§ Motion made, and Question proposed, That the sitting be now adjourned.—[Miss Melanie Johnson.]9.30 am
§ Mr. Richard Ottaway (Croydon, South)
I should like to raise the situation at the Equitable Life Assurance Society. I declare my interest as a policyholder of Equitable Life.
Since I announced that I was to instigate this debate, I have been deluged with advice, e-mails and faxes. I apologise to those who might be following the debate because, in the short time available, I cannot address every technical point. However, I am sure that this will not be the only debate on the subject and there will be plenty of opportunity in future to examine the minutiae. Today, I intend to consider some fundamental questions.
The Equitable Life Assurance Society is the oldest mutual assurance company in the world and it is a tragedy that this debate should have to take place. The situation at the Equitable is of extreme concern to the hundreds of thousands, if not millions, of people who are caught up in it. The frenzy of media coverage over the past few weeks—much of it uninformed—has not been helpful. We need a period of calm reflection so that the situation can be satisfactorily resolved.
It is important to remember that there has been no fraud and no intent to deceive. Although, in the view of many, there may have been misjudgment, every penny that has been paid to the Equitable is still there and has not gone away. That money is competently managed and the issue is an argument over which policyholders are entitled to which assets of the society. That argument can be resolved by rational intelligence and proper leadership. My thinking is based on my family maxim, "It's not how you get into the hole, it's how you get out of it that counts."
The recent case, culminating in the House of Lords decision in July, concerned the validity of the society's decision to award lower terminal bonuses to those whose with-profits pension policies matured with guaranteed annuity rates, known as GARs in the industry. A with-profits pensions policy is one in which the insurance company pays bonuses that are added to the fund at intervals. When the plan comes to an end, a final bonus is paid. The level of bonus depends on the investment performance of the insurance company. When the plan matures and the individual retires, part of the final pension fund must—I emphasise the word "must"—be converted to a regular income by the purchase of an annuity, either from the original pension provider or from another insurance company. The amount of annual income payable from the annuity depends on the market.
2WH I shall now make the only party-political point that I intend to make. The Conservative party plans, after the next general election, to change the obligation to buy an annuity. We shall adopt the recommendations of the committee headed by Dr. Oonagh McDonald, which will virtually remove that obligation.
The with-profits policies at the centre of the Equitable Life case were first sold in the late 1950s and offered a guaranteed annuity rate regardless of the annuity rate at the time the individual retired. Annuity rates have fallen considerably in recent years. In the past 10 years, they have fallen from around 16 per cent. to 8 per cent. per annum, halving the income that a newly retired person, with the same lump sum, would receive.
Rates have fallen for two reasons. First, the value of yields from Government bonds—more commonly known as gilts—that are used by insurance companies to back their annuities has fallen sharply as the Government's borrowing requirements have reduced. Secondly, people's life expectancy has increased and annuity rates have fallen to reflect that. As a result, the Equitable, along with many other pension providers, stopped offering GARs in the late 1980s.
However, the Equitable faced growing costs as about 90,000 GAR policies, already sold, began to mature. A greater proportion of the company's profits was subsequently allocated to those policyholders than had been originally anticipated. Equitable attempted to offset some of those costs by paying a lower final bonus to policyholders with GARs, compared with bonuses paid to policyholders without a guaranteed annuity.
Guaranteed annuity policyholders were effectively given a choice between exercising the right to a guaranteed annuity rate, in which case the final bonus would be reduced, or relinquishing the guaranteed growth, purchasing an annuity at current market rates and receiving the full bonus. The financial effect of both those options was roughly neutral. As a result of the Equitable board's policy and management, a number of the GAR policyholders complained to the Personal Investment Authority ombudsman, who agreed to allow the dispute to be referred to the High Court to test the validity of the society's actions.
In September 1999, the Vice-Chancellor of the High Court, Sir Richard Scott, held that the Equitable's actions had been valid. A representative policyholder appealed to the Court of Appeal, which reversed the decision and allowed the appeal in January 2000. The society appealed against the decision to the House of Lords. The Law Lords published their judgment on 20 July, finding that the Equitable's actions had not been valid, and saying so in extensive terms that went much further than the decision of the Court of Appeal.
That decision by the House of Lords obliges the society to pay a full bonus to the GAR policyholders and to pay the guaranteed annuity on the whole sum. That has created two different classes of policyholders in the Equitable: those with guaranteed annuities and those with annuities at market rates. The upshot is that the non-GAR policyholders are funding those with GAR policies. To cover that cost, the Equitable has frozen bonuses for seven months, which has raised the sum of £1.5 billion to cover those with guaranteed annuities. However, I understand that that is only an estimate, and the liability remains unquantified.
3WH After the House of Lords decision, the management immediately announced that the society was for sale. No less than 15 parties expressed an interest. The last, Prudential plc, withdrew from the process two weeks ago, precipitating what some have called a crisis inside the society. It should come as no surprise that it was impossible to find a buyer for the Equitable when the precise liabilities to the GAR policyholders remained unknown.
At the same time, the company announced that it would take no new business. That, coupled with the regulator's demand that investments be switched to more secure investments such as gilts, means that the fund will inevitably lose its momentum and pay lower returns. This has led to widespread concern. I am particularly concerned about the plight of existing annuitants, who face a shrinking annuity for the rest of their lives with no way out.
Having set the scene, the question is, where do we go from here? The number of policyholders involved is truly alarming. There are 90,000 policyholders with guaranteed annuities, and it is believed that there are 390,000 with-profits policyholders without guaranteed annuities. In addition, it is thought that up to 700,000 individuals have an interest in the matter through company group schemes.
Some of Britain's finest blue-chip companies, such as Sainsbury and Shell, as well as organisations such as the Consumers Association and the BBC, are caught up in the situation. Last, but not least, the parliamentary pension funds are involved, as they offer policies that are commonly known as AVCs for people who wish to make additional voluntary contributions.
I have been swamped with advice about what the Equitable has done wrong and what it should do in the future. I am sure that the management of the Equitable would agree that misjudgments were made; some people have described what has happened as incompetence, others as negligence. Some people talk about suing the Equitable or its directors, but that would achieve little and waste a lot of money. As the Equitable is a mutual society, those concerned would, in effect, be suing themselves. Other people say that the society's advisers should be sued. That would be a long drawn-out struggle and, as it is far from clear how they may have misled investors, in my judgment would achieve little.
The right way forward is for the Equitable to realise the massive and widespread concern, anxiety and dismay about the way in which the society has been managed, and to take a number of steps to restore confidence. At the society's last annual general meeting, an effort was made to elect a member on to the board of directors. The management resisted the attempt—slightly surprisingly, as the Equitable is, after all, a mutual society—and advised members not to vote for the person concerned. I hope that the management will change its attitude, and that the non-executive directors will insist that the board is expanded to include three further non-executive directors, all of whom are policyholders affected by the situation and who can bring their experiences into the boardroom.
4WH I have nothing against the present chief executive, but I do not believe that he should also hold the post of the society's actuary—although I understand that that is only a temporary arrangement. The management team should accept the appointment of someone credible from outside the society. A world-class pension fund manager without any involvement with the past should take over the reins and bring a fresh start and fresh thinking. I appreciate that the management are up to their neck in muck and bullets and are doing their best to stabilise the situation, but I hope that, as time passes, they will recognise that the best way forward is to accept such appointments.
When the board has been so constituted, it should address a clarification of the law. Many people believe that policyholders without guaranteed annuities were not properly represented at the successive court hearings at the High Court, the Court of Appeal and the House of Lords. The management of the Equitable invited the courts to approve its handling of the guaranteed annuity policy holders. The courts did not approve and, as their focus was on the guaranteed policy holders, the arguments of the with-profits policyholders without guaranteed annuities were not properly considered. It is the opinion of people far more qualified than I am that there was a conflict between the views of the Equitable's management and the non-guaranteed annuity rate policyholders. The least that the society can do is to take an independent legal opinion on the point and consider legal action if it supports the contention.
It is essential to stabilise the situation, so that the society can navigate itself through its difficulties without causing significant damage to its members' interests. If peripheral interests are to be sold off, that must done in an expeditious and orderly manner.
As I said at the outset, the fund is still there and has not gone away. It is not a Maxwell-type situation where funds are missing. It is simply a discussion or argument among intelligent people about who exactly owns what. I hope that agreement can be reached between the different classes of policyholder and that the liabilities can be quantified. I am sure that everyone involved in the matter wishes the management of the Equitable well and hopes that they will open up, loosen up, become transparent and work with policyholders to resolve this difficult situation.
On the role of the regulator, it is the view of many in the industry that the Equitable has been treated differently by successive regulators; by the Department of Trade and Industry until 1998 and by the Financial Services Authority thereafter. It is clear that something had to give. It was not possible for some policyholders to have guaranteed policies with guaranteed annuities, while other categories of policy holder were not so entitled, without there being some difficulty.
In the High Court, which found in favour of the Equitable, the Vice-Chancellor, Sir Richard Scott, believed that the society was right to pay a smaller final bonus to guaranteed policy holders, as the society was only obligedto bring the value of the benefits being taken by the policy holder on maturity up to a level that equates to the policy holder's notional 'asset share' in the Society's with profit funds.That is known as the asset share argument.
5WH In other words, the judge said that there was no need to pay a large final bonus because the high annuity would give the guaranteed policyholders their fair share. However, in the House of Lords, in a most lucid judgment, Lord Cooke of Thorndon said:The Vice-Chancellor's description introduces the concept of asset-share, which is nowhere mentioned in the policy but dominates the approach of the Directors.That is the nub of it. Lord Cooke was absolutely clear about that and so were his four colleagues. The highest court in the land has found that the Equitable management took an approach that was nowhere mentioned in the policyholders' contracts.
What was the regulator's view? When it looked at policyholders' contracts, did it think that the directors were adopting a policy that was nowhere mentioned in the contract? If not, why not? Why was that clear to the Law Lords, but not to the regulator or, indeed, to the Treasury? It is possible that the worst impact of the situation could have been ameliorated if it had been examined some years ago.
The Treasury, too, must answer an essential question. In December 1998, the Treasury was still offering guidance to all companies authorised by it to carry on long-term business in the insurance sector to the effect that the policyholders entitled to some form of guaranteed annuity could reasonably expect to pay some premium or charge towards the cost of their guarantee. In a letter of 18 December 1998, the Treasury said:This could be achieved in some cases through some reduction in the terminal bonus that would be payable if there were no such guarantee.There we have it. The Treasury was, in effect, endorsing the situation and the management of the Equitable. There is no doubt whatever that, in the Treasury's view, the Equitable's policy of paying smaller final bonuses to those with guaranteed annuity options was right. The Treasury must answer exactly the same question that I posed to the regulator. Why was the situation obvious to the Law Lords but not to the regulator or to the Treasury? When questioned on that point, the Minister's answer of 6 September to my hon. Friend the Member for Arundel and South Downs (Mr. Flight) was far from satisfactory. I am not sure where that leaves the Government, but the Minister will undoubtedly tell us in her winding-up what responsibility she accepts for the situation, why the Government acquiesced in the situation and why they issued guidance in support of the Equitable's decision and in support of the view that many now believe to be misguided.
The situation needs thorough investigation and I urge the Treasury Committee to look into it. I hope that the Minister will accept that there is widespread concern and that a calm, rational approach is needed, but that important questions must be answered to ensure that such a dreadful situation does not happen again.
§ Dr. Vincent Cable (Twickenham)
I congratulate the hon. Member for Croydon, South (Mr. Ottaway) on securing this topical debate and on the balanced way in which he introduced it. He made it clear that we are talking not about dishonesty or sharp practice, but 6WH about a major error that has had serious consequences. Like many hon. Members, I am a member of the parliamentary pension scheme and, therefore, have an interest that I should appropriately declare.
My initial point leads directly from the hon. Gentleman's closing remarks in addressing the question of whether there has been a regulatory failure. I do not assert that there has been, but the question needs to be asked. If there has been a failure, or indeed negligence at a regulatory level, that will have substantial implications. The matter would cease to be merely an issue between the policyholders and the company, and we would need to ask what were the Government's liabilities. There have been precedents of regulatory failure—for example, Barlow Clowes. In that case, policyholders received compensation.
The question of whether there has been regulatory failure focuses on different periods, the first of which concerns the distant past, when the guaranteed annuities were written. With the wisdom of hindsight, the Financial Times said that guaranteed annuities were actuarially based on mathematical brilliance and economic illiteracy, but we should ask at what point the Government began to have doubts about the policies being based on the assumption of continued high inflation. It has been the objective of successive Chancellors to produce low inflation and low long-term interest rates. It must have occurred to someone that there was a conflict between those objectives and the assumptions under which an important part of the insurance industry operated.
A more important question concerns the run-up to the House of Lords ruling. At what point did the Government, who regulated the industry, realise that something was seriously amiss? It is becoming clear that, about two years before the House of Lords ruling, serious worry was expressed in Government. I have been shown a minute— I am sure that there are many others—written in a note from the insurance directorate to the FSA on 5 November 1998. It says:The greatest public attention is focused on the Equitable Life, because of its controversial policy of paying the guaranteed annuity rate only on the guaranteed sum built up in the fund…Our preliminary view is that the Equitable is entitled to do this, though we are seeking further information to test the position further.That confirms what the hon. Gentleman said concerning the Government's judgment about the policies being pursued by Equitable Life and makes his point that the Government regulator did not anticipate the House of Lords ruling.
The second comment—which is more serious—in the note says:However, our primary concern is over the company's ability to reserve adequately for these guarantees. The information received to date is unconvincing, and raises serious questions about the company's solvency.That was written 18 months before the House of Lords ruling. The insurance directorate gave a clear signal of the danger of insolvency, and the need for urgent and major action. We must ask why the FSA did not act. It took action to strengthen reserves, but why did it not act commensurately with the scale of the problem that had already been identified?
To assess regulatory failure, we also need to focus on the period since the House of Lords ruling. The hon. Gentleman has already asked whether it was 7WH appropriate to stop writing policies. I would ask a slightly different question: why was it not considered necessary to launch a rescue operation in the City, such as that launched when Barings bank collapsed some years ago? Of course banks are not insurance companies and different principles apply. For example, there are issues of confidence in the banking sector, which do not apply to the same extent in this case. None the less, the City was encouraged to rescue a major flagship British bank but not a major insurer in which hundreds of thousands of people had invested their savings. Why was that urgency and sense of importance not communicated? Has there been a regulatory failure? Will the Economic Secretary explain how that will be investigated? How will the investigation take place and will it be undertaken by the Treasury or by someone independent?
Is a more comprehensive inquiry into how the insurance sector operates appropriate? Mr. Cruickshank led a major inquiry into the operation of the banks. A whole set of factors have come together in the Equitable Life case which suggest that the insurance sector should be subject to the same degree of overarching inquiry. I will illuminate some of those factors.
First, the Government are launching stakeholder pensions, a scheme I wish well. It is important that pensions are available, particularly to low-income families. However, in many ways, the concept of a stakeholder pension is based on the same form of operating as that followed by Equitable Life. As the hon. Member for Croydon, South said, Equitable Life was an admirable company. It operated socially aware policies, including flexibility in the payment of premiums. If Equitable Life got into trouble by operating socially enlightened policies for pension provision, can we be as confident as we were that stakeholder pensions will succeed?
My second question relates to mutuality. The Equitable Life case has exposed the instability of the mutual sector within the insurance industry. The ultimate source of Equitable Life's weakness was low reserves. However, had the company provided substantial reserves, it would have become a target for carpetbaggers. I can only speculate whether that was one of its reasons for not increasing reserves, although it was probably more to do with a wish to appear at the head of the performance tables. None the less, as a consequence of trying to operate according to the spirit of mutuality and not lay itself open to carpetbagger attack, Equitable Life was highly vulnerable. As we have seen in the building society sector, the lack of a proper regulatory structure for mutuals requires further investigation.
The orphan assets problem that we attempted to debate a few weeks ago is a third issue. Equitable Life was disadvantaged by not having orphan assets; indeed, one of the companies that tried to buy it used orphan assets as leverage in the purchase. Orphan assets are often accumulated through policies that are not entirely consistent with the welfare of policyholders, such as low rates of persistency and not paying out on with-profits policies. Equitable Life appears to have been penalised 8WH by its lack of orphan assets. That perverse state of affairs raises, yet again, the question of whether the Government have an appropriate policy for dealing with such problems.
The issues raised do not simply relate to Equitable Life. We must ask whether there has been a regulatory failure, but we must also ask the more general question of whether the insurance sector as a whole is properly managed and regulated. It is the Government's duty to address both problems.
§ Mr. David Lidington (Aylesbury)
I start by declaring that one office building in Aylesbury occupied by Equitable Life is leased from the Aylesbury Conservative association. Although the registrar tells me that that is not a registrable interest—it is a straightforward commercial arrangement—it is sensible for me to be completely open about it.
I sought to intervene in today's debate because Equitable Life is, by a long chalk, the largest private sector employer in my constituency. About 1,500 jobs in Aylesbury are at stake because of Equitable Life's troubles. That entails a threat to the purchasing power that its employees put into the town's economy.
I am grateful for the measured speeches of my hon. Friend the Member for Croydon, South (Mr. Ottaway) and the hon. Member for Twickenham (Dr. Cable). The sense of shock in Aylesbury during the past few weeks has been compounded by the high reputation that Equitable Life has always enjoyed locally, both as a good employer and as a company that takes pride in its mutual status and contributes to the local community. For example, it has supported the youth enterprise scheme enthusiastically year after year, and readily seconds staff to voluntary and charitable activities in the area.
Many of the points that I wanted to make have already been raised by my hon. Friend the Member for Croydon, South and the hon. Member for Twickenham. I will not repeat them, because other hon. Members wish to speak. However, I endorse their approach and their requests for further explanation, parliamentary debate and inquiry.
Many of my constituents are employed by Equitable Life, and many have invested in Equitable Life products over the years. I speak with the interests of both staff and investors in mind. I hope that the Economic Secretary will explain in detail her view of the role of both the Treasury and the FSA during this saga.
The hon. Member for Twickenham suggested that the Equitable's policy on reserves might have been prompted partly by awareness of performance league tables and partly by commitment to the spirit of mutuality. When I have met Equitable directors during the years in which I have represented Aylesbury, they have always impressed on me their commitment to the principle of mutuality. They take pride in it as a factor that differentiates Equitable from limited liability company competitors. It should not have surprised the regulatory authorities that few reserves were available to make good a loss such as that which has now occurred. Equitable's board was not keeping a secret, or covering up failure. It was a declared policy by successive boards that believed it was in the best interests of the society and all its members.
9WH At what point did alarm bells start to ring in the Treasury and the FSA? Was it when the court cases were first brought, or after the judgment in the court of the first instance? Was it after the House of Lords ruling? Has the Treasury changed the advice to which my hon. Friend the Member for Croydon, South alluded when he quoted from the letter from Treasury officials stating that the guidance had been suspended on 20 July this year? Perhaps the Department should have reconsidered that advice earlier. Why did the Financial Services Authority agree that Equitable Life should continue to sell new policies after the House of Lords ruling, although the future of the society was at that stage uncertain, to put it mildly?
The most difficult questions concern what should be done now, not how to discover what went wrong in the past. As my hon. Friend the Member for Croydon, South said, matters remain in a state of considerable confusion and flux. We wish the management of Equitable Life and other concerned parties well as they try to quantify the liabilities involved and to decide on the best way to make good the duty hat Equitable Life owes to every one of its policyholders. A great deal of discussion has taken place about the sale of various parts of the business to various parties, but the final outcome remains unclear.
It may be too early for the Government to answer some of these questions. However, an investor in my constituency has suggested the possibility of some kind of Government underwriting—not of the £1.5 billion estimated loss in growth stemming from the GAR, but to allow Equitable Life to continue to invest in equities instead of restricting its portfolio more closely to gilts. That would allow the asset base to grow over the years, helping both the annuitants to whom my hon. Friend the Member for Croydon, South drew attention and other policyholders who do not stand to benefit from the guarantees that were the subject of the recent litigation.
Have the Government considered appointing a troubleshooter or facilitator to help to bring the parties together? It is generally accepted that these circumstances are not comparable to those of the Maxwell case, in that no fraud has been involved. However, there are contending parties with different interests, and the experience of the Maxwell case proved that sometimes an impartial and respected third party is able to broker a way forward that the parties and their lawyers are unable to achieve if left to themselves.
About a week ago, in response to 2,000 redundancies in Luton, Ministers announced to the House a package of measures to help employees there to find new work. I ardently hope that the people of the neighbouring town of Aylesbury do not face a comparable situation to that in Luton. If the worst came to the worst and such an employment disaster occurred, I hope and expect that the Government would present a similar package of help and support for redundant employees in Aylesbury.
This has been a timely debate, but it is important that Parliament and Select Committees continue to inquire into the circumstances affecting Equitable Life and the insurance sector in general and continue to debate the development of this crisis.
10WH Several hon. Members rose—
§ Mr. Nicholas Winterton (in the Chair)
Order. I hope to call two further speakers before the Minister winds up, but she will require sufficient time to reply to this very important debate.
§ Ms Oona King (Bethnal Green and Bow)
I shall endeavour to be exceptionally brief, Mr. Winterton.
I want to take this opportunity to discuss the problems faced by my constituents and, as we have heard, many others. I congratulate the hon. Member for Croydon, South (Mr. Ottaway) on securing this important debate. I admit to being rather shocked, as many Members seemed to be, at the detail of what has happened to Equitable Life investors. In 1997, two of my constituents, Melvyn and Alizah Litvin, took the advice of Equitable Life and invested money in the managed pension with-profits bond. Like many others, they had no reason to mistrust such advice. Indeed, as the Financial Times pointed out this week, Equitable Lifewas regarded by most observers as a pillar of the establishment.My constituents were unaware that, in the 1980s and 1990s, Equitable Life was, as some might put it, recklessly marketing guaranteed annuities that proved unsustainable when the financial climate changed.
As we have heard, Equitable Life is now raiding the with-profits fund to honour those guaranteed annuities. Essentially, it is robbing Peter—or Melvyn and Alizah and others like them—to pay Paul. It has now closed its fund and imposed a 10 per cent. deduction on anyone who wishes to remove their investment, which represents a double whammy. My constituents have already lost a substantial sum, and they will lose even more if they try to get out. Naturally, they are aggrieved. As they put it:We did not have unrealistic unsustainable expectations for our investments, we invested in a reputable company considered very ethical and therefore we feel very aggrieved and angry about the outcome.My constituents have two questions for the Minister. First, why was the quality of supervision by the authorities so low? Secondly, why was Equitable Life apparently allowed to operate with a much slimmer financial cushion than comparable insurers? As the hon. Member for Croydon, South pointed out, it seems extraordinary that its directors were adopting a policy that was nowhere to be found in policyholders' contracts. Naturally, we must ensure that that cannot happen again, and I look forward to hearing about the Government's plans to prevent such an injustice from recurring.
§ Mr. Howard Flight (Arundel and South Downs)
I congratulate my hon. Friend the Member for Croydon (Mr. Ottaway), South on securing this debate. It is a serious matter when the bluest of blue-chip insurance companies encounters a problem that threatens to undermine public confidence in insurance and pension provision. It will cause considerable problems in promoting the stakeholder product, and weaken greatly public confidence in regulation.
11WH As we know, the problem occurred because of the obligation to buy annuities, because liabilities were not reinsured and because the company—partly because it was a mutual—adopted a policy of paying out and not reserving. The regulators, the Department of Trade and Industry, the Treasury and the Financial Services Authority, must have known what was going on for at least the past three years. Indeed, the increase in the cost of annuities has occurred mainly during that time.
The letter of 18 December 1998 is perhaps the tip of the iceberg. The bodies concerned concluded that the problem could be fixed by the method outlined in the letter, which was that those with guaranteed annuities would suffer a loss of with-profits. As my hon. Friend pointed out, that seemed legally doubtful at the time and unlikely to fix the problem effectively. The problem exploded two years later, by which time it had probably worsened. Meanwhile, the cost of annuities rose further with the fall in real interest rates. It is not only falling nominal rates and falling inflation that drive up the cost of annuities, but the dried-up supply of gilts. Many lawyers who are members of Equitable Life feel that there is a possible case for Government liability, given that the regulatory body did not address the problem two years ago.
I urge the Government to encourage a rescue, and I ask the Minister if the Government are willing to make available public funds to smooth the path of a possible rescue. If there is no rescue, the problem will get worse because many people will seek to withdraw, given the change in investment policy. In that case, the scope to recover will be reduced by the lower equity element and the higher gilt element. If large numbers of people decide to pay the 10 per cent. penalty and withdraw, there will be a declining pot of assets at Equitable Life to finance the fixed annuity liabilities. I take the point made by my hon. Friend that the matter requires a responsible and calm approach. If it is not addressed urgently, the potential problems for both Equitable Life and the public perception of insurance pension schemes will become significant.
§ The Economic Secretary to the Treasury (Miss Melanie Johnson)
I shall do my best to respond to the points that have been raised. I congratulate the hon. Member for Croydon, South (Mr. Ottaway) on securing the debate. When Equitable Life announced that it was to close to new business on 8 December, its president said thatthis is a very sad day for all in the Society.Many hon. Members have shared that sentiment today.
As a number of hon. Members have pointed out, the size of Equitable Life means that news of its closure to new business is of great interest to many thousands of families across the UK. Before discussing the circumstances that led Equitable Life to close to new business, it is important to make it clear where responsibilities lie. First and foremost, it is for the board and management of Equitable Life—as for any insurance company—to account for their stewardship of the business to their owners and customers. In the case of Equitable Life, which is a mutual, that 12WH responsibility is particularly vivid, since its customers own it. Its policyholders have a range of interests, depending on the terms of the policies that they hold, and over the years it has been Equitable Life's responsibility to strike a proper balance between those different interests.
I speak as a Treasury Minister in this debate because the Treasury has policy responsibility for the FSA. The FSA is the prudential regulator for the insurance industry, including of course Equitable Life. Equitable Life sold a range of investment-linked insurance policies whose distribution was regulated under the Financial Services Act 1986. The main regulator responsible for setting rules relating to this part of Equitable Life's business was the Personal Investment Authority. Some professional bodies may also have been member firms that did business with Equitable Life. The PIA is in the process of being absorbed into the FSA as part of the Government's policy of establishing a single regulator for financial services.
Equitable Life is, of course, a large mutual insurance company. Its premium income in recent years has placed it as one of the UK's three largest pensions providers, with total assets of around £33 billion. Equitable Life has approximately 1 million policies in force and 650,000 policy holders, of whom 450,000 are members. It is the oldest mutual life assurance society in the world, and the unexpected news of its closure to new business came as a shock to policyholders and members—and, as the hon. Member for Aylesbury (Mr. Lidington) said, to the staff and the whole of the financial services industry.
The Government have noted the recent statements on the matter by the Financial Services Authority and by Equitable Life, and welcome the fact that the FSA and the society are working closely together to protect the interests of policyholders. I stress that that work is continuing because it has been suggested that the FSA might be acting as a sort of ring-holder in the process. At the moment, it is actively engaged.
The Government appreciate the concern that the closure to new business has brought to the 650,000 policyholders of Equitable Life, especially in the run-up to Christmas. We welcome the society's efforts to provide timely information to policyholders, so that they can fully consider their options. We also welcome the fact that the FSA is providing information to affected policyholders via the consumer section of the FSA's website and its consumer helpline. The FSA's advice is that policyholders should reflect carefully on their options before taking action. It is only right that they should have access to the best possible information to enable them to make appropriate decisions. The Government support that approach.
Equitable Life has said that its inability to find a buyer means that the loss of growth in with-profits policies between January and July 2000 is now unlikely to be restored. The society has said that the investment performance of its with-profits funds is likely to be impaired because it will need to be invested to a greater extent in bonds and gilts rather than in equities, which have historically generated higher returns in the longer term. The FSA has advised policyholders to take that into account when deciding on their options for their existing investments as well as for their future investment strategy.
13WH I turn briefly to the remarks made by the hon. Member for Arundel and South Downs (Mr. Flight). We should be clear that no theft has taken place, that Equitable Life is not insolvent, that the contractual elements will be honoured and that the policies are valid. I thank hon. Members for their generally measured tone, but it is important that we do not over-emphasise the problem. We should remember that the factors that I have just mentioned still hold true, and we should feel confident about the matter.
Many hon. Members will, of course, have an interest in the FSA's advice because they are making additional voluntary contributions to the parliamentary pension scheme. I do not hold any AVCs, so I do not have an interest in the matter.
The FSA is concerned that material changes to the expectations of Equitable Life policyholders are seen in context, and that policyholders should not rush to take precipitate action. The FSA has advised Equitable's customers to remember that the society remains solvent and that their existing policies are still valid. The society therefore continues to meet the statutory requirements that apply to insurance companies. The society has made it clear that it is still able to meet its contractual obligations to policy holders.
The hon. Member for Croydon, South alleged that the regulator had treated Equitable Life differently. The regulator is obliged to treat every firm in the same way and under the same principles, taking account of the risks of the business. The Treasury's guidance on running such a business does not absolve Equitable's management of responsibility for taking legal advice about running the society. It can do no more than give its best assessment of how the courts would interpret matters.
The hon. Gentleman suggested that there might be several proposals that involved new board appointments and new external management in selling off assets, but that is primarily a matter for Equitable Life. Any new manager will be subject to regulatory approval by the FSA, as any senior manager in a financial services business would be. It is for Equitable Life to consider and take legal advice if there is an issue about the clarity of the law, as the hon. Gentleman suggests that there is.
The FSA is concerned that material changes to the expectations of Equitable Life policyholders are seen in context. That is why the FSA has advised policyholders to reflect carefully on their options before taking early action. The FSA has noted that the early surrender of an Equitable Life policy, for example, may not be the best option. In addition to the information being provided to policyholders by Equitable Life, the FSA has helpfully posted information on its website to enable policyholders to assess their situation. The FSA's information includes several questions that policyholders considering a transfer to another product provider should ask financial advisers.
The hon. Member for Twickenham (Dr. Cable) referred to a 1998 document that was recently leaked, which he said showed that the regulator was aware that Equitable Life was not managing its risk properly. I believe that a more accurate interpretation of that document is that the regulator recognised the problem 14WH and was taking action to deal with it. It is a matter of public record that Equitable Life's reserves went up by £1.5 billion in the following year as a result.
The hon. Member for Twickenham also raised the issue of the FSA allowing Equitable Life to keep advertising and selling new business after the Lords' judgment. Immediately after the judgment, the FSA accepted Equitable Life's view that it seemed likely that the society could be sold as a going concern. The FSA appreciated that stopping the business from trading normally would have prejudiced the chances of a successful sale. Of course, it was only with the benefit of hindsight that the FSA appreciated that there might have been merit in earlier closure.
§ Mr. Ottaway
If the Minister believes that the guidance from the Treasury was the right advice, why was it suspended two days after the House of Lords decision?
§ Miss Johnson
It was suspended because the House of Lords decision was a legal judgment that obviously altered the circumstances.
The question of mutuality being doomed was raised. It is wrong to draw such a sweeping inference. Mutual institutions can offer a range of valuable advantages to their customers, as members of several building societies have found. In the case of Equitable Life, the FSA has pointed out that the circumstances of its business challenges were unique and did not betoken wider-ranging problems.
The hon. Member for Aylesbury (Mr. Lidington) suggested that the FSA should compensate Equitable Life investors. Compensation for the customers of financial services firms is available if they become insolvent, as the hon. Gentleman is aware. The FSA has made it clear that Equitable Life is not insolvent, that its customers' policies are valid and that it will meet its contractual obligations.
I am afraid that I have little time to make some of the points that I wanted to make, but I shall concentrate on one, which is the question of what happens next. Several hon. Members made it clear that they sought further information about the events that led to Equitable Life's decision to close to new business. Those concerns are understandable and timely, as it is important that lessons should be learned promptly from the unfortunate episode.
Hon. Members will want to know that the FSA chairman will invite the board, when it meets later this week, to put in hand a review of the events that led to Equitable Life's decision to close to new business. The review will cover the FSA's actions as a prudential regulator and in carrying out its functions under the 15WH Financial Services Act 1986. The FSA's internal audit department will carry out the review with external assistance as necessary; for example, from expert accountants and lawyers. The Treasury will publish the conclusions of the review, which is likely to take a number of months.
§ Mr. Nicholas Winterton (in the Chair)
Time is up. The next debate, initiated by the hon. Member for Reading, East (Jane Griffiths), is on key worker housing in the south-east.