formed no part of my remit".

§ Ruth Kelly
How does the hon. Gentleman respond to the comment by Lord Penrose in the foreword to the report that 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, that could have accommodated in parallel the investigation and resolution of disputed contentions of conformity or non-conformity with generally accepted norms of practice in any of the fields that would have been relevant."?

§ Mr. Tyrie
The Financial Secretary seems to say that the situation is so complicated that we cannot handle it and no scheme could be devised to do so. Of course it could, and Lord Penrose could be asked to consider that. I strongly agree with the hon. Member for Twickenham (Dr. Cable) on that point. Having spent two and a half years considering the issue, Lord Penrose could work up a scheme and a methodology for working out whether compensation should be paid—in other words, to establish liability—and then what that compensation should be. The fact is that Lord Penrose was not asked to do that. The Government did not want the answers, so they did not even ask the questions.
Perhaps the worst misrepresentation involves the ombudsman's role. The Financial Secretary said that the parliamentary ombudsman has cleared the Government of all cases of maladministration. That is like clearing the fox of killing the chickens without bothering to look at the hencoop. The ombudsman has only looked at one case. She has only been allowed to look at 18 months of a 20-year problem. Moreover, she made it clear that she was unable even to inquire into the workings of the key Department—the Government Actuary's Department—where most of the litany of regulatory failure cited in the Penrose report appears to have emanated. So the Government, particularly the Government Actuary's Department, have not been cleared of anything at all, but that has not stopped the Financial Secretary saying: There is no issue after 1997 in Lord Penrose's report that has not been considered by the parliamentary ombudsman".—[Official Report, 8 March 2004; Vol. 418, c. 1270.] What an absurd remark. I leave that lying there for the people listening to the debate to judge its plausibility.
At the start of the debate, my right hon. Friend the Member for West Dorset went carefully through each stage of the Financial Secretary's argument. We can now see more clearly why that line of argument has been developed: because it is the Government's best defence for doing nothing to help the policyholders who have been hit. First, she said that the management were to blame. Few hon. Members dispute that. She then said that the regulatory failure was secondary and systemic. Lord Penrose's report shows it to have been significant and operational. She then sought to create the impression that all the regulatory failures took place before 1997, but much of it took place after 1997—not 1022 that that distinction should matter to a responsible Government. She was chuckling away at that moment ago.
The Financial Secretary sought to create the impression that light-touch regulation was an exclusively Conservative policy; but, as we know, it was the Government's policy when they framed the Financial Services and Markets Act 2000. Finally and most perniciously, she sought to imply that there was no maladministration. In fact, no systematic effort has been made to look for maladministration. The Government are preventing the ombudsman from looking in the one place where it is most likely to be found: the Government Actuary's Department.
The Financial Secretary and the rest of the Government can do one simple and sensible thing now: they should get on with amending the Parliamentary Commissioner Act 1967, to enable the parliamentary ombudsman to examine the workings of the Government Actuary's Department. Only then will we know whether the litany of regulatory failure identified by Lord Penrose constitutes maladministration, and we can then get clear recommendations on compensation. The Government could make that amendment tomorrow if they chose to do so. They could get on with it right away. The Financial Secretary shakes her head in disagreement. Perhaps she would like to explain why she could not do that tomorrow.

§ Ruth Kelly
The hon. Gentleman must realise that secondary legislation cannot be used to make retrospective changes of the kind that he advocates.

§ Mr. Tyrie
If the Financial Secretary looks at the Parliamentary Commissioners Act 1967, she will find a specific section that enables her to do so, and it is absolutely incredible that she should be denying that. I hope that I can find it—oh I can—how convenient. It states: A complaint under this Act may be made in respect of matters which arose before the commencement of this Act". I have been advised that a complaint can therefore be made that relates to matters that occurred before the commencement of an amendment to the Act.
Another crucial passage in the Act says that a complaint not made within that period may none the less be considered if there are special circumstances which make it proper to do so. So the ombudsman can make her own discretionary judgment on that matter.

§ Mr. Tyrie
I should like the Financial Secretary to answer the point that has been made, instead of trying to interrupt, because hundreds of thousands of people want her to make an intelligent reply.

§ Ruth Kelly
We have had an interesting debate with some passionate contributions on each side of the House, including from my hon. Friends the Members for Brent, North (Mr. Gardiner), for Warwick and Leamington (Mr. Plaskitt) and for West Bromwich, 1023 West (Mr. Bailey). Before responding to the debate, I should make it clear to the House that I have not presented my findings or the Government's findings, much as some hon. Members have tried to insinuate that that is the case; I have presented Lord Penrose's account. Tonight, I have found that the real position of the Liberal Democrats is that Lord Penrose's report is unsatisfactory, and that the position of the official Opposition is to try to attribute to Lord Penrose a view that he does not hold. I shall shortly deal with each point raised by the right hon. Member for West Dorset (Mr. Letwin).
First, I must dispel some myths that have been raised during the debate. Lord Penrose is absolutely clear that it was not the guaranteed annuity problem that led to the society's financial crisis in 2001. He says that, superficially, a £1.5 billion additional liability should not have brought down a society with funds of £32 billion. The issues that he identifies are deep-rooted and go back 30 years into the history of the society. He says that, primarily, the Society was author of its own misfortunes. Hon. Members in all parts of the House are agreed with Lord Penrose that, with hindsight, it was the system that failed to provide the regulation that changing circumstances…required, not that there was failure to implement what was fundamentally a satisfactory system. Nevertheless, I believe that the House should reflect carefully on the fact that that was the system that Ministers and Parliament had intended.
The difference between the two sides of the House tonight arises on whether there was operational failure that led to economic loss by policyholders. Lord Penrose has not presented in his report evidence of operational failure. I quote: 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 examines the regulators with the benefit of hindsight and that they were operating under a system that was different in approach, resources and values from that which applies today. I think that the House should reflect carefully on the fact that 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 regulator.
Let me deal with the points raised by the right hon. Member for West Dorset. First, he tried to insinuate that because the level of skills needed to be upgraded after the FSA was instituted, that was itself a sign of operational failure. However, if he had done his homework and read the report more fully, he would have read Lord Penrose's view of that issue. I quote from chapter 13: 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 as to restrict the workload that a less restrained approach would involve. 1024 It was that which led deliberately to the under-resourcing of the DTI. Lord Penrose goes on to make the link by stating that the DTI was ill-equipped to participate in the regulatory process. It had inadequate staff, and those involved at line supervisor level in particular were not qualified to make any significant contribution to the process. Lord Penrose himself is clear that that was not operational failure but a deliberate decision taken by managers, and when he was asked in the Select Committee on the Treasury about systemic failure, he said that those issues were aspects of the same problem. He is absolutely clear about that point.

§ Ruth Kelly
If the hon. Gentleman listened, he might hear the quotes from the Penrose report. I must put the points on the record before the end of the debate.
The right hon. Member for West Dorset referred to chapter 19 and paragraph 187, which is about subordinated debt. If he read the Penrose report more closely, he would see that Lord Penrose says of that episode: The authorisation was within the scope of the relevant regulations and guidance. I do not criticise any of the formal steps taken or the propriety of the order granted. The right hon. Gentleman went on to refer to paragraph 117, which is about the failure to appreciate a change of valuation assumptions in the regulatory returns. The practice adopted between 1990 and 1997 by Equitable Life of using different interest rates for valuing its assets and liabilities was within the regulations of the time. As they were within the regulations, regulators had no grounds to challenge the decision—again, there was no evidence of operational failure.

§ Mr. Tyrie
Will the hon. Lady give way?

§ Ruth Kelly
No, I must make my points before the end of the debate.
The right hon. Member for West Dorset cited paragraphs 240 and 228 of chapter 19 about the general failure by regulators to follow up issues and the ineffectiveness of challenge. Again, we can trace Lord Penrose's comments back to under-resourcing—a decision was deliberately taken by Ministers in the DTI to restrict the work load that a less restrained approach would involve. As Lord Penrose says, individual regulators operated in good faith and to the best of their abilities within the system as they found it". The right hon. Gentleman also cited paragraph 209 of chapter 19 about the information obtained, which was not used to form a realistic appraisal of the society's financial position. Had he looked back a couple of paragraphs he would have found that Lord Penrose deliberately makes a link to the Government's success in watering down the third life directive and the fact that a paper-based approach remained in place. He said that that approach had "other consequences" and made a link to the episode. Again, it was a policy decision, not an operational failure. 1025 Many hon. Members have raised the question of the ombudsman's remit and her inquiry. You will know, Mr. Deputy Speaker, as will hon. Members, that the parliamentary ombudsman is an Officer of the House, who reports to it and is independent of the Executive and Government. That is an important principle that all hon. Members should abide by. In her initial investigations, the ombudsman chose to examine the FSA's period of stewardship. She could have chosen to examine a different period, but did not. She chose to look at one lead case. She could have chosen a different case, but did not do so. She concluded that there was no case for the Government to answer, and that there was no maladministration that led to loss. The fact that hon. Members do not agree with her conclusion does not mean that they should reject it.

§ Mr. Letwin
Will the hon. Lady give way?

§ Ruth Kelly
No, I have two minutes left, and the right hon. Gentleman must let me make my point.
We are determined to protect policyholders. Lord Penrose says that the FSA reforms represent a major comprehensive re-assessment of the requirements of an efficient regulatory system". We are determined not to be complacent. There will be a programme of comprehensive reviews—a review of corporate governance of life mutuals will be led by Sir Derek Morris; a review of actuarial standards of performance will be led by Paul Myners; and a review of accounting standards will be led by the independent Accounting Standards Board. That work, alongside the FSA reforms welcomed by Lord Penrose, will develop the architecture of the life assurance industry for present and future policyholders, and will help to ensure that the regulatory system remains up to date.
We have also pledged to consult shortly on legislation that will protect policyholders from unlimited liability—an issue raised in the Penrose report that we are determined to address. I have also spoken to the financial ombudsman to see whether he needs any additional resources or help from the Government to deal with any consequential claims that may, or may not, arise from Lord Penrose's report. We have learned the lessons— It being Three hours after the commencement of proceedings, the motion for the Adjournment of the House lapsed, without Question put, pursuant to Order [17 March].