§ Motion made, and Question proposed, That the sitting be now adjourned—[Mr. Kemp.]9.30 am
§ Richard Ottaway (Croydon, South)
I start by declaring a past or latent interest I am a former Equitable Life policyholder.
It is remarkable that, despite repeated calls, this debate is taking place almost a year after the last, and it is profoundly depressing that absolutely nothing seems to have happened during that year. A few well-meaning but narrow inquiries have made constructive remarks, but Lord Penrose plods along at his own speed while millions of policyholders and their dependants remain frustrated, firmly believing that an injustice has been done. The Government sit on the sidelines, saying nothing, suggesting nothing, stalling, and hoping that they can evade responsibility.
The problems of Equitable Life are well documented. In its heyday, it was one of the most respected life assurance companies of the 20th century. It closed to new business in December 2000 after a House of Lords decision in July of that year that criticised decisions made by the regulators and management over the preceding 25 years. We are talking about a scandal on a massive scale. Policyholders from all walks of life who were planning for their retirement put their faith in pension companies like the Equitable for one simple reason: although there is no such thing as a risk-free investment, they believed that they were protected from financial mismanagement because the pension companies were subject to scrutiny, supervision and regulation by the authorities set up by Parliament. It is not acceptable, as has been suggested, to say that policyholders should have been more alert or that their expectations were too high. It is the job of the regulators to monitor the probity of an institution in the financial services sector and to take appropriate action. The people expect that and are entitled to demand it.
The Equitable started to go wrong in 1975, when policyholders were guaranteed annuities at interest rates that subsequently proved unsustainable. Throughout the 80s, that policy continued even though interest rates on the investments that underwrote the policies were falling. The Equitable then made the ultimately disastrous decision in 1988 to continue to issue policies without guaranteed annuities, and to mix the two classes of policy into one financial pot. By 1993, interest rates had fallen to such a level that those with guaranteed annuities were clearly sitting on a far more valuable asset than those without. In response, the board lowered the bonus for those entitled to guaranteed annuities. By not lowering the bonus for other policyholders, all policyholders were, in effect, put in the same financial 194WH position. That was a recipe for disaster. In 1998, it was calculated that the liability for those with guaranteed annuity rates was in excess of £1.6 billion.
What on earth were the regulators up to? As long-term interest rates fell, the Equitable should have closed itself to new business involving policies that gave a guaranteed annuity rate, drawn a line under the business contracted on that basis and opened a new fund for policies without guaranteed annuities. That would have made it clear to all which funds were available to meet which liabilities. Why the regulators did not act is a central question for Lord Penrose. After all, if five Law Lords could work that out in a few days, why could the army of civil servants whose sole job it is to monitor such things not do so?
At the same time as the events I have described, the Equitable embarked on a bonus strategy that was deceptive and equally dangerous in its consequences. In simple terms, the Equitable consistently announced bonuses without having the underlying assets available to sustain them. A successful direct marketing campaign, hyped by over-bonusing, attracted a large number of new policyholders and an increasing flow of contributions from existing members. Through the 1990s, that gave the Equitable a level of growth that was without equal, but t was bound to end in tears. Even at the top of the bull market in January 2000, the fund was in deficit by about £2 billion, and it was £3.3 billion below policyholders' reasonable expectations.
Throughout that period, the regulator stood by and did nothing. It was a truly remarkable state of affairs. In the eyes of EMAG—Equitable Members Action Group, which is a most constructive and positive group—Equitable was effectively running a pyramid scheme. That is a point of view with which I have some sympathy. Perhaps the issue was so big that the regulators could not see the wood for the trees.
Equitable Life closed to new business in December 2000. The Government announced the Penrose inquiry in August 2001. It was set up on a non-statutory basis, and its brief was to discover the facts and establish what lessons could be learned. The then Economic Secretary to the Treasury—now the Financial Secretary—announced that Penrose would report as soon as possible. More than two years later, he still has not reported. In October 2001, the Government said that he would report in the second half of 2002. The Minister said in December 2002 that Penrose would report to Ministers in summer 2003; and in March 2003, that the report was expected in June. In May, Lord Penrose said that he could not report in June; in September, the secretary to the inquiry said that the report was nearly finished. In October, there were suggestions that the report could be delayed by litigation among those involved in this sorry saga; last week, Lord Penrose said that that was not the case. Now, there are suggestions that the report might not be published until the new year.
I draw back from demanding an inquiry into the inquiry, but it is incumbent on the Financial Secretary to explain what is going on. I put to her three specific questions of which I have given her prior notice. First, is she satisfied that the inquiry has had sufficient resources to do the job that it was required to do? If she is, will she explain the delay? Secondly, are witnesses refusing to co-operate? If they are, will she undertake to 195WH put the inquiry on a statutory basis, so that Lord Penrose has the power to call witnesses? Thirdly, will she confirm that, immediately upon receipt, she will publish the report in full and that she will reject the arguments of those who seek to block publication on the grounds that the report could prejudice the outcome of their legal battles? The significance of the last point will not be lost on those who suspect that the Treasury would be only too happy if it was prevented from publishing a report that pointed to regulatory failure and opened the floodgates to compensation. In his statement last week, Lord Penrose made it clear that his job is to investigate the facts, not to determine fault: he will describe or comment on the role of those involved, but stick to the facts. In the light of that crystal-clear statement will the Financial Secretary confirm that the report will be published in full on receipt?
The Chairman of the Treasury Committee, the hon. Member for Dumbarton (Mr. McFall), has written to me expressing his disappointment that he is unable to attend today—the Treasury Committee is sitting at this moment. However, he confirms that once the Penrose inquiry is published the Treasury Committee will continue its inquiries, which is greatly to be welcomed.
§ Mr. Patrick McLoughlin (West Derbyshire)
My hon. Friend has followed this story more closely than any other hon. Member. This is his third debate on the subject and many of us are incredibly grateful to him for that. Thousands upon thousands of people await the outcome of the Penrose inquiry to see where their future lies. My hon. Friend described vividly the delay in getting the report ready; does he agree that any delay in publication will be unacceptable?
§ Richard Ottaway
My hon. Friend has sat through our previous debates on this issue, and he makes a powerful point, which I am sure is not lost on the Financial Secretary. Millions of people await the outcome of the report, so that they will know exactly where they stand.
Before discussing the role of the parliamentary ombudsman, I should like to make one point about the role of the former directors. There is no doubt that extraordinary decisions were made by past board members. Those decisions are now the subject of litigation. Whatever we may think about the actions of those people, I believe that the decision to sue is a diversion from the exposure of the regulatory regime. Bankrupting former board members will raise a few millions, but that is peanuts in the global scale of Equitable's problems. If there is a remedy, it lies in the criminal law. My advice to the current board is to drop the litigation against the former directors and move on to expose the regulatory failures.
The report by the Parliamentary Commissioner for Administration has had a very different voyage. Initially the ombudsman announced that he would not investigate the complaints put before him. However, during the debate held here in Westminster Hall in October 2001—our second debate on the subject—hon. Members on both sides of the House made it clear that the ombudsman should remember that he reports to Parliament, not to the Executive, and that his refusal to 196WH investigate smacked very much of the wishes of the Executive. To his credit, the ombudsman recognised the force of this argument, and announced an investigation a few days later. That followed publication of the Baird report, which emerged from the Financial Services Authority's own internal inquiry. Like all good internal inquiries, it found that whoever was to blame, it certainly was not the FSA.
§ Jane Griffiths (Reading, East)
The Baird report demonstrates that the die was cast for Equitable before 1999, and figures available to us show that that die was almost certainly cast before 1997. The hon. Gentleman referred to events as long ago as the 1970s. Where does he think the responsibility ultimately lies?
§ Richard Ottaway
I suspect that the hon. Lady is verging on making a political point. I wish that the Financial Secretary had made that point. The Labour Government continued precisely the same policy as the previous Government, so if the hon. Lady is suggesting that the previous Government got it wrong, she must acknowledge that the present Government have got it wrong too. Before she makes interventions like that she should come clean about exactly where she is coming from. There is a point to be made about the Baird inquiry, however, which is that it was limited in its scope and it did not look at the earlier problems.
The period covered by the ombudsman's inquiry has gone up and down. He initially announced that he would examine only the period January 1999 to December 2000, as the Baird report did. Then, in March 2003, his successor told the Public Administration Committee that she did not rule out pre-1999 investigations. In July, she published her report in which she ruled out further investigations. Now I read reports that once Lord Penrose has published, the ombudsman will consider further investigations. Perhaps this is all part of life's rich tapestry, but Parliament, to which the ombudsman reports, should have clarification of the matter rather than have to read about it in the press.
There have been many criticisms of the parliamentary ombudsman's report. Many people believe that the FSA's decision to allow the Equitable to continue to write new business despite knowing its parlous financial state was an error. For reasons that I find unconvincing, the parliamentary ombudsman found otherwise. Her view that the Government Actuary's Department is not within her remit is puzzling, and there are questions about her views on the definition of solvency and the test of a prudent regulator. However, the nub of the matter is that the ombudsman spoke in her report of a mismatch between the public's expectations of a regulatory regime and the light-touch approach of the regulators. That is the heart of the matter.
The ombudsman came down on the side of the establishment. The implication was that the policyholders should not have expected the regulators to notice and act on the financial chaos at the Equitable. The regulatory touch was so light that it was almost non-existent. If that is the Government's definition of regulation, their approach needs to be revisited—either that or the ombudsman was wrong. The real problem is whether the ombudsman, with limited resources, is the right person to conduct such an inquiry. It is perfectly 197WH legitimate for MPs to put complaints such as those about the Equitable to the ombudsman. However, if the inquiries to be made are so technical, a review of the ombudsman's role in such complaints is justified.
The Financial Secretary must recognise that while the saga continues, hundreds of thousands of policyholders are affected. Billions of pounds have been lost and the elderly suffer; meanwhile the guilty men go free. These matters must be drawn to a head, and the Government must be seen to act decisively. We cannot be fobbed off with excuses and lame explanations.
§ John Barrett (Edinburgh, West)
I congratulate the hon. Member for Croydon, South (Richard Ottaway) on initiating this morning's debate. His introduction provided a clear and concise history of events. People who have been confused by ongoing events, as I have, should read his speech because it provides a clear summary. Many hon. Members, including me, have been applying for a debate since the publication of the ombudsman's report. The Government should have allowed us an opportunity to discuss the report after it was produced, in Government time, before the summer recess. I am glad that hon. Members of all parties agreed with me and signed my early-day motion calling for such a debate; unfortunately, little notice was taken of it.
Today we have our latest opportunity to debate the ongoing quagmire that is the Equitable Life scandal, which has already been described as a "scandal on a massive scale". Many people would agree with that. It is our first chance to debate the matter since Ann Abraham produced her report, and the subject is topical, with stories about Equitable Life again appearing in newspapers as we anxiously await Lord Penrose's report. We should not go over old ground or rehearse old arguments, but it is important to consider what has happened since the last debate, to examine the ombudsman's report, and to look ahead to see what help remains to be given to the millions of people who trusted others with their finances only for that trust to be betrayed.
The ombudsman's report was a major disappointment and left many of my constituents worried and distraught about their remaining options and recourse for action. I found many of the report's conclusions surprising and confusing. I do not say that lightly. MPs and our constituents must be able to trust the ombudsman to root out maladministration. That trust must remain after a report is published, but it has been seriously dented on this occasion. I could not justify to my constituents the decision of the ombudsman not to award compensation, given that the Government in their role as regulator were at best negligent and careless, and at worst downright incompetent almost to the point of recklessness, while Equitable was being so badly mismanaged. Worse still, those of us who question the ombudsman's conclusions have been left further confused by the admission by the ombudsman's lawyers that further investigations by her offices may be necessary following the Penrose report, despite earlier statements that she would take no further role.
Such changing positions only make a complicated and difficult situation worse, leaving policyholders more confused and frustrated. Furthermore, as my hon. 198WH Friend the Member for North Norfolk (Norman Lamb) has pointed out, especially in his role as a member of the Treasury Committee, the sheer number of different investigations that are taking or have taken place should in no way mean that those policyholders who had the foresight or even the luck to choose one route have a better outcome than those who followed another. It is clear to me that all policyholders who have suffered at the hands of Equitable Life should be compensated; they deserve nothing less.
Looking to the longer term, perhaps the whole process has given the Government food for thought about the system for complaining about financial services. It is safe to say that there is room for massive improvements—changes that the Treasury would do well to consider. I do not envy Lord Penrose: many people, including many hon. Members, are pinning their hopes on his report, and although I understand the impatience for publication, it is important that haste does not come in place of thoroughness. However, Lord Penrose has had plenty of time. Although I read the recent intriguing news stories about the Penrose inquiry with interest, the resulting speculation has served only to increase people's expectations even more. Such heightened expectations are widespread, but the fact that Lord Penrose has again contacted Treasury and Department of Trade and Industry officials must not encourage people to draw early conclusions, before the report is made public.
I sincerely hope that when the day of publication comes, as much of the original report will be published as possible. We know the arguments that will be advanced for deleting some aspects of the report, but hiding behind the argument of commercial confidentiality will not win over any policyholders, especially with Equitable having been closed to new business for the past three years. The Financial Secretary must be warned that the anger that policyholders are showing now will be nothing to their anger if the report appears in any way to be a cover-up to protect not commercial sensitivity but the credibility and reputation of the Government. The inquiry process and the attempts to obtain justice by the policyholders of Equitable Life are coming to a climax. Much is expected of the Government, who should be trusted to be the defender of their interests. I am not sure that that trust exists now, but the Financial Secretary and the Treasury have a chance to build that trust in the way in which they act over the coming months.
I have a few questions that I hope the Financial Secretary will answer. Why has there been a delay in the Penrose report; will the full report be published; what can we expect next; and what is the time scale for what is about to unfold for the very many disappointed policyholders throughout the country?
§ Chris Grayling (Epsom and Ewell)
I apologise to my hon. Friend the Member for Croydon, South (Richard Ottaway) and to the Financial Secretary for my late arrival.
I shall make a few comments on behalf of the many constituents of mine who have written to me, to the ombudsman and to Lord Penrose to express their great concern about what has happened to them and their 199WH pensions, and about the circumstances surrounding this sorry affair. All of us as constituency MPs can judge the strength of feeling on an issue by the number of letters that we receive. Even the most high-profile issue arousing concern in a constituency does not necessarily generate many letters, but I am sure that I am not alone in having received a large number of letters from people in my constituency whose retirement prospects or retirement income have been ripped apart by this sorry affair, and who feel profoundly let, down and rightly seek answers about what has happened.
That is where the Government's key responsibility lies in the weeks and months ahead. Those people's expectations of retirement have been fundamentally changed by the unhappy events at Equitable Life. Their future will be altogether different from the one that they expected, so it is not unreasonable of them to seek absolute and clear answers and a true and open explanation of what has happened from the Government, who are ultimately responsible for setting the frameworks for regulation of the financial services sector, and who have played a central part in the regulation of Equitable Life and the sector as a whole.
My hon. Friend was right to talk about the mismatch that was highlighted by the ombudsman between public expectation of the role of regulation and the light-touch approach. Conservative Members do not want regulation to be imposed on industries that is onerous and that makes it impossible for them to work. None the less, there are public expectations about the way in which the Government will handle the response to the Penrose report and release its findings into the public arena, and the Government must deal with and meet those expectations.
There is no doubt that there was a major management failure at Equitable Life, and that in the eyes of policyholders the regulatory framework—and those responsible for regulating the industry—did not deliver the expected level of supervision. One of the fundamental jobs of Lord Penrose—and of the Government in their response to Lord Penrose's report—is to answer those people's queries, criticisms and unhappiness, and to set out what can sensibly be done to ensure that these events cannot happen again. That, at the very least, is what the Government owe to the pensioners who have lost out.
Every hon. Member present—including, I suspect, the Financial Secretary—will have received letters from pensioners saying that they feel profoundly let down by the company. With hindsight, and with the application of common sense, one can see that some of the actions that the company took—selling guaranteed annuity rate policies and, in effect, looking forward to a future in which nothing could go wrong—were clearly flawed. Those actions should not have been taken, and it is arguable that regulators should have taken a view about them much earlier than they did.
It is not only the circumstances of product development, product selling and the financial position of the company that have aroused so much concern. I am currently receiving letters from people who direct their anger at the Government. Many of my constituents believe that the Government are seeking to cover up the detail of what has happened. It will be for 200WH the Government to disprove that. There have been too many stories about the possibility that the Penrose report may not include the full picture of what took place—too many stories of information not being included for commercial reasons, and suggestions that the report may be suppressed in part or in full. I am receiving letters from constituents who now believe that the whole picture will not be revealed. I wanted to participate in this debate so that I could say to Ministers that that must not happen. The people who have lost out must understand the reasons for what has occurred. Lord Penrose must give a full and accurate picture.
I have concerns, expressed by my hon. Friend the Member for Croydon, South, that the Penrose inquiry might not have the power that it needs to get to the bottom of what happened. I hope that, despite the fact that he cannot compel witnesses to attend or give evidence, Lord Penrose will have been able to gain access to all the information that he needs and that he will be able to produce an incisive and accurate report on what took place.
It is important that the report be concluded, published and fully in the open as soon as possible. Many people who come to see Members of Parliament in their surgeries are looking for closure—for answers. They have to deal with their own personal situation, but they want to know that the overall issue that has caused their personal situation has been dealt with. Speed, clarity and openness are therefore of the essence. I hope that at the end of this debate the Financial Secretary will give a clear public commitment to my constituents and those of other hon. Members that when the Penrose report is ready, it will be published quickly and in its entirety, that the Government will set out clearly what lessons need to be learned, and that there will be no attempt to cover up any failings in the Treasury or in the regulatory system. We should have a full and open debate about what went wrong, learn the lessons and change the systems to ensure that such difficulties cannot arise in future.
We need to give a true, open and honest picture to my constituents and those like them around the country who have suffered as a result of this appalling affair. I hope that the Financial Secretary will be able to give those undertakings, and I look forward to the arrival of the Penrose report on the desk of every Member of Parliament in the very near future, so that we can write back to those who have written to us and give them at least a sense that the pressure on the Government appears to have made a difference, and the Government are taking a sensible and responsible attitude and addressing the issues that Lord Penrose has raised. That is my message to the Financial Secretary, and I look forward to her assurances at the end of the debate.
§ 10 am
§ Dr. Vincent Cable (Twickenham)
I congratulate the hon. Member for Croydon, South (Richard Ottaway). I have been involved in all the debates on Equitable Life. He has always been present and actively involved, and he has maintained a consistent support for the policyholders. I congratulate him not only on what he said today but on his consistent interest in this very real problem.
I also congratulate EMAG. The issue is complex and it has dragged on for a long time. It would have been easy for our adversely affected constituents to become 201WH demoralised and to lose track of the plot. They and we owe a great deal to EMAG for the way in which it has continued to marshal support and to brief us.
I introduced an Adjournment debate on Equitable Life a year ago. I was prompted to do so by two considerations. First, Equitable Life cut payments to 50,000 annuitants last autumn—nominally by 20 per cent., although in practice for many it amounted to 29 per cent. The hardship was particularly difficult for those annuitants, because they had no flexibility whatever. Their anger—like that of the other policyholders—is just as live and real now as it was then. That has been communicated by my hon. Friend the Member for Edinburgh, West (John Barrett) and by the hon. Member for Epsom and Ewell (Chris Grayling). My other purpose in introducing the debate a year ago was to prod the Government into giving some suggestion of when the Penrose report would appear. It is eloquent testimony that a year later we are still waiting and there is no expectation that the report will appear within weeks, let alone days.
The ombudsman's report has been the major development during the past year. I agree with the hon. Member for Croydon, South that it was unsatisfactory. I hesitate to criticise the ombudsman, because constitutionally we need a back-stop organisation. We all have constituents who complain bitterly about real, or sometimes imagined, failures of Government. They must have an objective, impartial body to appeal to, and they must have confidence in that body. Constituents sometimes come to our surgeries carrying an unfavourable ombudsman's report, shaking with anger, wanting the ombudsman to be investigated, and we have the job of explaining that the report is the end of the story: the appeal process has finished, they have had their say and a reputable body has given a definitive view on the matter. However, if we are to be able to say that, we must have confidence in the office.
My confidence in the ombudsman has been shaken by the way in which this particular inquiry was conducted and concluded. As the hon. Member for Croydon, South said, there were fundamental failings in the report. It dealt with precisely that period in which the Government were not involved in regulation. It was narrow in scope, and consideration of the role of a key player in the story—the Government Actuary—was ruled out. The ombudsman adopted a definition of regulatory responsibility that was, frankly, bizarre, narrow and limited, and assumed that the regulators are purely concerned with solvency. She did not appreciate the philosophy of "twin peaks" regulation, which has run through the creation of the FSA. The report reflected the belief that it is the FSA's responsibility solely to maintain light-touch regulation and, above all, it concluded that there was no case for reopening the issue, even if Penrose were to find substantially against the Government's role in regulation. I understand from the press that that judgment has changed, and that the ombudsman will reopen the case, but I have not been informed of it in writing. Our constituents and we are owed an explanation as to where the ombudsman resides on the matter, as none of us is clear about it.
The trouble is that when one complains about the ombudsman it can sound like a whinge; however, it is worth our examining the speech made last week by Sir Gordon Downey, whose role as Parliamentary 202WH Commissioner for Standards, which is a parliamentary institution, cannot be questioned or bettered, and who gave in three short pages a brilliantly concise description of the problem and the failings of the ombudsman's report and the structure of the Penrose inquiry.
Sir Gordon, in his eloquent summary, defined five precise ways in which there was clearly a failure of regulation. He made the point, first, that the Government allowed unguaranteed policies to be sold as low-risk investment, with the fact concealed from the people taking out those policies that there were obligations to the guaranteed policy holders; secondly, there was a period of over-bonusing the guaranteed policies at the expense of new investors; thirdly, an attempt was then made to correct the balance by introducing differential bonuses, which were subsequently found to be illegal; fourthly, there was a period in which Equitable Life was clearly being allowed to trade with insufficient reserves; and, finally, Equitable Life was allowed for a long time to publish misleading accounts. Sir Gordon, a highly experienced public official with experience as a regulator, commented:If this does not amount to maladministration, I really do not know what does.That summarises the whole case.
There were investigations of the position of the FSA in the Baird report, and before discussing the Penrose report—and while we are waiting for its publication—I ask the Financial Secretary to explain what the FSA's role is now. It appears to be acting as a kind of shadow director: it has regulatory responsibility for the rump company and things are happening that are of great concern to policyholders and to our constituents. As I understand the present position, there is an assumption—indeed, an agreement—that something in the order of £900 million will be paid out in compensation to various aggrieved groups, including several thousand people who were mis-sold managed pensions, many of whom were effectively cheated out of their GAR policies. There is an understanding that they will be compensated, but they have not been paid yet; the potential beneficiaries do not expect to be paid at least until the end of next year.
What is the FSA's role in all that? Is it encouraging Equitable Life to achieve a prompt settlement? Is it doing nothing? How does it define its current responsibilities? How does the Financial Secretary, who has oversight of the FSA, see her role in this matter?
§ Mr. Stephen O'Brien (Eddisbury)
The hon. Gentleman, whose industrial manufacturing background I share, has raised an interesting and crucial point about the possibility of the FSA in its current role being seen to be a shadow director. He, too, knows the grave issues that that raises about potential responsibility and liability. Has he had any advice that has helped him to establish a causal link between being a shadow director taking decisions now, and the likelihood of that leading either to future liability or to compensation?
§ Dr. Cable
I have not had any such advice. The hon. Gentleman puts a proper question, but it takes us into legal terrain with which I am not qualified to deal. However, I believe that the FSA is turning a blind eye to 203WH what is happening and leaving Equitable Life to make the decisions itself, even though there is a public policy interest involved.
When the Penrose inquiry was established, many of us argued that its foundations were weak. The Government defined the terms of reference of the inquiry even though it was to examine Government behaviour, and they decided that it should report to Government, not to Parliament, even though it was to examine the failings of Government. No time limit was set, and we have seen the elasticity of the timetable stretched to breaking point in the past few years. Moreover, there is potential for key information to be suppressed in the name of confidentiality, even though, as my hon. Friend the Member for Edinburgh, West made clear, there is no justification for information to be suppressed on grounds of commercial confidentiality.
I have written a letter to the Financial Secretary to the Treasury, to which I hope she will respond today, asking precisely what can and cannot be excluded from the report, in the context of "maxwellisation"—the process whereby officials are given prior notice of references against them and an opportunity to respond to them. I asked the Financial Secretary whether that would lead to the deletion of material about which we should know, and what sort of safeguards operate to ensure that the maxwellisation process is not used as a cover for censorship. We need reassurances on those matters, if the Penrose inquiry is to form a meaningful conclusion to this sorry episode.
Currently, there are two major inquiries examining the failures of the Government, both of which are being conducted by High Court judges. The fact that those inquiries are taking place under High Court judges is a sorry reflection on Parliament, because Parliament has the power to conduct such inquiries itself. The contrast between the two inquiries is striking: the Hutton inquiry has been a model inquiry in terms of speed and transparency, standing in gross contrast to the sluggishness and opacity of the Penrose inquiry. I hope that, even at this very late stage, the Government will try to conduct themselves with decorum and improve the sorry reputation that they have earned as a result of the way in which they have the conducted the process.
§ Mr. Stephen O'Brien (Eddisbury)
For the sake of good order, I declare a tangential interest, in that I have a life assurance policy with Equitable Life. I hope that I shall not have to cash it in.
I warmly congratulate my hon. Friend the Member for Croydon, South (Richard Ottaway) on having secured the debate. I know that he would wish to join me in thanking all our colleagues who sought en masse to have a debate on this subject. I also take the opportunity to pay tribute to my hon. Friends the Members for Christchurch (Mr. Chope) and for Hertsmere (Mr. Clappison), who worked so diligently in the early period of this tragic saga to ensure that the role of the Parliamentary Commissioner for Administration was well understood and utilised.
As has been said, we last debated Equitable Life on 27 November last year. If it was timely then to have a debate on this serious matter, it is a scandal that the 204WH Financial Secretary and her boss have presided over such a protracted and delayed process that we are here again today. About 1 million of our fellow citizens, many of advanced years, who did the right thing in their earning lifetime to provide for their non-earning time and not to be a burden on the state, have suffered and continue to suffer grievous financial damage through no fault of their own. Their security has been irreparably harmed. That is a grave matter, as the debate has already shown, and it affects all Members of Parliament, all of whom have constituents blighted by the appalling debacle of Equitable Life.
We heard from my hon. Friend the Member for Croydon, South about the catalogue of delays. He raised the interesting notion that the situation warrants an inquiry into the inquiry. I hope that the Treasury Committee can perform a useful function in examining the process and ensuring that we do not again have to endure the appalling length of time that it has taken to reach even this pre-report stage. As the hon. Member for Twickenham (Dr. Cable) pointed out, the process stands in stark contrast to the conduct of the Hutton inquiry.
My hon. Friend also mentioned the need to consider putting the inquiry on a statutory footing, even at this late stage, if the inability to compel witnesses to attend causes any difficulty. Like others, he noted that it would be unacceptable if there were any attempt not to publish the Penrose report in full on receipt by the Treasury. The hon. Member for Edinburgh, West (John Barrett) also made that point ably, as well as the good point that the Government should have made time for a debate on the Floor of the House when the parliamentary ombudsman's report was received just before the summer recess.
I will not even dignify the intervention by the only Labour Back Bencher present, the hon. Member for Reading, East (Jane Griffiths), on the basis that it was totally unworthy and tried to make party political points out of a tragic and difficult situation that affects all Members of Parliament. Although sadly few MPs are present today, it is interesting that both the Financial Secretary and I represent a north-west England constituency, as does her Parliamentary Private Secretary, the hon. Member for Stalybridge and Hyde (James Purnell), and there are three London MPs and one Member representing a Scottish constituency present, so it is fair to say that the whole country is represented.
My hon. Friend the Member for Epsom and Ewell (Chris Grayling) spoke passionately and with great force on behalf of his constituents, showing the strength of feeling that underlies the debate. There is a crying need for resolution and for consideration to be given to the compensatory opportunities for those who have suffered. I pay tribute to the hon. Member for Twickenham for his continuing diligence, and he was right to raise the important issue of the FSA's role, which needs further explanation. He made further points, which I will try to reinforce.
It is with no apology that I rely on what Sir Gordon Downey said at the recent annual general meeting of EMAG. I pay an enormous tribute to EMAG for its commitment, energy, diligence and fairness in pursuing the issue over many long years. I also pay tribute to the 205WH other six Equitable members' representative groups. All have worked hard on behalf of the various interests who are suffering from the Equitable Life saga.
Sir Gordon Downey is an authority not only because he is a non-GAR annuitant of Equitable Life but because he was head of the home finance division of the Treasury in the 1970s and is therefore a former regulator. He became the chairman of FIMBRA—the Financial Intermediaries, Managers and Brokers Regulatory Association—in the 1990s and, briefly, chairman of the Personal Investment Authority, before becoming an Officer of the House of Commons, first as Comptroller and Auditor General, and then as Parliamentary Commissioner for Standards. It is appropriate that we hear his measured, serious and authoritative comments on the issue.
Sir Gordon says, rightly, that the debate that we had a year ago continues to be relevant, which is part of the problem. However, there have been several significant developments, and for the sake of the record it is important to bring us up to date. Policy values and annuities have been further cut, prospects remain bleak, and time is running out for many annuitants. It is now more than three years since the House of Lords decision undermined the society's stability, and more than two years since the Penrose inquiry was established. The new Equitable Life board's actions against the auditors and former directors are progressing in the courts, but one must assume that they will be long drawn out and costly and the outcomes uncertain.
The parliamentary ombudsman produced a report exonerating the FSA from the charge of maladministration in its role as regulator in the period after 1 January 1999. That is now the subject of an application for judicial review.
Under the self-denying ordinance that we have in our rules, I cannot stray into the territory of the court actions in respect of the former directors and auditors and the merits of those actions. However, on checking with the House of Commons Library, I was interested to note that "Erskine May" makes an exception of anything said in respect of a judicial review of Executive action. While I do not intend to stray too far down that path, it is important to recognise that we have the opportunity to examine the application for judicial review, not least because EMAG and some of the individuals involved in it have put together a document of enormous authority and force that details the whole sorry saga. I hope that all Members of Parliament, especially Ministers, will read it with great care and recognise that they need to read it in conjunction with the Penrose report, which we hope—although we have expressed the hope before—will emerge in the not too distant future.
What issues remain unresolved? In matters of regulation, prudential supervision of the Equitable was exercised until 1999 by the DTI and the Treasury, after which responsibility was passed to the FSA. Throughout, much of the detail was delegated to the Government Actuary's Department, a subordinate body of the Treasury. Given the current dispute over the recent report by the parliamentary ombudsman, to pursue the role of the FSA too far at this stage does not seem the most profitable route to take. Suffice it to say that the FSA seems to have played a passive role when dealing with the crisis thrown up by the House of Lords 206WH decision. The authority defended its role on the ground that, with all the information and expertise at its disposal, it was "99.9 per cent. certain" that the Equitable could be sold on terms that would safeguard the interests of policyholders—yet, within three months of putting itself up for sale, the Equitable was rejected by 16 or 17 suitors, who had rapidly reached the conclusion that it was not viable.
What of the other regulators? It is generally agreed that most of the damage done to the Equitable took place before the FSA took responsibility in 1999. The die was indeed cast before then, yet, on the basis of her limited inquiry into the FSA, the parliamentary ombudsman concluded that she saw no case for inquiring into the actions of the DTI and the Treasury and that she had no powers to inquire into the Government Actuary's Department. Surely Parliament cannot condone such a position. It must find a way of expressing what it expects from prudential supervision and know whether those expectations were realised. It has been suggested that prudential supervision is essentially a matter of ensuring that solvency requirements for life assurance companies are observed. That is not true. An equally important purpose is to exercise supervision to protect policyholders from unreasonable risks and to safeguard their reasonable expectations. The concept of reasonable expectations is specifically provided for in legislation, which also gives regulators ample powers to intervene to ensure prudent and responsible management.
Against that yardstick, the regulators have failed dramatically. They allowed the Equitable to sell unguaranteed policies as low-risk products without disclosing the existence of guaranteed policies representing huge contingent liabilities on the common fund. They permitted the publication of accounts that obscured the real position of the society, and endorsed its attempts to redress the balance by paying differential bonuses, which were later ruled illegal. The regulators allowed the society to pay unjustifiably high bonuses for several years and, in effect, to use the funds of new investors without their knowledge for the benefit of those enjoying prior guarantees. They also allowed it to trade with totally inadequate reserves.
I turn to the role of the parliamentary ombudsman, and in particular the fact that she cleared the FSA of failing in its regulatory duties. As my hon. Friend the Member for Croydon, South said, she warned investors of a fundamental mismatch between what the public expect from the financial regulator and the degree of protection that can be offered. EMAG has been extremely critical of the parliamentary ombudsman's report and considers it deeply flawed. I commend the extensive, comprehensive and responsible approach EMAG has taken to detailing its criticisms on its website, and I hope that they will be read in some detail.
I have sympathy with the approach taken by the hon. Member for Twickenham. It is important that we do not condemn the parliamentary ombudsman out of hand. There is an important process that we should defend with regard to her role in examining possible maladministration. Of course, the ombudsman's role is terribly important to us because of the potential for her to make recommendations on compensation: at the end of the day, compensation is what policyholders and annuitants are seeking, because they feel that they have 207WH been done an injustice. However, we must recognise that, unfortunately, there is a serious mismatch in what successive parliamentary ombudsmen have done.
I do not want to condemn the office of parliamentary ombudsman, and I recognise that it is the last place of appeal. However, although the current parliamentary ombudsman's predecessor gave a pretty clear assurance that his office should consider whether it was appropriate to extend the inquiry into the pre-1 January 1999 position once Penrose had reported, that was categorically denied by the current parliamentary ombudsman. That is what has caused such outrage, and I have said on record that I think it an unnecessarily brutal finding. It seems that it has been made known to certain elements of the press—I cannot tell whether that is simply because this debate had been secured, so there was a stronger focus on the issue—that perhaps the issue could be considered again. I very much hope so, but I agree with what has been said: the commitment to do so should be put on a more formal basis, so that we can understand its essence.
It is important to say that this is not simply an argument for argument's sake. The proposal has been supported in a number of recent early-day motions by Members of all parties, all of whom call on the parliamentary ombudsman to extend her inquiry. I hope that, as a result of this debate, she will acknowledge the strong sense, in terms of the route provided by her office, that that is the only way in which justice will be satisfied. There is good cause and it would be in the interests of fairness to take forward her investigation.
In its most recent press release, EMAG lighted on what it calls "an astonishing 'U turn''' by the parliamentary ombudsman, saying that she has come full circle. It welcomes the fact that she has apparently rescinded the decision to preclude consideration of the pre-1999 period. EMAG says that it regards that as important because it is the parliamentary ombudsman's functionto focus on maladministration by Government departments".It says that it is worth recalling that,as in Barlow Clowes, she can recommend Government compensation. EMAG therefore welcomesthe parliamentary ombudsman'schange of heart as an encouraging step".We need rapid clarification of that point.
It may be that Lord Penrose will tackle all the issues that we have discussed relating to the parliamentary ombudsman and to the broad understanding of those of us who have followed the matter closely and advocate the position of aggrieved policyholders and annuitants. None the less, it is worth looking at the constraints within which he has to work. The Government—the Treasury—set the terms of reference for the inquiry; they are very broad and relate largely to the future of the life assurance industry as a whole. Lord Penrose reports to the Treasury—that is, to one of the regulators under scrutiny. He cannot compel witnesses to give evidence, and the Treasury can accept or reject his recommendations, which cannot deal with compensation. There is no guarantee that the report will be published.
What is Parliament's responsibility? I said in the debate a year ago that I thought that the Government intended to kick the subject into the long grass until 208WH after the next general election. My fear is that I was right, but I hope that my fear will be assuaged today. If only Parliament had the ability to prevent the Government seizing the initiative as they have done, but the Government like to believe that, given the current composition of the House, they can plough their own furrow regardless of the wider interests.
There is still no comfort to offer policyholders and annuitants. They have suffered injustice, and we have not yet found the machinery to deal with it. The damage to the savings industry in the broadest sense has been enormous. All MPs should be deeply concerned about the effect that that is having on the savings culture and about the yawning savings gap that has grown over the last few years. Sir Gordon Downey has written to me in the following words, which help to sum up the serious position in which we find ourselves:Of course, we shall now need to await the outcome of the Penrose Inquiry. But it is essential that it should be published as fully as possible and that Government should give a rapid response. Failing a satisfactory outcome, it must be a matter for the House to devise its own machinery for taking things forward. If the Parliamentary Ombudsman is, as she says, unable to cover much of the ground, we shall need to find another way.In case the Financial Secretary is in any doubt, I put her on notice that my colleagues and I in Her Majesty's official Opposition will be relentless in pressing the case for justice for Equitable Life policyholders and annuitants. I know that that case is supported by hon. Members of all parties, including Labour Back Benchers.
The Penrose inquiry is a creature of the Treasury: it will report to the Treasury, the Treasury will determine what is published, and it is for the Treasury to decide how long to sit on the report before publication and whether to accept liability and award compensation where criticisms are made of the DTI and the Treasury. Does the Financial Secretary regard the Penrose inquiry as determinative or merely advisory? That is important, because many people witnessing today's proceedings will want to know whether, when the Penrose inquiry eventually reports and is published—and we demand that it be published in full—they will have to consider what it contains and then charge off to the courts or use some other process to prove the facts all over again. Can we have a copper-bottomed guarantee that if they are criticised and there is found to be regulatory failure, the Government will say, "Fair cop."?
We cannot continue to protract the misery of the policyholders and annuitants who have suffered. The Government must step up and look at the compensation that should be paid. All those witnessing today's proceedings, will be listening out for that in the Financial Secretary's response.
There has been a recent announcement from the Penrose inquiry that put on the record some corrections of what it regards as wrong information in the public domain. It said:The inquiry cannot, and will not seek to adjudicate on liability, including determination of a professional duty.However, Lord Penrose has made it clear that he will make adverse findings about any institutions or individuals involved if the evidence justifies it. Because those two views sit somewhat uneasily together, we need an answer today, which I have just demanded from the Financial Secretary; otherwise, there will be genuine 209WH concern about whether we can trust the process to deliver for the policyholders and annuitants if there is found to be regulatory failure at the hands of Departments.
On the issue of publication, if the Minister's refrain a year ago that the Penrose inquiry is independent and that it is up to Lord Penrose to decide how long the inquiry will take and when he will be able to report—[Interruption.]
§ Mr. O'Brien
Thank you, Mr. Stephenson.
In addition to my request to the Minister to do everything that she can to speed up the Penrose report, while recognising that maxwellisation is a genuine process that must be gone through, I want the Government to realise that they cannot have it both ways. If maxwellisation is taking place, we are going through a process whereby one of the restraints on future publication relating to confidentiality or potential prejudice is removed, because the process gives people the chance to comment. It must be clear that Lord Penrose has the liberty to make all the relevant findings that have been the subject of his inquiry and to adjudicate on them, notwithstanding the fact that he has said that he himself will not be finding fault. I urge the Minister to give a commitment once and for all. The maxwellisation process has engaged us in further delay, and the price of that delay, which has caused further misery for policyholders and annuitants, should be securing full publication of the report.
There is an important point about what might happen with regard to maxwellisation. There might be no finding of fault in the Penrose report—despite the fact that we will all pore over it, searching for findings and facts and seeing whether there has been any attempt to point the finger. We demand full publication, which should be coupled with an assurance that there will be no opportunity for a further protracted process. If the Government want to show that the Penrose inquiry is genuinely independent, they should accept that there is no need for a further process to determine and prove the independently gained facts of the case. If they have to be re-proved and the evidence marshalled again, and there is a move from Lord Penrose's investigative process to an adversarial court process, many policyholders and annuitants will rightly say that they are losing faith in the processes that the Government put in place and that the inquiry should have been put on a statutory basis from the very outset—as my hon. Friend the Member for Croydon, South mentioned.
Policyholders and annuitants will rightly want to be satisfied on a further point, which was somewhat ungraciously introduced in the intervention of the hon. Member for Reading, East. It might be said that the fault entirely lies with a previous Government. My hon. Friend the Member for Croydon, South answered that well by demonstrating that there has been a continuum. If Government as an institution—irrespective of which political party happens to hold power at any given time—are found to be at fault in their regulatory duties, subsequent Governments must step up and stand behind Government liabilities. That is one aspect of the 210WH nature of Government. Therefore, I can give a commitment that if a finding of regulatory fault or failure is laid at the door of one or more Departments, and if compensation therefore flows, an incoming Conservative Government would not seek to renege on that responsibility. The Government should make the commitment that, if the Treasury and the DTI are criticised, they will not necessarily seek simply to defend them, but they will acknowledge that this whole episode must be brought to a swift resolution. It is difficult to see how it can be resolved when, by any test, there is a need for compensation for people who have suffered an injustice.
I hope that the Government will carefully look at following the precedents of Barlow Clowes and other lifeboat operations. Sir Gordon Downey has brought weight and authority to this whole sorry process. He understood what happened during the 1974 banking crisis: that crisis was potentially even more serious than the Equitable Life saga facing us now, but a solution was found and mutual responsibility was accepted by Government and the private sector.
I look forward to hearing the Financial Secretary's remarks, and I hope that she will be able to give full answers to the questions that have been raised.
§ The Financial Secretary to the Treasury (Ruth Kelly)
I congratulate the hon. Member for Croydon, South (Richard Ottaway) on securing another debate on this important topic. I pay tribute to his long-standing interest in this subject and his championing of his constituents' cause. I also pay tribute to the work of the Equitable Life members' representative groups who have made their concerns known in a loud and clear manner.
I will try to respond now to as many as possible of the points that have been raised, but I first wish to make clear the sympathy that I feel for the many people who have been affected by the events at Equitable Life. It was in order to meet the concerns raised by hon. Members and the wider public that the Government set up the independent inquiry under Lord Penrose in August 2001. In making that decision we carefully considered the concerns of policyholders and a range of other bodies, including the Treasury Committee.
It is worth reminding hon. Members of Lord Penrose's terms of reference, which are:To enquire into the circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury Ministers.The terms of reference have deliberately been drawn wide to ensure thorough consideration of the root causes of the problem. Some commentators and hon. Members have argued that the terms of reference do not allow Lord Penrose to lay blame, and that the inquiry is just a fact-finding exercise. The inquiry has made it clear to us that Lord Penrose will make adverse findings about any institutions or individuals if the evidence justifies that. He can interpret his terms of reference as he sees fit, and I stress that he is working independently of the Government and the Treasury, but with our full co-operation.
211WH Many people are disappointed that Lord Penrose has not reported sooner. The undertaking has been considerably more complex than any of us appreciated when the inquiry was set up. It is important to stress that no deadline was set for Lord Penrose to report by. I understand the frustration of hon. Members and policyholders at the time needed to complete the work, but the inquiry's scope is broad and the issues are complex and important. It is in all our interests that the inquiry is thorough. The parliamentary ombudsman took more than 18 months to complete her report, which examined a period of just two years during which the FSA had stewardship. That report considered neither the regulation of business conduct nor Equitable's actions.
The inquiry spent most of its first year examining the substantial body of material held by Equitable Life and its regulators, as well as obtaining evidence from other sources such as the auditors and policyholders. On the basis of that work, the inquiry began a major programme of taking evidence directly from witnesses in autumn 2002. That continued until after Easter this year. The inquiry is currently maxwellising the draft report, a process that I will explain later. Once maxwellisation is complete, Lord Penrose will be in a position to finalise his report and present it to Treasury Ministers. It is a matter for Lord Penrose to determine when his report is complete and the timing for presenting it to Ministers, and we look forward to receiving it as soon as he completes it.
The hon. Members for Twickenham (Dr. Cable) and for Eddisbury (Mr. O'Brien) raised a point about maxwellisation. Maxwellisation is the process whereby those who might be criticised in a report are given an opportunity to comment on the accuracy and completeness of the relevant facts and the reasoning process behind them. That is to ensure that any errors or misunderstandings can be corrected before the report is finalised. The term arose from cases following a DTI investigation into Robert Maxwell in the 1970s. Persons or institutions being maxwellised are not given access to the full draft or even to any complete part of the draft. They are informed of the substance of the proposed comments made about them and given access to the supporting material that Lord Penrose, in this case, considers it absolutely necessary that they see. Lord Penrose could change his view in the light of the representations made. Maxwellisation is intended to ensure that the report is fair to those individuals or institutions that may be criticised. The process also helps to ensure that the report is accurate and comprehensive. The chairman of the inquiry determines how and to what extent maxwellisation is carried out.
The Treasury is taking part in the maxwellisation process, but as I have already said, by no means does that mean that we have received the draft report. It may be worth explaining the arrangements that the Treasury has put in place internally to deal with the maxwellisation process, so that it cannot be subject to misinterpretation. A small team of dedicated staff is preparing the Treasury's response to Lord Penrose's material, commenting factually where appropriate. There is a Chinese wall between this team and those who have been liaising with the inquiry, and those who will 212WH receive the report when it is completed, including Treasury Ministers. That means that only those officials who are in the maxwellisation team have seen any draft material sent by Lord Penrose. We decided to adopt that procedure given the Treasury's position as both the commissioner of the report and one of the parties with a direct interest in its contents. It is up to Lord Penrose to decide on any changes that he may make to his report following receipt of the comments. We have no influence over how he handles that process. In addition, once we receive the report, it will not be possible to take on board any other comments on the factual content or any other content of substance.
All hon. Members spoke about publication and asked how we intend to deal with the publication procedure. We will publish as much of Lord Penrose's report as we can—as much as is practicable—as soon as is practicable, following receipt of the report. However, I must emphasise, so that people do not have unrealistic expectations, that it will take time legally to examine the contents of the report. We must ensure that it is lawful for us to publish the report in full. Parts of it could be subject to legal confidentiality restrictions: for example, it is a criminal offence to reveal to a third party information received by the regulator in the course of their duties, except in narrowly specified conditions. Our lawyers will have to go through the report to ensure that none of those restrictions is breached. In fact, when Lord Penrose accepted the commission from us and undertook the inquiry, we had to go through a similar process to ensure that he could see the regulatory information relating to some of the decisions made. It would be completely negligent of the Department not to undertake that process.
§ Richard Ottaway
I am grateful to the Financial Secretary for her explanation, but I am sure that anyone listening to her in the last minute or so will be dismayed, because she has implied that there will not be full disclosure if the Treasury considers that appropriate. Given that last week Lord Penrose made it crystal clear that all he was reporting on was facts, what can she be concerned about that might fall foul of what she has just said?
§ Ruth Kelly
Clearly, we will not be in a position to know that until we have seen the contents of the report. The other point is that Lord Penrose has made it clear to us that, in drawing up the report, he is aware of the legal confidentiality restrictions and is attempting to draw up the report so as not to breach those restrictions, so that we can publish it in full. It is our complete desire to put the full contents of the report in the public domain. The only reason why we may not be able to do so is the legal confidentiality restrictions. We hope that we can publish the report in full and that Lord Penrose has taken full account of those restrictions in drawing up the report.
§ Mr. Stephen O'Brien
Further to the question posed by my hon. Friend what strikes me and, I think, most people listening to the debate is that the Government cannot have it both ways. Either the report has been drafted so as to avoid legal difficulties—indeed, because it will not be finding fault, it cannot be seen as prejudicial to someone's interests—or this is a case of having to 213WH look for the legal protection of commercial confidentiality. The Government seem to be hedging their bets. Above all, the Treasury owns the process, and one assumes that because the Treasury commissioned the report, once it is delivered to the Treasury, the Treasury owns it—
§ Ruth Kelly
We do. That is why we want to publish the report in full. However, were we to publish it and breach any confidentiality restrictions by so doing, it would be open to third parties to sue the Government for infraction of those restrictions. Therefore, under a duty of care, we must subject the report to the scrutiny of our lawyers before putting it in the public domain. We intend to publish the report in full, but because of those technical confidentiality arguments, we must take legal advice before publishing it.
§ Ruth Kelly
I cannot comment on that here. As far as I am aware, the Treasury lawyers will examine the content of the report. However, if the hon. Gentleman wishes to pursue that point, I can respond to him later.
The hon. Member for Croydon, South and others asked whether we were satisfied that Lord Penrose had sufficient resources to carry out his inquiry and whether it should be put on a statutory footing. The inquiry is fully independent, so it is not up to us to determine what sort of resources or powers he needs, or how he carries out his investigation. However, I shall read an extract from a letter that Lord Penrose has put in the public domain—a letter that he wrote to the Treasury Committee in February this year.
On resources, he says:I was assured at the outset by the then permanent secretary to the Treasury that I would have access to all the resources that I could reasonably require. It took some time to establish what resources I needed, and the demands of the inquiry have fluctuated from time to time, but I would like to assure the committee that I have not been denied any resources that I have sought.On whether we should have put the inquiry on a statutory footing, he says:I am grateful to all those who have co-operated so far with my inquiry, which includes Equitable, Ernst & Young, the Treasury and the FSA, as well as a great many policyholders.He continues:I am far from convinced that statutory powers would have made as much difference to the rate of progress as some commentators have assumed. Parties involved in litigation and other proceedings would have been just as likely to want to review the evidence being made available and to assess the implications for them, in the context of those processes, of disclosing material to the inquiry and allowing the inquiry to form and express views on that evidence. And it is likely that, with a view to protecting those parties' wider interests, the exercise of those powers would have been challenged and the inquiry might well have spent time debating the extent of those powers, and their exercise, very possibly in court. In short, powers have disadvantages as well as advantages as compared with the informal approach I have been able to adopt.214WH Lord Penrose has made it clear to us that he prefers the non-statutory approach, and has received full co-operation from the Treasury and the FSA in carrying out his inquiry.
§ Richard Ottaway
Can the Financial Secretary confirm that all witnesses are co-operating? I asked whether Lord Penrose needed statutory powers, not whether he wanted them.
§ Ruth Kelly
It is up to Lord Penrose to decide whether he should put information in the public domain. To the extent that he has commented on that in public, he has indicated that he is receiving sufficient co-operation from witnesses. To suggest that, at this stage, we should put the inquiry on a statutory footing would be to suggest that the inquiry be held up for months while the process is sorted out. In effect, that would be to reopen the inquiry from scratch. I do not believe that anyone—certainly not the policyholders—would think that desirable.
Many hon. Members have commented on the parliamentary ombudsman's report. The publication of that report is one of the main developments that has taken place since we last debated Equitable Life in Westminster Hall. The parliamentary ombudsman published her report on the regulation of Equitable Life by the FSA on 1 July. The investigation examined the period from 1 January 1999, when the FSA became responsible on a day-to-day basis for prudential supervision of insurers, to 8 December 2000, when Equitable Life closed to new business. The Treasury and the FSA co-operated fully with the ombudsman at all stages of her investigation.
As hon. Members will be aware, the ombudsman is an Officer of the House and is entirely independent of the Government. She has wide discretion to determine the matters within her jurisdiction to investigate and the procedures that she adopts for doing so. The conclusions she reaches are a matter for her alone. Therefore, it would be inappropriate for me to comment on how she has carried out her investigation, and I urge hon. Members to make their comments directly to the ombudsman's office.
Let me give a wider perspective on the role of Government and regulators—
§ Mr. Stephen O'Brien
Before the Financial Secretary moves on, does she have an answer to my question about whether she sees the Penrose inquiry as determinative or advisory, and whether there will be any further process to establish compensation as a result of receiving the report?
§ Ruth Kelly
I found the hon. Gentleman's comments a little difficult to interpret, but I presume that he is referring mainly to compensation. On that, our terms of reference are in the public domain, and it is up to Lord Penrose to judge as he sees fit. It would not be wise to pre-empt or speculate about his findings, and he can comment on anything that he sees fit to comment on, but what is important is that we learn the lessons from this episode and minimise the prospect of it happening again.
215WH The proper role of the Government is to ensure that a proper legislative and regulatory framework is in place for financial services. The FSA operates within that framework as the independent regulator. The hon. Member for Epsom and Ewell (Chris Grayling) seemed to suggest that we should have a regime in which companies never have the opportunity of failing. That should not be the case. Regulation must balance the safety of policyholders against the freedom for firms to seek out the best return. It is not the regulator's role to prevent all business failure, as a no-failure approach would mean lower returns for investors and would stifle innovation and competition. In a well-regulated market, the consumer can be sure that he or she understands the risks when buying a product. In a well-regulated market, it is also true, as we all recognise, that some firms must fail—or might fail. That is why the Government have set up a safety net, in the form of the financial services compensation scheme, to compensate investors in those firms.
§ Chris Grayling
The Financial Secretary is putting words into my mouth—that is not what I said. Does she agree that the regulator's role is to sound an alarm bell when a situation has the potential to go wrong?
§ Ruth Kelly
Of course it is the regulator's role to monitor firms closely, which is one of the things that Lord Penrose is examining in his report, and with hon. Members and others, I await that report with interest.
I know that the hon. Member for Twickenham is interested in the role of the FSA in relation to policyholders. The FSA continues to monitor the situation at Equitable Life closely, and it has been working with the society to ensure that clear and appropriate information is available to policyholders as developments occur, and that they continue to receive appropriate support. We expect the FSA, as the independent regulator of financial services, to continue to monitor the regulatory solvency of Equitable Life and to ensure that the company acts in a way that is consistent with its responsibilities to its remaining policyholders. I am talking about Equitable Life, but that is the FSA's role in relation to any regulated firm for which it has responsibility.
To deal with the hon. Member for Croydon, South and the question of whether there has been a continuum of process, I draw hon. Members' attention to the fact that the regulation of the life assurance industry has been overhauled since the Labour Government came to power. We have established in the form of the FSA an independent regulatory body that brings together eight different sectoral regulators. It is wrong to suggest that there has been a continuum throughout a period spanning 30 or 40 years.
The Government's main concern regarding the Equitable Life affair is to ensure that the lessons are learned. That will allow both regulators and the industry to develop the tools that they need to prevent similar incidents in future.