HL Deb 22 January 2001 vol 621 cc5-7

2.47 p.m.

Lord Steel of Aikwood

My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In so doing, I must declare an interest, albeit a rather painful one, in common with many former Members of the other place.

The Question was as follows:

To ask Her Majesty's Government what action they propose to take to review the effectiveness of the Financial Services Authority following the judgment of the House of Lords in the case of Equitable Life.

Lord McIntosh of Haringey

My Lords, like the noble Lord, Lord Steel, I declare an interest in this issue as an Equitable Life policyholder through my additional voluntary contributions to the parliamentary pension scheme.

As the Economic Secretary to the Treasury announced during a debate in Westminster Hall on 19th December last year, the Financial Services Authority intends to prepare a report on the events that led to Equitable Life's decision to close to new business. The report will cover both the FSA's role as a prudential regulator and its exercise of its functions under the Financial Services Act 1986, including the Personal Investment Authority's responsibility for conduct of business regulation of long-term investment-linked life insurance. The report is likely to take some months and will be published.

Lord Steel of Aikwood

My Lords, I am most grateful for that reply, but does the Minister accept that many people believe that an internal inquiry by the FSA is simply not good enough in the circumstances? Surely there was a failure of oversight as indicated by failing to follow up the Treasury memo of 1998. Even before the FSA came into being, were there not eight years of surveillance by the DTI during which Equitable Life entered into unhedged and open-ended liabilities on the false assumption of continuing high inflation? In those circumstances, do not Her Majesty's Government have a moral obligation to inquire fully into what went wrong?

Lord McIntosh of Haringey

My Lords, I confirm that in the period between the late 1950s and 1988 Equitable Life offered guaranteed annuities which relied to some extent on higher levels of inflation than have since been the case. However, I challenge the noble Lord's assertion that this is purely an internal inquiry. After all, the Financial Services Authority, as set up under the Financial Services and Markets Act 2000, has 11 non-executive directors as compared with three executive directors. Ronnie Baird, the director of internal audit, who is responsible for the inquiry, reports not to any of the executive directors but to the board as a whole. I think noble Lords will agree that that gives a good deal of assurance that the inquiry will indeed be independent.

Lord Saatchi

My Lords, two parties stand accused of a failure of supervision in this case: the Treasury and the regulator. Do the Government think it appropriate to order an investigation in which one of the accused is asked to investigate the other?

Lord McIntosh of Haringey

My Lords, the Government did not order an investigation. The Financial Services Authority undertook to carry out such an investigation.

It is true that until 5th January 1998 these matters were the responsibility of the Department of Trade and Industry; and previously the Board of Trade. From 5th January 1998 to 31st December 1998 they were the responsibility of the Treasury. Since 1st January 1999 they have been the responsibility of the Financial Services Authority under contract to the Treasury.

I do not think that it does any good to do anything at present other than to ensure that the inquiry which takes place is independent, as I indicated to the noble Lord, Lord Steel, and covers the whole history of the affair. With hindsight all of us could imagine that an open-ended commitment to give guaranteed annuities might be unwise. If we had realised that that was available, some of us might have taken advantage of it. But we do not all have that hindsight. The noble Lord, Lord Saatchi, does not have it and neither do I.

Lord Avebury

My Lords, has the Minister noted that a number of policyholders have cashed in their policies with a penalty of 10 per cent? How many policyholders would have to take that step to enable the remainder of the policyholders to receive the full amount of their annuities?

Lord McIntosh of Haringey

My Lords, I understand that approximately 3,500 policyholders have cashed in their policies. Even if a large number of policyholders cashed in their policies, I do not think that it is plausible that Equitable Life would become insolvent. Equitable Life is not insolvent; its customers' policies remain valid; and it is capable of meeting its contractual obligations under any reasonable actuarial assumptions.