Independent Insurance Company

HC Deb 04 July 2001 vol 371 cc120-7WH

1 pm

Mr. Barry Gardiner (Brent, North)

I remind the Chamber that I am an associate of the Chartered Insurance Institute and I am a chartered insurance practitioner. As such, although I no longer make my living in the financial services industry, I declare an interest in the subject of this debate.

On 14 June this year, Independent Insurance Company Ltd., the main subsidiary of Independent Insurance Group plc, a listed insurer on the London stock exchange, ceased writing new business. Four days later, PricewaterhouseCoopers was appointed as provisional liquidator, and approximately 600,000 policyholders found that their insurer, their line of last resort, had gone belly up.

My hon. Friend the Minister will undoubtedly want to assure the House that the Policyholders Protection Board will provide compensation up to 90 per cent. of the value of their proven claim of those private individuals who insured with Independent. She should point out that PricewaterhouseCoopers, as the provisional liquidator, concluded a deal with Royal and SunAlliance on 23 June, whereby that company would take over the policies of more than 250,000 Independent clients, the overwhelming preponderance of whom are private individuals from Independent's councils and tenants book of business.

Those clients transferred to Royal and SunAlliance will receive 100 per cent. of their proven claims and Royal and SunAlliance will claim that back from the Policyholders Protection Board. Those personal policyholders will continue to make their claims from Independent in the normal way as the liquidators have retained many claims staff. In my discussions yesterday with Mr. Dan Schwarzman of PricewaterhouseCoopers, he assured me that he was looking for other insurance carriers that would take over the policies not covered by the Royal and SunAlliance deal. The Policyholders Protection Board will also pay 100 per cent. of claims by companies where insurance is compulsory; hence third party motor insurance and employers' liability claims will be met in full.

I have sought to establish the above not only because it is of considerable interest to those companies and individuals affected, but as a way of ground clearing. I have long since discovered that the best way of getting a Minister to focus on the points that one wants answered in an Adjournment debate is to mention all those important, but perhaps distracting, issues that civil servants would otherwise use to pad out the Minister's reply. No self-respecting Minister would want to parrot back even the worthiest of points and I trust that, with those issues out of the way, we can move to the critical questions that the industry must have answered about the regulations in the case.

I suggest a note of caution about the Royal and SunAlliance deal concluded by the liquidators and any others that may be in the pipeline. In an interview on the BBC's "Money Box" programme, Blythe Morris, a director of Royal and SunAlliance, claimed: We did not pay anything for this business. If that were the case, we must question why the liquidators, whose sole function is to liquidate the assets of Independent, agreed to the transfer of the policies. I raised that point with PricewaterhouseCoopers yesterday, only to be told that, although it was bound by commercial confidence, it was confident that the arrangement was mutually beneficial to Independent's creditors and Royal and SunAlliance.

I come to my questions. First, the Minister will be aware that a provisional liquidator is answerable to the court rather than to a board of creditors. Will she press the liquidator, and Royal and SunAlliance, to agree to complete transparency about the deal so that all creditors may be assured that it is in their interest? Secondly, if the deal entails the transfer of more than 250,000 policies to Royal and SunAlliance, and if part of the benefit to creditors is that the administration and notification of policyholders is effected and paid for by Royal and SunAlliance, will she ensure that no policyholder details are transferred to Royal and SunAlliance in a manner that would breach the Data Protection Act 1998? My intention is not to prevent the Royal and SunAlliance deal from taking effect; I believe that it probably is in the creditors' interest. My point is to ensure that the Treasury highlights such cases to Department of Trade and Industry Ministers to see where the current data protection legislation may act against the public interest.

Since 1 January 1999, the Treasury's regulatory functions under the Insurance Companies Act 1982 have been contracted to the Financial Services Authority. It falls to the Minister to determine the exact date of N2, as it is known, when the full powers under the Financial Services and Markets Act 2000 devolve to the FSA. However, her predecessor stated on the record that that would be no later than November. Although this is clearly a time of transition in the regulation of the market, I know my hon. Friend too well and trust her integrity too much to think that she would seek to hide behind the cloak of that changing relationship with the FSA.

If the FSA failed in its regulatory function as a result of internal incompetence, the Treasury has a responsibility to discipline—and perhaps also to replace—those responsible for that incompetence. If the FSA failed through structural incapacity, the Treasury, as the author of that structure, must accept its responsibility to examine how best it might change that structure to ensure that regulatory failings do not happen again.

It will not have escaped the Minister's attention that that argument is based on a condition. If the FSA failed, it did so either through incompetence or through structural weakness. That leads to my third question: does the Minister consider that the FSA failed in the exercise of its regulatory function in relation to Independent? If she answers yes, my fourth question is: what corrective measures does she propose to take? If she does not know, my fifth question becomes clear: will she agree to establish an investigation to ascertain whether the Financial Services Authority failed in its regulatory function in that respect? I must warn the Treasury that it will not do to say that it cannot undertake such an investigation for fear of prejudicing the investigations conducted by the Serious Fraud Office or the FSA. It is clear that the Treasury would not undertake such an investigation into the Independent Insurance Company. I, on the other hand, urge the Minister to consider an investigation into the ESA itself.

The Minister could answer no and proclaim her satisfaction with the way in which the FSA discharged its regulatory role in relation to Independent. If she did so, she would find herself in the company of Peter Casey, John Whitlock and John Tiner—the new managing director—from the Financial Services Authority, with whom I spent two hours in dialogue over coffee on Monday. They agreed to meet me at short notice, and I am grateful to them for their courtesy and patience in answering what must have seemed a barrage of irksome and unwelcome questions. They were keen to impress on me that the FSA was not beset by any structural incapacity. Mr. Tiner confirmed: We broadly do have the powers we need to regulate the market properly. He may not have realised that that only propelled me more surely to the first alternative conclusion—there must have been internal incompetence in the FSA. Mr. Tiner and his colleagues explained that they were contracted by the Treasury to monitor solvency and to make an assessment of fit and proper persons". I asked the FSA people how they monitored solvency. The answer was staggering. Mr. Casey told me: We rely on information provided by management regarding solvency. At that point, I asked him to speak slowly, so that I could be sure not to misunderstand or misrepresent him. I wrote down his words: We have relied on auditors as far as the veracity of underlying data is concerned Do we really pay £232 million each year to run the Financial Services Authority, so that it can rely on auditors appointed and paid by the company that the FSA is supposed to be monitoring? The Minister should note that that was not my sixth question, but a purely rhetorical question designed to express my frustration at the FSA's complacency. Clearly the cautionary words, "When in a hole, stop digging", were unfamiliar to Mr. Casey, as he continued to answer my specific inquiries by confirming that the FSA relied on the auditors on matters such as that claims are properly booked and that the directors have appropriately reserved both for booked and as yet unquantified claims.". At that point, I wanted to ask Mr. Casey whether he had ever heard of a company called Independent Insurance at which £62 million of claims had not been booked and at which the comfort level reported by external actuaries had declined markedly over three years. I refrained. I felt that irony might not be Mr. Casey's strongest suit.

I hope that the Minister will join me in welcoming the decision by the Institute of Chartered Accountants in England and Wales to undertake its own investigation into the involvement of its members in the demise of Independent Insurance. Will she undertake to examine the results of that investigation carefully with a view to ending the over-close relationships that certain accountancy firms enjoy with the companies that they audit?

An audit does not usually go into sufficient detail to uncover mismanagement. Materiality considerations lead to audits missing anything but the biggest gaping holes. Problems are explained away or seen as an opportunity to sell a consultancy project. Auditors do not usually see themselves as individuals whose role is to maintain a statutory regulatory framework set down by law. In reality, auditors face a huge conflict of interest. Audit is a loss-making business, and in order to earn money from a client, auditors need to sell consulting work. Highlighting accounting problems does not ingratiate an auditor to management, and that is an obvious conflict of interest.

Auditors uphold the law and are required to be independent. Solutions may involve the building of legally required Chinese walls and restrictions on internal communication, as with investment banks. When the ICAEW report is eventually produced, will the Minister consider putting in place a framework that ensures that there is a far less cosy relationship between auditors and their clients?

The Minister will be aware that KPMG is reported to have received £1,567,000 from Independent Insurance for its auditing and consultancy work this year. In March, it reported that the company had adequate resources to continue its operations for the foreseeable future. By June, Independent had no foreseeable future. It was in liquidation. The Minister may share my view that the first call on that £1,567,000 might be for KPMG to get its corporate eyes tested. The Minister will also be aware that the last set of audited accounts showed that the group had £1.4 billion of gross liabilities against assets of £1.7 billion. Within two months of that assessment, the external actuaries, Watson Wyatt, had discovered that the company faced unquantifiable losses and the total scale of its gross liabilities could not be quantified.

My seventh question to the Minister is: will she join me in calling on the Institute of Actuaries to conduct its own investigation into the role of its members in the collapse of Independent Insurance?

I have been sidetracked from the FSA. Monitoring solvency is only one of the two functions of the regulator. We need to look at the FSA's role in the assessment of fit and proper persons. Schedule 2A to the Insurance Companies Act 1982 lays out the criteria that the regulator must use to ensure than an insurance company is managed in a sound and prudent manner. The criteria include that each manager and director is a fit and proper person and that there are a sufficient number of persons who are fit and proper persons to manage the company. How does the FSA decide whether someone is a fit and proper person? At this point in my questioning of the trinity from the FSA, I made a cardinal mistake—I tried humour. I joked that, at least in assessing whether someone was a fit and proper person, it was not possible to rely only on the information provided by the management. Deadpan, Mr. Casey replied: We would normally only procure external information if we already had some reason to doubt the fitness or properness of a person. When a person has a guard dog, it is good to know that it has teeth. However, it is equally important to establish whether it has a sense of smell, some eyes and some ears. The FSA claims to have the power and controls that it requires. However, if it is totally incapable of undertaking a proactive inquiry, the wonder is not that the Independent Insurance Company collapsed, but that we do not have many more such failures on our hands.

I pressed the FSA further on that, as I seemed to be mining an extremely productive vein. I asked what might constitute a reason to doubt the fitness or properness of a person, which triggers the decision to procure external information. I was told that an example might be if the person had previously been associated with a failing company. I asked how the FSA might know if a person had previously been associated with such a company. I was told—without a hint of embarrassment—that the FSA would know that if the person had filled in its form correctly.

I am sure, Mr. Cummings, that you will find it as comforting as I do to know that the regulatory body for the insurance industry will procure external information if a director has been associated with a failed company in the past and that such information would determine the fitness and properness of that person. The FSA would primarily establish that by looking at its form, which the person filled in, assuming that he or she had filled it in correctly.

The argument is not just circuitous, but circular. I asked Mr. Casey whether he had heard of Lombard Continental Insurance Company, which was once run by Mr. Michael Bright, Independent's chief executive. I asked him whether he was aware of the insurance solvency international report, which found that Lombard was non-viable because of under-resourcing. He responded by saying that the ISI report was published after the flotation of Independent. I pointed out to him that the report was undertaken in 1983, some 10 years previously, and had been shared with the chairman and one other director of Independent as early as 1985. Mr. Casey did not know that.

Section 45(1) of the 1982 Act gives the FSA powers to limit premium income, to address poor internal controls and, primarily, to obtain information about such matters as internal controls. I asked Mr. Casey whether he had ever exercised those powers in full, on the grounds that it would appear that the criteria of sound and proper management of a company had not been observed. He replied that he did not know, and that he would do that only if other powers proved inappropriate.

The FSA made it clear that it did not feel that that was appropriate. I believe that sunlight is the best disinfectant. Only by ensuring that it is common knowledge that such powers are exercised—some of them regularly—can the market draw conclusions on whether their use is a routine matter or whether it betokens something more serious. Mr. Casey told me that, if such instances were publicised, market confidence would be undermined. It would be undermined a good deal less than it was by the collapse of the Independent Insurance Company.

1.20 pm

The Economic Secretary to the Treasury (Ruth Kelly)

I congratulate my hon. Friend the Member for Brent, North (Mr. Gardiner) on securing the debate. The Government understand the concerns that he has raised. We appreciate the anxiety of former employees of Independent who have lost their jobs and of policyholders who are waiting for claims to be paid.

Glenda Jackson (Hampstead and Highgate)

Some of my constituents were clients of the Independent Insurance Company. They suffered a severe fire in their home and were assured that, up to and including 15 June, claims for the restitution of their home would be met in full and their hotel accommodation costs would be paid. They then discovered that, because their policy was classed as commercial, they were at the bottom of the pay-out hierarchy.

Those who look out for policyholders in that situation could not offer them any joy. PricewaterhouseCoopers has said that it can do nothing. Since such commercial policies were the core business of Independent—they sold block pensions to residents of private blocks of flats, which are mainly conversions—some pressure should be put on them to bring my constituents' claims higher up the hierarchical list.

Ruth Kelly

My hon. Friend makes an important point, and I will investigate the issue and write to her on that subject.

I would like to set out some background. Independent Insurance Company Ltd. was formed from a buy-out of Allstate Insurance Company Ltd. from its previous owners in 1987. It is the main subsidiary of Independent Insurance Group plc, a listed insurer on the London stock exchange. Independent wrote general insurance and re-insurance business, mainly covering liability, property, motor and other insurance for the commercial and personal lines sector.

On 8 February this year, Independent Insurance Group warned that last year's profits would be about £20 million below the market expectations of about £70 million. The main reasons cited were poor results in the French operation and a need to increase further reinsurance cover on the London market and provincial liability accounts. That news caused Independent's share price to fall 23 per cent. As a result, it was announced at the annual general meeting in April that Michael Bright had resigned as chief executive.

The group company's shares were suspended on 11 June. A subsequent announcement stated that a planned rights issue had been abandoned, and the shares remained suspended. Following further work, on 17 June, the directors of the company took the advice to appoint provisional liquidators.

The Serious Fraud Office announced that it would investigate events at the company, following a referral by the FSA on 18 June. It would be inappropriate for me to comment on the affairs of Independent while there is an investigation in progress. I believe that it is important to protect both the investigation and those who are being investigated. We cannot prejudge the outcome, and it would be unfair to do so.

The Financial Services Authority, which regulates insurance companies, had been in close touch with the company during the period leading up to the announcement in June. The FSA is now keeping in close touch with the provisional liquidator, the Serious Fraud Office and the Policyholders Protection Board and is monitoring the situation carefully. The FSA is considering, with the Treasury and the Department of Trade and Industry, whether any further investigations are necessary.

I shall attempt to cover some of the points raised by my hon. Friend the Member for Brent, North. In particular, he raised the issue of the transfer of policies to Royal and SunAlliance. No payment was involved in the transfer and Royal and SunAlliance will take responsibility for the paying and administering of reporting outstanding claims. As I understand it, the proposal will mean that the policyholders who are transferred to RSA will have seamless cover. All claims will be paid in full, even when the Policyholders Protection Board will provide compensation only to 90 per cent. Clearly, that is a good outcome for policyholders. Given that there was no payment involved, my hon. Friend asked in particular about the confidentiality of arrangements between Royal and SunAlliance and the provisional liquidator. Unfortunately, I must tell him that I am not in a position to press for further transparency on the details of the claim, as it is up to the courts to determine whether to provide that information. The provisional liquidator takes his authority from the court, and not from the FSA, and is entitled to keep the details of the arrangements confidential.

My hon. Friend is also concerned about the confidentiality of personal details relating to policyholders and whether the transfer might breach the provisions of the Data Protection Act 1998. As I understand it, when policyholders give their consent for the deal to take place, they are also giving their consent for their policy details to be transferred. No breach of the Data Protection Act would occur under those circumstances.

My hon. Friend questioned the reliance of the FSA on auditors for basic facts. Without a major increase in resources, which would allow the FSA to duplicate the efforts of auditors who are currently in place, it would be impossible for it to take on that work.

Mr. Gardiner

I am aware that it would be impossible for the FSA to duplicate the function of auditors. However, my hon. Friend will be aware that other regulatory systems, such as those in America, give the regulator the capacity to send in teams of auditors when it feels that such external independent work is needed. Will she consider incorporating that in the powers of the FSA?

Ruth Kelly

My hon. Friend makes an interesting point. However, the United States has 10,000 insurance regulators, and is therefore in a different position from that of the United Kingdom. My hon. Friend also raised the point about asking the Institute of Actuaries to investigate the actuaries involved in the case. That is a matter for the professional body itself. The actuaries received specific confirmation from the independent management that they were given full and accurate data.

Mr. Howard Flight (Arundel and South Downs)

More generally, when this matter occurred, the director of enforcement of the FSA had recently moved to another job and no one was even in charge of the unit that is supposed to monitor potential collapse and fraud. Does the Economic Secretary agree that the FSA might usefully increase its focus on and prioritisation of this territory?

Ruth Kelly

Clearly, the FSA will be considering its response to this area. However, the current priority is the Serious Fraud Office investigation. That must be got right before we determine what other reviews may be necessary.

My hon. Friend asked me to consider whether the FSA had failed in regulating the Independent Insurance Company. I re-emphasise the fact that we must ensure that the fraud investigation is conducted first. We shall keep in close contact with the FSA to ascertain what else needs to be done.

I thank my hon. Friend for securing this important debate and I am grateful for the opportunity to answer at least some of the points that he raised.