§ Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Heppell.]
9.30 am§ Mr. Alex Salmond (Banff and Buchan) (SNP)I want to raise a number of issues this morning, but I shall be wary of the time because other hon. Members want to speak.
I have no interest to declare in Standard Life. I have no Standard Life policies, and I have no brief for Standard Life in the sense that, when I was preparing for the debate, the company—perhaps understandably—did not want to talk to me but merely sent its press releases. My concern and interest were initially raised by an article in The Guardian on 8 January 2004, which I shall deal with later, and it was maintained by subsequent press comment about the Financial Services Authority and Standard Life. I was concerned about some of the things that had been written, and I wanted the opportunity to explore them in greater depth, because they touch on several very important issues and the matter is very much in the public interest.
First, I want to talk about some of the publicity surrounding discussions between Standard Life and the FSA. I want to look at some of the comments suggesting that that publicity emerged almost as part of the negotiations, to examine whether that is true. I am making absolutely no allegations; I am simply raising questions that seem to be of legitimate concern.
Secondly, I want to look at the essence of mutuality as a concept of ownership in the financial sector, and I want to explore with the Financial Secretary the Government's attitude to it. Nominally, the Government and the Financial Services Authority—as the FSA said recently in a letter to the hon. Member for Twickenham (Dr. Cable)—are fully committed to diversity of ownership in the financial sector; they think that it is a good thing. However, in the conduct of financial regulation, the proof of the pudding is in what the regulations actually are, and I want to examine whether things are being done, in terms of assumptions and ratios in the financial sector, that make it very difficult perhaps for a very large company to be in mutual ownership.
Thirdly, I want to look at the Scottish dimension to these matters and the importance of Standard Life not just as Europe's largest mutual assurance society but as a major bulwark of the Scottish financial sector, which is hugely important in terms of employment, funds under management and the diversity and range of its activities.
I shall look at the publicity that has surrounded the dramatic events and issues of the last month or so. I first learned of this issue from an article in The Guardian on 8 January. In the first four paragraphs alone, the reporter managed to get in the words "urgent," "Equitable Life", "run on the institution", "panicked" and "devastating", 244WH but leaving to one side the hyperbole and colourful language, the report seems to be a fairly blow by blow account of discussions between the Financial Services Authority and Standard Life. As I think about the origins of that report, it could hardly have been in the interests of Standard Life to provide any of that information, and suggestions arose in the press that it had effectively been leaked or briefings given or matters talked about as part of the negotiations, as a sort of macho attempt to bring Standard Life to heel. I do not know whether that is true, and I should say in all fairness that the FSA explicitly and robustly denied any such suggestion; indeed, the chief executive, John Tiner, sent me a letter yesterday, referring to what I thought was a fairly innocuous question that I asked the Financial Secretary last week in the Chamber. I will read it in full. It is headed, "Standard Life and the FSA".
During questions to the Treasury last week in the House of Commons, you asked the Financial Secretary to the Treasury if there was 'any credence at all to be given to suggestions that information about those discussions [between the FSA and Standard Life] was briefed to the press by sources within the FSA'.On 14 January the Daily Telegraph implied that we had leaked information to the press on these discussions. The following day the paper made it clear that: 'the FSA points out that there is no evidence that the leak came from its side, contrary to the implication here yesterday'. No credence should therefore be given to such claims.That seems pretty comprehensive, but I had not actually seen the report in The Daily Telegraph. In fact, the first I heard of it was when I received that letter yesterday, and I went back to have a look at what had been said. I was actually referring to a range of other reports that had made the same point.I shall read one of those reports because it encapsulates the unease of many financial commentators and others. It is part of an article in the Sunday Herald of 18 January:But these explosive events do raise issues that need to be carefully considered. On first reading, it appears that Standard Life had been squeezed into a corner by a regulator keen to flex its muscles ahead of the results of the Penrose inquiry into the debacle at Equitable Life. If that were shown to be the case, it would be a grim day indeed. Have we really seen such damage to one of our biggest companies and the savings and investments of so many—including a vast number of Scots—because the Financial Services Authority wants to get its defence in first?The manner in which it has taken place also raises questions about the FSA 's approach. If the news of the questions over solvency was deliberately leaked, that would make the opprobrium that the regulator deserves all the greater.Several articles made the same point.My unease stems from this: it is a very serious matter if a feeling is abroad, as it were, in the press in general—not just The Daily Telegraph, which incidentally is not my paper of choice—that there has been an attempt to create a macho atmosphere or to brief in the run-up to the publication of the Penrose inquiry report, which could be very embarrassing for the Government and the FSA. The Financial Secretary screws up her face a bit at that, but while we wait for the report to be published—perhaps she will tell us when it will be published—a feeling of unease has certainly developed from that type of coverage. I make no accusations—I am not in a position to do so—but there is concern, which I share, that such things should be suggested and thought possible. Clearly, briefing and spinning to the press can 245WH be no part of financial regulation. The financial regulator has a difficult, challenging job but absolute trust between the regulator and those who are regulated is part and parcel of successful financial regulation.
I even read in one report the suggestion, which I initially thought ludicrous, that the FSA was imposing a rash of fines in the run up to the publication of the Penrose report. I discounted that as daft and silly until I examined the FSA's record over the last year and saw that, lo and behold, after 10 months in which seven financial companies were fined, there were six such fines in the last two months. Maybe it is simply the case that financial companies are fined in the run-up to Christmas these days, but there does seem to have been a sudden rash of fines on some of the leading companies in the sector. I agree that when companies deserve to be fined, they deserve to be fined, but it is interesting that there seems to be such a rash of fines in the run-up to the publication of the Penrose report.
I want to give the Financial Secretary the opportunity to deal with those points, and to make it clear that briefing the press can be no part of financial regulation. We do not know whether that happened—it is explicitly denied by the FSA—but the original report in The Guardian obviously came from somewhere, given the detail that it contained, and it would help if we could calm the atmosphere of speculation that has surrounded reporting and the issue of financial regulations.
The second question that I want to raise is the underlying question of the negotiations and discussions that have been going on between the FSA and Standard Life. It is interesting that, in this fevered atmosphere, it is possible for even the most sensible newspapers and the most sensible people to be dragged in in a rather alarmist way. An article in The Sunday Times of 18 January discussed the recent hearings of the Select Committee on Treasury, which were designed to boost consumer confidence in pensions. It says:
The notoriously aggressive panel, chaired by the Dumbarton MP John McFall, is thought to be concerned about the viability of the 178-year-old Scottish insurer… McFall is expected to be well briefed, because Ned Cazalet, the insurance analyst who is Standard's arch-critic, is an adviser to the select committee.I believe that the hon. Member for Dumbarton (Mr. McFall) is far too wise a person to be concerned about the "viability" of Standard Life. He and the Treasury Committee, the Financial Secretary and the FSA may well be concerned about aspects of guarantees and commitments made across the financial sector by life companies, and they may be seriously looking at the ratios of Standard Life, but they would not, I think, argue that there was a question about the "viability" of Standard Life. That report gives an idea of the feeding frenzy that can develop when issues like this emerge— and are debated—in the way that they have over the last month. Discussion is legitimate and proper; given some of the circumstances in the financial sector and given the range of issues in the pensions market at present, people are understandably concerned, but there is great potential for damage to institutions, and to people's jobs and pensions, if a snowball effect affects confidence in the financial sector or particular institutions.
At the heart of discussions between Standard Life and the FSA was, first, the question of the new "realistic balance sheet" that the FSA is applying across the 246WH financial sector and how that affects ratios. Standard Life was first up for those discussions because of the timing of its accounting year, which was several months ahead of other companies', and no doubt other companies may soon go through the same bruising process. I hope that it is not a bruising process, but Standard Life led the way in that sense.
Secondly, there was the question of the FSA wanting the company fully to commit and reserve for what Standard Life has been presenting as a mutuality bonus—that is to say, the addition that policyholders could expect from with profits policies as a result of the company's being in mutual ownership and therefore not paying back a percentage on shareholders' capital.
Now the FSA says that such things should be fully capitally accounted for, or fully reserved in terms of access to capital, and I do not think that anyone would dispute the idea that if people are offering what is presented as a guarantee, such a guarantee would have to be reserved. On the other hand, if people are presenting an argument that being in mutual ownership means by definition that policyholders effectively have equity in the company and are therefore entitled to the return on capital that would go to shareholders in a plc, that argument seems to be at the very heart of mutual ownership. If a mutual company cannot argue that, it is very difficult to see what the marketing advantage of being a mutual company actually is. A plc has advantages in the financial market over a mutual company. For example, it finds it easier to raise capital; a plc has many ways and areas of raising capital that are not open in the same way to a mutual company. So a mutual company, in its marketing, has to make the most of its advantage over plcs.
I am not sure that everyone fully understands the full extent of the new ratios and realistic balances, because a series of very complicated mathematical models is now being applied to work out the new realistic balance sheet, but I think we can have a sensible discussion about whether requiring a fully capital-backed application to the claim of mutual ownership in itself militates against mutual ownership in the financial sector.
§ Mr. Michael Weir (Angus) (SNP)Does my hon. Friend agree that although plcs have many more routes, it is a fact that Standard Life is stronger than many of the former mutuals that have gone down the plc road, both in its own finances and in pay-outs to policyholders under their policies? Many of those who have gone down the plc route have ended up being swallowed up and have cut their bonuses significantly.
§ Mr. SalmondYes indeed. I shall come to that. As I said, I have no interest in Standard Life; but I do have an interest in a demutualised life assurance company. I have several endowment policies, and I can say openly to hon. Members that I wish they had been with Standard Life, because they would have been worth a great deal more over the last 20 years than they are with the demutualised company that they are with. For the sake of that company, it will remain nameless.
Returns from Standard Life speak for themselves when compared with those of other life assurance companies, with figures for with profits policies, and 247WH with figures for the range of mutual companies. I saw a performance list in a newspaper, which showed that 17 of the top 20 performers for TESSAs were mutual building societies; that struck me as a very interesting statistic indeed. So there is a great deal of evidence, as my hon. Friend the Member for Angus (Mr. Weir) said, that performance in terms of investors' returns is very healthy in the mutual sector. Indeed, there is a great deal of evidence not only that Standard Life is a solid company in terms of its overall ratios and any commonsense application of them, but that it has, by comparison with other companies in the sector, achieved good returns from its policies.
My hon. Friend spoke about the fate of other Scottish mutual companies that have demutualised. That is the final aspect that I want to discuss. The situation was summed up very well by one of Scotland's most experienced financial commentators, Bill Jamieson. In The Scotsman on 16 January, he wrote:
I have lost count of those who have told me in the past week that Standard Life would be better off by demutualising. I wish I could be so sure. For I have not lost count of all those other great Scottish life offices that have survived as independentcountries—that was a Freudian slip, but we shall keep it on the record, I think. I meantcompanies after demutualisation. That number is easy to count. It is even easier to remember. For it is a nice round number. It is wholly and precisely zero.Economists have a term for this: the law of unintended consequence. And it could be about to destroy Scotland's last big player in life assurance. A groundless worry of no import? Consider what has happened to all the others, those names we once proudly recited as enduring treasures in the pantheon of Scottish finance. Scottish Amicable, swallowed by the Prudential… Scottish Mutual, bought by the Abbey group… Abbey National Fund Management is itself transferring £28 billion of funds under management out of Glasgow to London… Demutualisation is no magic wand. The danger for Standard Life is that of predatory attack, and from companies not at all interested in preserving the business in Edinburgh, or even the brand name. Are we really sure this is a dose of financial Viagra for our financial sector? Let's be sure before we bite that it's not a cyanide pill.That commentary neatly explains some of my own concerns. Standard Life is very much a pillar of the Scottish financial sector. It has been in mutual ownership since the 1920s. It has been a hugely successful company. The track record of other demutualised life offices does not give us any confidence that huge benefits will result from conversion to a plc, certainly in terms of the Scottish financial sector. It lays companies, even those as large and substantial as Standard Life, open to predatory attack.
Standard Life is hugely important for its policyholders—the people who have put faith and trust in it—and that faith and trust has been well rewarded and well established over very many years. It employs 12,000 people. It is part and parcel of the Scottish financial sector, and serves a worldwide customer base of policyholders.
It could be argued that being a plc confers advantages, even after a commitment to mutual ownership for many years—indeed, only a few years ago, carpetbagger attempts to demutualise the company were fought off. However, if the company were chased into conversion from mutuality by the unintended consequences, as Bill Jamieson put it, of certain aspects 248WH of financial regulation, I am sure that that outcome would not be wanted by the Government or, indeed, the financial regulator.
I am aware of the time available, and know that a number of Members want to contribute to our debate. Let me summarise my concerns. First, I should be grateful if the Financial Secretary made it crystal clear that any briefing, even pub gossip, in the financial sector cannot possibly be used as a means of negotiating when companies are in discussion with the FSA. The FSA, of course, denies that that has happened, but the Financial Secretary must accept that a range of reports, not just in The Daily Telegraph, have raised it as the motive in a number of discussions. The fact that such a feeling is abroad and shared by many journalists is a matter of concern, because the financial regulator depends on complete confidence in the financial sector. To maintain that, people must have full confidence in the financial regulator.
Secondly, there is a substantial point to be made about mutual ownership. Is the Financial Secretary concerned that some of the new ratios and applications of guarantees may create an inadvertent prejudice against mutual ownership and make it more difficult for large companies to remain in such ownership? That would be an unintended consequence—I certainly hope that it would be unintended—of the new system of regulation and capital adequacy.
Thirdly, does the Financial Secretary acknowledge Standard Life not just as a mutual company but as an important pillar of the Scottish financial sector? It would be unfortunate if a company were effectively chased out of mutual ownership, as that would create difficulties for the company's future independence.
I wish to make it quite clear that our debate should not add heat to the fevered atmosphere of the past month. On the contrary, it should cool things down and elicit sensible responses to reasonable questions. It certainly has the best interests of the financial sector and the companies that operate within it, particularly Standard Life, at heart. I hope that the Financial Secretary's reply will reassure policyholders, customers and companies in the sector.
§ Mr. Andrew Love (Edmonton) (Lab/Co-op)I join the hon. Member for Banff and Buchan (Mr. Salmond) in acknowledging the complexity of the subject. I have tried to understand the negotiations between the FSA and Standard Life and grapple with the issues, but I have been baffled. The press release issued by Standard Life came as a shock, as it spoke about the need to
review the application of risk modelling techniques to long-dated products such as those offered by the life insurance industry in consultation with the industry, particularly with regard to the appropriateness of economic scenarios used in such modelling.I have no idea what that means, so I cannot make a contribution to our debate about such issues. However. I was struck by the discussion with chairman Sir Brian Stewart on the Standard Life website. In answer to a question, he said:The resolution was that we are going to take out of our projections for policyholders the benefits of mutuality.That pinpoints my interest in our debate, and I hope that the Minister can provide reassurances.249WH Many background issues may or may not be pertinent to this debate, such as Equitable Life, the Penrose report, for which we are still waiting, and the Serious Fraud Office, which has been referred to. I accept the importance of all those issues but do not believe that they are directly relevant. They are, however, indirectly relevant to Standard Life, as I shall discuss later. Some people say that it was too exposed to stocks and shares when the stock market was adjusting, and that that is the cause of its problems. If that is so, it is a relevant consideration for Standard Life, but it is not relevant to the debate about whether or not it should be a mutual company.
Standard Life itself says quite a lot of its business is in relatively high-risk areas, so there may be question about whether those risks should be borne by policyholders or whether there is a role for shareholders. However, it has been grappling with that issue for some years, so I accept that it may want to make decisions.
I should like to focus on risk as it relates to the FSA. Equitable Life is relevant, because there are pressures on the regulator to come to terms with the difficulties and problems that have arisen since it assumed responsibility for financial regulation. The hon. Member for Banff and Buchan touched on the change from a statutory basis of accounting to what the FSA characterised as a more realistic basis. I am not an accountant and shall not try to describe that change, but a number of issues arise. We can assume that a realistic basis is intended to give a more realistic view of a mutual insurer's accounts. I suspect that most hon. Members in the Chamber would accept that if that achieves more transparency for investors, policyholders or, indeed the industry generally, it is a good thing and should be welcomed.
I should like to touch on three changes resulting from the way in which insurers now have to publish accounts on a realistic basis. First, they have to quantify future discretionary benefits, as the hon. Member for Banff and Buchan said, including the level of discretionary bonuses and terminal bonuses. They have to account more than they did in the past for the level of those benefits. Secondly, they have to give a more explicit statement of their liabilities so that they have adequate capital to cover them. That includes a requirement for greater transparency so that people know that their money is not at particular risk should the mutual get into difficulty. Thirdly—I suspect that the Equitable Life saga is relevant here—options and contracts, such as guaranteed rates for annuities, must be quantified in value and included in the liabilities. The FSA requires insurers to hold capital to meet increased risks that are made apparent by accounts on the new realistic basis. The FSA wants explicitly, says one publication, to reduce the pressure
to sell shares when the stock markets fall.That highlights an issue that has been very much to the fore in the FSA's discussions with the insurance industry about its difficulties.I am interested in the way in which those three issues impact on Standard Life as a mutual body. For example, when we take into account the benefits of mutuality, will that make a pertinent and significant 250WH difference to the accounts that are produced at the end of the year? I do not know the answer, so hope that the Minister can deal with that. However, if discretionary benefits are increased and bonuses, such as the terminal bonus, are improved by the benefits of mutuality, would that inevitably mean that the accounting had to include a greater capital requirement to meet that increased risk? Similarly, would increased liabilities have an impact on accounting?
My personal view is that if annuity rates are guaranteed, there is no particular difference between contracts offered by a mutual or a non-mutual company, provided that they both include guarantees. Mutuals may believe that they can offer such guarantees more often because of the benefits of mutuality, and they know what they are doing. Although a problem arose with Equitable Life, the issue is relevant to the whole industry, rather than just the mutual sector.
Are we putting the mutual sector at a disadvantage because of the new realistic basis of accounting? Standard Life, for example, has announced that it can no longer take into account the benefits of mutuality. As a result, mutuals must reconsider whether there is any point in being a mutual.
That brings me finally to diversity, an issue raised by the hon. Member for Banff and Buchan at the beginning of his speech. When we discussed the Financial Services and Markets Act 2000, I made a speech on Second Reading in which I called for a change in the objectives of the FSA to include diversity. The mutual sector in financial services is relatively small. It may not require protection because, as has been said, it produces better returns—people who save with a mutual get a better return than they would in other parts of the sector—but the special circumstances of mutuals need to be recognised.
That may be the root of the present problem. The Financial Services and Markets Act is under review, and I believe that there is a need to consider whether diversity needs to be taken into account so that we can be sure that the mutual sector and its benefits for the marketplace are protected. We can then ensure not only that Standard Life, the largest mutual insurer in Europe, but all the other mutual organisations are aware that we think that mutuality is a good thing.
§ 10.3 am
§ John Barrett (Edinburgh, West) (LD)I congratulate the hon. Member for Banff and Buchan (Mr. Salmond) on securing this debate. He set out clearly the problems facing Standard Life, and referred to the feeding frenzy in the press, which has created a distorted view of the FSA's involvement with Standard Life, and information available to the public.
Whether we are interested in the economy, employment, pensions or personal finance, it is safe to say that the issues facing the financial services industry are important to many hon. Members. Our postbags on Equitable Life alone would surely be testament to that—mine certainly was. As a minor policyholder in Standard Life, I declare an interest in this debate. After being elected to Parliament, I entered into correspondence with Standard Life to transfer that small policy to a parliamentary pension fund. A year later, it still has not managed to make that transfer, so I remain a policyholder with Standard Life.
251WH I have, however, a much wider interest in the relationship between Standard Life, the FSA and my constituency. The company is by any measure of primary importance to the city of Edinburgh, part of which I have the honour to represent. Apart from the thousands of my constituents who have policies with Standard Life, the company employs 8,000 staff in Edinburgh as a whole, making a huge contribution not just to the financial industry in the city but to the Edinburgh economy as a whole. Although the future of Standard Life is an issue that rightly concerns the whole UK, the future of the company is of particular importance to Edinburgh and many of my constituents.
I confess that I was a fan of Standard Life. Not very long ago, in this very Chamber, I referred to the company in a debate on the outsourcing of financial services jobs, and paid tribute to its attitude on that issue. Its managing director of human resources had a firm commitment to keeping jobs in the city at a time when many of its competitors were moving customer service roles overseas. However, Standard Life has made mistakes, and continues to do so, both of presentation and of substance. Some say that the problems are of Standard Life's own making. Its reliance on equities at a time of stock market decline had a major negative impact on the company's capital reserves. That decision, combined with other circumstances, has left Standard Life in its current position.
At the same, however, it is vital that we deal with the issue constructively. It would be easy, in the wake of the Equitable Life scandal, to respond to Standard Life's difficulties with alarm and horror, as has happened in some press reports. Such an attitude is misguided, because Standard Life is not going the same way as Equitable Life and is not as short of capital as Equitable was. However, we must wait for its new balance sheet following the new FSA rules in March. Much has been made of demutalisation and the extent to which that could solve Standard Life's problems. Even contemplating such a process would be a massive U-turn by Standard Life, and shows the depth of the challenge facing the company. Indeed, such a consideration makes the protestations by the chairman of Standard Life that there is not a problem even more unbelievable.
The hon. Member for Dumbarton (Mr. McFall) secured a fair amount of coverage for the grilling that he and his Select Committee gave Standard Life management two weeks ago, but the interrogation was justified. We, as our constituents' representatives, must ask difficult questions to which our constituents want answers. Extraordinarily, in addition to the evidence given to the Treasury Committee, the Standard Life website features a special question and answer page with its chairman in which he says that
it is not a difficult time for Standard Life.That is spin worthy of Alastair Campbell, and bears little resemblance to what people in the industry, the staff, policyholders, the FSA and others have seen. There is no shame in the challenges that face the company. It goes without saying that Standard Life must he honest and open. The UK financial services world changed after Equitable Life, and people rightly expect nothing less than complete honesty from those who handle their financial affairs. I hope that the 252WH decision to give an indication of what has been agreed between Standard Life and the FSA when the annual results are published on 18 February will mark a new period of openness, but that depends on exactly how forthcoming the company is in that report.Demutualisation, of course, offers no short-term remedy for the company. People in the industry believe that a full-scale conversion could take up to two years because of the requirement to get permission from policyholders, an independent actuary, the Financial Services Authority and the courts. The process is not cheap, and Standard Life spent £6 million on administration during the 2000 campaign against demutualisation. There are other options, which I hope can be considered in the current review. For example, the company could either cut new business to protect the interests of current policyholders or cut equity exposure. I am not a financial adviser, and do not pretend to offer advice on those matters, but I believe that Standard Life should consider its options carefully. The Government, the FSA and others should make every effort to offer assistance.
§ Mr. SalmondThe hon. Gentleman has a huge constituency interest in the matter, so will he say something about the point that the hon. Member for Edmonton (Mr. Love) and I tried to explore? There is concern that there might well be—perhaps inadvertently—something in the regulation that the FSA is looking for that would militate against major companies staying in mutual ownership. If that is the case, it puts some of his comments in a different context.
§ John BarrettI absolutely agree. Standard Life has long promoted the benefits of being a mutual company. It should be made clear if the rules are changing, and the FSA's involvement is queering the pitch for Standard Life. I look forward to hearing what the Minister has to say about the matter, because there is a genuine concern for the company's future and its employees and policyholders.
Policyholders have to be realistic, too. Demutualisation would certainly not bring the windfalls that it would have brought when it was first mooted back in 2000. and any windfall now would in no way make up for the cuts in bonuses that were announced last week.
Hon. Members have, quite rightly, fought to preserve the interests of the millions of people who have policies with Standard Life and whose policy bonuses are falling—I strongly agree with those comments. However, the current uncertainty also means that behind Standard Life's impressive buildings on Lothian road, Conference square and George street, 8,000 staff remain in an equally uncertain position. As I said, the hon. Member for Dumbarton was absolutely right to be critical of Standard Life's management for, at best, their lack of information and, at worst, misleading some people over the position of the company. Similarly, I fear that the management are equally secretive with Standard Life's staff. The company's six-month review has effectively left many employees in a state of limbo. In fact, from what I know from those who have contacted me, I do not think that it is too much to say that some in the company are quite depressed. Promotions are being postponed and long-term goals 253WH are being amended. Many within the company who, even a few months ago, would not have contemplated changing jobs now feel that they must reassess their situation. However, as one of my constituents told me, it is not as if she has pages of job ads to wade through. This is a sad situation. We must remember that the staff worked hard over many years to build Standard Life into the world-class business that it is today. For example, the work to resist demutualisation four years ago was a credit to all involved.
I am conscious that other hon. Members may wish to speak, so I shall not go on too long. On the positive side, the scrutiny under which Standard Life appears to be is a sign that lessons have been learned from past mistakes and that foundations are being laid to ensure that the previous situation does not happen again. This is a difficult time, not just for those in the financial services sector, and difficult decisions will have to be taken in the months ahead. It is in all our interests to ensure that Standard Life continues to be a leading player in the financial services field. A resolution must be found for the company and its staff and policyholders, so I would welcome any reassurances that the Minister can give to those policyholders and employees.
§ Dr. Vincent Cable (Twickenham) (LD)I congratulate the hon. Member for Banff and Buchan (Mr. Salmond) on securing the debate, which is highly topical and of concern to many of our constituents. The Standard Life problem is nothing like as extreme as that of Equitable Life, but many of our constituents who are policyholders are none the less anxious, so the debate is timely and helpful. The hon. Gentleman rightly emphasised the role of the institution in the Scottish economy, as did my hon. Friend the Member for Edinburgh, West (John Barrett). I shall dwell on two more general issues that overlap: first, mutuality in the insurance sector: and, secondly, the implications of what is happening to with profits policies and their regulation, which has been touched on rather less. The two matters are linked, but I shall separate them.
The management of Standard Life argue on the basis of their track record that mutual ownership gives real benefits to its policyholders because it can produce a return that is 0.75 percentage points higher than the industry average over a long time. I do not think that that is simple self-promotion because there has been a lot of academic analysis on the point. The hon. Member for Edmonton (Mr. Love) is a considerable authority on such matters, so he will know that a lot of work has been done at the university of Loughborough by Professor Llewellyn, among others, to demonstrate that mutual insurers produce a higher return for their policyholders than public limited companies do over the long term. That happens for the simple reason that such insurers do not use equity capital, which is a more expensive form of finance.
By the same token, however, mutual insurers have disadvantages. The fact that they have difficulty raising capital in a hurry has been touched on. Their other problem is that by having equities on the asset side of their balance sheet rather than the liabilities side, they 254WH are potentially unbalanced because their risks are not properly offset, which was the underlying problem with Equitable Life.
The future of with profits policies overlaps with mutuality. Many of us remember that during the great days of the bull market in shares, everyone wanted a with profits policy. As someone who had a Standard Life policy that matured at just the right time, I have rosy memories of with profits policies and Standard Life. Since that time, however, the market has turned down and such policies are considerably less fashionable. Several years after the horse bolted, the FSA is busily erecting a stable door in the form of reserves and provisioning to ensure that the horse does not escape—that is understandable given the current situation.
There is a public policy issue that we want the Minister to address. We want it to be absolutely clear that, as the hon. Member for Banff and Buchan put it, there is no unwitting bias against mutual ownership in the system of regulation. I am not saying that as an ideologue promoting mutual ownership—it has benefits and disbenefits. However, we want to ensure that there is a genuine level playing field and that there is real diversity in the market with mutual and non-mutual institutions. The Government have a creditable record in the field. The Financial Secretary will remember from her role on building societies in the previous Parliament that the Government took a strong position to ensure that the building society movement was not effectively wiped out by activities such as carpetbagging. They introduced new regulations to that effect, although some of us criticised them for not enacting primary legislation. None the less, the mechanisms that they implemented have stabilised mutual ownership in the building society sector. Nationwide, which was considered to be the most vulnerable building society, is apparently stable.
A different pattern is emerging in the insurance sector, and it appears that mutual insurance might be heading toward extinction. Although I do not think that the unfortunate history of Equitable Life's problems was intrinsically caused by mutuality, it was compounded by it. Standard Life is coming under pressure to demutualise. The only remaining significant mutual insurer is the Liverpool Victoria, which is really a friendly society with several characteristics of an insurance company. It is possible to envisage that mutual insurance will effectively disappear in a couple of years unless action is taken to stabilise the situation.
Although that is a general problem, there is a specific question about the role that the FSA is playing. A charge has been made in some quarters that the FSA might be deliberately—that is probably not the case—pushing Standard Life toward demutualisation. I wrote to Mr. Tiner last week because of that concern. He replied yesterday and published his reply on the internet—I think that it has been widely picked up.
Several specific points about whether the FSA is pushing Standard Life toward demutualisation need separating out. First, does the FSA have any general bias? Mr. Tiner makes it clear in his letter that it does not. His strong statement says:
On mutuality more generally, we have no view one way or the other about the merits of a mutual structure255WH and says that that is a matter for members. I completely accept that and do not allege any sort of conspiracy or ideological bias.Several hon. Members have touched on a more complex matter: the illustration of the benefits of mutuality. Consultation paper No. 195 is currently in circulation—[Interruption.] It is being waved by the hon. Member for Chichester (Mr. Tyrie). It is a weighty document, but if I may try to summarise its significance and the essence of the problem in one line, I understand that it will prevent mutual insurers from illustrating the benefits of mutuality, such as extra returns, in a context in which they must maintain higher provisions. Standard Life's worry is that if it will be no longer allowed to illustrate benefits, its credibility as a competitor in the market will be undermined. Indeed, there is already evidence of that from the response of the rating agencies, Standard and Poor's and Moody's, in downgrading Standard Life on the market when it became clear that it might not be able to illustrate the benefits of mutuality.
If I have understood the problem correctly, I hope that the Minister will say that the Government will respond to the consultation paper and make it clear that public limited companies' lobbying to stop the mutuals from illustrating their benefits will be countered so that mutuals will be able to compete in the market by publicly declaring what they think that the benefits of mutual ownership will be. The Government might be able to intervene, although I accept that the situation is confusing. Mr. Tiner's letter says:
You express concern about the benefits of mutuality no longer being included in illustrations of future returns. This is a matter for Standard Life.However, Standard Life does not believe that—it believes that it will come under pressure not to do that—so perhaps the Minister will clarify the situation.One fundamental problem for mutuals is that they cannot go to the equity market, so they have to go to the bond market. They believe that they are at a disadvantage by having to do that because of the conditions set by the FSA as a regulator. I would welcome feedback from the Minister about whether she recognises that that is a problem—the mutual insurers certainly believe that there is a problem and that the FSA's requirements are too onerous.
I conclude with a point about which I am not terribly clear; perhaps the Minister will clear it up. People who are worried about the rush to demutualisation express concerns that it would not only not be in the long-term interests of policyholders, but it would not solve Standard Life's problems. Standard Life is under great pressure to raise cash to meet the new regulatory requirements, but if it demutualises, it will probably take between 18 months and two years to bring additional capital into the company, so it may be pushed into demutualisation for the wrong reasons at the wrong time, despite the fact that that might not solve the problem with which it is confronted.
I accept that the matter is largely one for the company, its members and the FSA, which, properly, has devolved powers so that it is at arm's length from Ministers. However, we want the Financial Secretary to give us a clear picture of how she sees the mutual sector in insurance. Do the Government have a proactive view, 256WH as they did with building societies and, if so, how will she manifest their concern? Does she accept the analysis that the FSA, in subtle ways through its interventions, makes it more difficult for the mutual sector to survive? Does she propose to respond publicly to the consultation paper in a way that would express several of those concerns?
§ Mr. Andrew Tyrie (Chichester) (Con)We have heard a little about the importance and size of Standard Life. It is a crucial major employer in Scotland, which is at least part of the reason why we are holding the debate. The point made by the hon. Member for Banff and Buchan (Mr. Salmond) about the leak in The Guardian is pertinent. Regulatory discussions cannot be conducted in the newspapers. It appears that someone has put something in the public domain as complicated negotiations were taking place behind the scenes, which I regret. I tabled a written question about the leak, but it was ruled out of order by the Table Office. I wonder in passing whether we need to examine our rules to find how we could introduce more flexibility to the way in which we table written questions, given that the Freedom of Information Act 2000 will make it much quicker and more sensible from 2005 to put a letter in the public domain that would require an answer.
The immediate reasons why we are having the debate are the discussions on demutualisation and rumours that jobs might be lost in Scotland. That is worrying, and I raise a question in passing, although I do not expect the Minister or anyone else to answer it. Whenever demutualisation is discussed, why does it so often seem to mean "large savings in employment costs"? I am a supporter of the mutual principle, but the discipline that shareholders could bring to mutual companies could gives scope for cost-cutting that would bring greater benefits to policyholders or shareholders.
As the hon. Member for Twickenham (Dr. Cable) and other hon. Members said, the heart of the debate on demutualisation is the question of access to capital, because a demutualised company can borrow more easily and find resources to expand its business, which is especially important in the fast-changing business environment in which we live. I noticed 18 months ago that, Legal and General raised about £800 million in the capital markets, which would have been more difficult and time consuming if it had remained a mutual.
Set against that benefit is the cost of the long-run yield that shareholders obtain that should accrue to policyholders, which can be measured, in theory. The hon. Member for Twickenham referred to research about which I am aware showing that part, but not all, of that benefit ends up with policyholders, although a number of assumptions that are built into the calculations make it difficult for us to be sure that they are correct.
Standard Life and other firms have historically argued that they have sufficient financial strength to do most of the things that a limited company can do while giving extra benefits to their policyholders, which is the nub of the argument for mutual status. Most of those benefits go to with profits policyholders. The FSA's proposals on with profits policies lie behind the uncertainty surrounding Standard Life. The FSA has 257WH proposed a tightening of the regulation of with profits policies, but even if we were to stand back and suppose that the FSA had taken no steps to tighten regulation, we would still be debating the industry. The underlying reasons for uncertainty in the industry go far deeper than the FSA's intervention, and I shall cite three or four reasons why.
First, the deep bear market in equities put the size of inherited estates in life companies under a great deal of pressure. The amplitude of the business cycle in the 1980s and 1990s put enormous pressure on the policy of smoothing returns to policyholders, which is the practice of handing out only a proportion of the return during the upswing and giving part of it, but not all, back during a downswing. If the cycle is very big, that policy comes under great strain, particularly if it is much bigger than had been assumed by the actuaries when the policy was put together.
A second reason why the debate would be taking place anyway, or a contributory reason, is that lower inflation and interest rates have increased the value of guarantees that the firms have written, creating much larger liabilities in the balance sheet. That was bound to bring pressure on the industry. Added to that are the facts that forecast life expectancy is greater than anticipated and surpluses on non-profits business are lower than expected. The expenses cap on stakeholder pensions has not helped in that respect, and the Government have something to answer for there.
Finally, and most important of all, there is the effect of the Equitable Life scandal and collapse. It sent a shudder through the whole market when one of the flagships came crashing on to the rocks. Now is not the time to discuss why. I hope that we will soon have an opportunity to discuss why that happened, with the publication of the Penrose report, which the Minister has already read and which I hope we will shortly be able to see in full.
It is important not to draw simplistic parallels between Equitable Life and Standard Life, as the hon. Member for Edinburgh, West (John Barrett) also said a moment ago. Equitable Life operated on a unique business model. It had virtually no reserving and very high terminal bonusing. Inevitably, that created greater risk for policyholders. Whether regulators should have permitted that business model to survive and continue is a subject to which we shall return, but that is not the model on which Standard Life has been operating. It is therefore important that the wider public, including policyholders, do not draw any simplistic conclusions about any putative threat to Standard Life from what happened to Equitable.
In response to the factors that I have listed which put great pressure on the industry—the last of which was the collapse of Equitable, which brought with it a great deal of publicity—the Financial Services Authority launched a review of the entire industry. Several key elements of the review are worth mentioning, as the hon. Member for Twickenham and other speakers did. I have a list of the major changes in the regulatory tax and accounting framework for life companies that have been pushed through in the past couple of years or are coming through in the next couple of years. There are 21 major changes. I will not read them all out—I will not read any 258WH of them out, but they can be found on the actuarial profession life office taxation working party website. Even from reading the titles, one gets a sense that this is an industry undergoing fundamental change as a consequence of a reform of the regulatory framework.
We must keep reminding ourselves that the customer is paying for all this regulatory work. It is putting bills up and reducing terminal bonuses and returns to shareholders and policyholders. As we said in our deliberations on the Financial Services and Markets Bill, it is crucial that there is a balance between the costs and benefits of regulation. I support what is going on, as far as I can tell—I do not have the benefit of a detailed knowledge. However, we must bear it in mind that it does not come cost free. The FSA will ultimately be judged on whether it has got the balance of costs and benefits right. It is far too early to tell.
Among those 21 changes, there have been six major consultation documents from the FSA. I have two of them, just to give Members an idea of the volume of paper that the industry is expected to cope with. I shall refer briefly to them, as they are the most important.
CP 207 is about treating with profits policyholders fairly. The purpose is good. It is designed to open up the black box that has been at the heart of life assurance for a very long time.
How should an asset share be calculated? That is an extremely complicated question. Firms vary their practice enormously on how they do those calculations. Is it right that they should continue to have that degree of flexibility? How should a smoothing reserve be managed? I mentioned that earlier. Should firms be allowed to vary the amount by which they smooth in percentage terms? When is a guarantee a guarantee? That question is not understood even now by many people who read the literature. We heard a moment ago about the marketing literature.
I do not have answers to these questions. Reading CP 207 is enough to make one wonder whether more than two or three people in the world at any one time will ever fully understand the answers, but the questions should be asked. I am fairly convinced that it was wrong that directors of life companies should have had—and continue to have, although it is being reduced—such enormous discretion to vary their policy on these matters. Not all life companies agree with that. Standard Life recently put out a document stating:
There are risks … that excessive limitation of companies' discretion may impair the performance of with profits products, and that excessive disclosure may make the smoothing of returns to reduce volatility more difficulty to achieve.I am not sure who has the better of that argument and I shall not try to adjudicate, but it goes to the heart of whether mutuality should survive and thrive.I have two questions for the Minister on the consultative document, which I touched on earlier. First, is it the intention of the regulators to bring greater homogeneity to asset share calculations, or is it merely the intention of the regulators to create transparency, so that people can see the differences? Secondly, CP 207 did not discuss the implications of the Sandler report for with profits business, and there are a number of issues involved, on which I shall not elaborate now. I should like to know the Government's view. Of course, it is consistent with Sandler, but can the Minister go beyond that and say what that consistency amounts to?
259WH The second paper that I shall briefly discuss on this remorselessly complicated subject is CP 195, which has already been mentioned. Again, it is a huge document—hundreds of pages of tiny print, part of which I have tried to read in the past few days before the debate. It is entitled "Enhanced Capital Requirements and Individual Capital Assessments for Life Insurers." It introduces the notion of realistic solvency assessments and realistic balance sheets. When I was reading it, I wondered whether that means that up to now we have all been working on unrealistic balance sheets and unrealistic solvency assessments. I hope that is not the case, but the mere fact that that word can be used in this context without people finding it curious tells a story. Balance sheets have not been transparent enough in the past.
Part of the difficulty has been that the balance sheets of life companies have in the past shown the full value of any fall in markets on the assets side of the balance sheet, but not the full likely effect of that fall in the markets on the liabilities side. That is one of the major issues behind the construction of realistic balance sheets. As I was reading the document yesterday, it struck me that a great deal of discretion is still left to directors of firms to decide how to describe their liabilities.
I have a couple more questions to ask the Minister. The creation of realistic balance sheets was used a few months ago as a justification for using waivers to minimum reserving requirements. Those minimum reserving requirements were in turn triggering the forced sell-off of equities. Was the Treasury consulted by the FSA before such waivers were used? The long-run implications of the use of those waivers are quite profound. An issue of great concern was that if the forced sell-off of equities continued, there would be a massive overshoot in equity prices, with a massive downturn.
I have a more general question that will open another black box that exists in the area of public finance regulation. Very few people know of the existence of the tripartite committee, which consists of the Treasury, the Bank of England and the Financial Services Authority. I know very little about it. Can the Minister tell us whether that committee, which meets monthly, has ever discussed the systemic implications of all the radical changes that are being pushed through in the insurance market?
The regulatory modernisation that is taking place, of which those two documents are just a small part, is sharply changing the shape of the industry. It is partly a result of the colossal failure of Equitable Life. I support what the FSA is trying to achieve, but I return to the point I made a moment ago about the costs and benefits of regulation in the long run. We must not lose sight of that. We are left with a number of quite deep questions, which the hon. Member for Twickenham alluded to, although he phrased them rather differently.
How much are risks spread in with profits policies? I am still not clear about that, and it is a question of which the regulators should be mindful. Can businesses in the 21st century thrive without access to capital that is afforded with limited liability? That is at the heart of the question on mutuality. Can we continue to have a major industry with a massive actuarial black box at its heart, in an age of greater transparency in which consumers 260WH are demanding far more knowledge about products, and shareholders are far more active in demanding higher returns? I am a supporter of mutuality, but these are difficult questions for the industry and they are the very questions that the Financial Services Authority is opening up in its review. I shall be interested to hear what the Minister has to say about them.
§ The Financial Secretary to the Treasury (Ruth Kelly)A relatively short time remains to me, but I shall try to answer as many as possible of the questions that have been raised.
I pay tribute to the hon. Member for Banff and Buchan (Mr. Salmond) for securing this timely debate. I entirely concur with the sentiments of the hon. Member for Twickenham (Dr. Cable), who said that this is an issue of great concern to constituents in Scotland and throughout the country for varying reasons, including the financial sector in Scotland and the employment impact, and the fact that there are Standard Life policyholders across the country. Hon. Members will understand that it is not for me to comment on the ongoing details concerning the regulation of Standard Life or any other life company. However, I welcome the opportunity to lay some concerns to rest.
There is no conspiracy against Standard Life, mutuals in general or Scottish financial services. In my written answer to the House of 13 January, I noted that the Financial Services Authority had kept me informed of the matter under the terms of the tripartite memorandum of understanding. I also noted that the FSA has responsibility for regulatory decisions under the Financial Services and Markets Act 2000 and that it had informed me that it had, under section 166 of that Act, commissioned a review by independent experts into the origins and implications of the significant divergence in the calculation of Standard Life's liabilities. The FSA will continue to keep me informed of the matter under the terms of that memorandum, and I will keep the House informed of developments, as appropriate.
I cannot comment on the substance beyond that statement and those made by the FSA and Standard Life on the day. There are, however, a few things I can say of interest to Members in the Chamber about the handling of the issue and about mutuality generally. First, Standard Life is in no way being singled out by the FSA in respect of realistic reporting. The vast majority of the industry is currently in discussion with the FSA regarding the move to reporting on a realistic basis. Secondly, that move is part of the FSA's much needed programme of modernising the regulation and capital requirements of life insurers, be they mutual or quoted companies. The hon. Member for Chichester (Mr. Tyrie) was right to say that companies are undergoing a programme of fundamental change.
Thirdly—this is of particular interest to hon. Members present—the Government recognise the contribution of all forms of mutual financial service provider to offering choice and diversity in the sector. The recent proposals to update life insurance regulation are categorically not part of a demutualisation campaign by the FSA or the Government. I know of the long-standing interest of my hon. Friend the Member 261WH for Edmonton (Mr. Love) in these matters. He and others will recognise the contribution of the Treasury to the development of the mutual sector over the past few years, not least, as the hon. Member for Twickenham noted, in supporting the building societies' movement against carpetbagging, and in my own support of two private Members' Bills on industrial and provident societies, taking forward the issues raised by the mutual sector and trying to further that cause.
§ Mr. SalmondStandard Life is the last of the great mutual life insurers. We have been trying to explore whether forcing a mutual to be fully reserved undermines its claim of mutuality and the well documented advantages of mutuality. We are not suggesting a conspiracy. We are asking the Minister to address that fundamental point.
§ Ruth KellyI will. As I am sure the hon. Gentleman noted, I said that I would deal first with the handling of the issue, and then with the substance of the issue of mutuality. If he will be patient, I shall come to his point in a moment.
On the hon. Gentleman's point about briefing to the press, I can categorically assure him that to the best of my knowledge there is absolutely no information to suggest that the Treasury or the Financial Services Authority was the source for any story that appeared in the papers. A story in The Guardian was followed up by other newspapers. I have no information that would suggest that the Treasury or the FSA was responsible.
With reference to concerns about realistic reporting and its impact on the life insurance sector and on mutuality, the FSA has been extremely active in pushing through a massive programme of reform for the regulation of financial services as a whole. Nowhere is that more concentrated than for insurance regulation. The programme of reform that the FSA is delivering has focused both on the prudential regime—that is, the amount of capital that firms are required to hold to match their business mix—and on the conduct of business rules, which relates to the way in which firms treat their customers.
For the purpose of today's debate, I shall focus on the reform of prudential regulation for life insurance firms. Shortcomings of the current statutory valuation methods for life insurers, which were so exposed, as the hon. Member for Chichester said, during the recent bear market in equities, are widely recognised in the UK and abroad. In August 2003, the FSA published its latest proposals to address these shortcomings on a more formal basis that will require firms to make a realistic assessment of their with profits liabilities to determine whether they need additional capital, on top of mathematical reserves to cover expected discretionary bonus payments. In particular, this realistic assessment is to include a requirement to value the guarantees and options embedded in some with profits business through more modern techniques that have been prevalent in the industry thus far. The shift to realistic reporting is to be welcomed, as it will result in more risk-sensitive and accurate reporting of firms' liabilities.
The FSA is currently considering responses to its proposals and finalising some of the more technical details with industry representatives. Almost without 262WH exception, proposals for a realistic assessment of with profits business have been positively received, with the vast majority of respondents considering the proposed approach to be more risk-responsive and transparent. I should emphasise that the proposals have been welcomed throughout the industry by both mutuals and non-mutuals. Indeed, Standard Life has welcomed the move to realistic reporting. The FSA intends to implement the new approach to prudential regulation by the end of the year. However, in the meantime, many firms will include realistic reports in their year-end returns, which are due by the end of March.
The FSA's updating of insurance regulation is much needed; the industry has long recognised that and widely welcomes it. For example, Peter Vipond of the Association of British Insurers described the realistic regime as
a big move in the right direction. We are bound to get a bit of bumping and scraping as the FSA tries to push this through and firms come back to them with practical problems".Standard and Poor's commented:Realistic reporting is long overdue, and should form a fundamental part of an insurer's wider risk management process.The move to realistic reporting and new capital requirements is not intended to force the industry as a whole to raise more capital. However, the FSA has acknowledged that it will probably result in the need for a proportion of firms in the industry to assign more capital to reflect the more realistic valuation of the risks that with profits companies face, given the policies that they write. That may entail simply reassigning capital that already exists in a group to the with profits fund rather than having to raise additional capital from the financial markets. Alternatively, companies, including mutuals, have the option of resorting to the capital markets. I note that Standard Life has announced its intention to raise £750 million of subordinated debt. The FSA's reformed capital requirements are slanted neither to favour mutual companies operating in the industry nor against them.
I want to deal directly with the point about the benefits of mutuality and the way in which they are shown in policyholder illustrations. How companies illustrate their projections is a matter for them. Standard Life has had a choice, as have other mutuals in the industry. The FSA's anxiety is first, that they fulfil the accounting requirements and secondly, that they treat customers fairly. The measures that the companies take, if they feel that they need to raise capital, and their proposals to fulfil the requirements, are completely up to them. It is up to the FSA to evaluate those measures in the light of the proposals.
§ Mr. SalmondThat is a little disingenuous. It is all very well for the FSA and the Financial Secretary to say that it is up to the company, but if regulation forces it to reserve fully for any claim of the benefits of mutuality, it renders the claim impossible to make. Standard Life has said that it will no longer make that claim in the policy. It is therefore disingenuous to create a system that renders it impossible for a mutual to make that claim without fully reserving. That removes the advantage that the company is claiming. The Financial Secretary owes us a wee bit more on that.
§ Ruth KellyI completely disagree with the hon. Gentleman. I am sure that companies will make 263WH different policies, but if the hon. Member for Twickenham does not mind, it is probably apt to refer to the letter that the FSA published last night on Standard Life. It especially notes:
The background to the current position is that, in the course of developing the realistic reporting of its financial position, the company identified a significant divergence in the calculation of its liabilities. This accelerated the need for it to consider what benefits previously illustrated to policyholders should be treated as a liability under the FSA's forthcoming realistic solvency tests.That issue is specific to the company and perhaps does not have a wider application.
§ Ruth KellyThe hon. Gentleman knows, not least from my written answer, that the FSA has commissioned a report under section 166 of the Financial Services and Markets Act 2000 to examine the significant divergence and to understand how it arose. We do not therefore have the information with which to answer that question fully. However, I stress that companies will remain free to illustrate projections as long as they treat customers fairly. It is the FSA's duty to ensure that they do that.
The hon. Member for Chichester made some points about the FSA's review of with profit companies and referred especially to CP 207. He is right to suggest that the FSA is undergoing a thorough review of the with profits industry. He made some interesting points. As always, he is right to draw attention to the necessity of a cost-benefit analysis. Indeed, that is embedded in the FSA's responsibilities and the principles under which it operates. It has to consult the industry and draw up a cost-benefit analysis on each change.
The hon. Gentleman asked whether the FSA intended to require greater homogeneity for asset-share calculations, or simply greater transparency. The overriding objective is for transparency to be as complete as possible so that policyholders are fully informed. He also asked about waivers and whether the Treasury was consulted when the FSA used waivers on, for example, the realistic regime. The Treasury would not be consulted in such circumstances. As I have already made clear, the FSA has full operational responsibility for regulatory decisions. Unless it felt it necessary to inform the Treasury under the memorandum of understanding between the FSA and the Treasury, we would not even know about the individual agreements between the FSA and the relevant companies.
264WH The hon. Gentleman asked about the operation of the tripartite committee, which comprises the FSA, the Treasury and the Bank of England and considers financial stability matters, and whether it had examined the changes to life insurance regulations and with profit companies in general. He understands that it would be completely inappropriate for me to disclose any conversations about financial stability. It is essential to the effective operation of the committee that discussions are not disclosed publicly. Nevertheless, he makes an interesting point.
Let us consider the mutual sector and the Government's view of mutuality. The Government believe that financial mutuals have specific, distinct advantages since they do not have shareholders to whom they have to pay dividends. They can therefore deliver greater value to their members, either through higher returns to investors or lower interest rates to borrowers or both. The additional competitive pressures that diversity of ownership creates in the marketplace can deliver benefits to investors in mutuals and non-mutuals. We also value the strong links between many mutuals and their local communities, some of which have their roots in the co-operative self-organisation of working communities in the 19th century. Today, credit unions play a key role in promoting financial inclusion in local communities and the Government are keen to encourage that valuable work.
The Government and the mutual movement have a shared interest in an inclusive society in which all have equal access to the means to participate to the best of their ability. We also have an interest in markets as social institutions that confer rights and obligations in equal measure on the participants, and the exercise of individual liberty with the acknowledgement of individual responsibility. The Government are committed to ensuring that mutuals continue to serve the best interests of their members and wider society.
As I said earlier, we have taken many steps to promote mutuality and encourage mutuals to develop in future. I hope that I can make more progress on the development of the mutual sector in the coming months and years. We are committed to the mutual sector and to proper and realistic financial accounting to ensure that firms recognise the true value of their liabilities and that they treat customers fairly. I hope that I have also shown hon. Members that the FSA has no indirect or covert agenda to disadvantage the mutual sector. The Government and the FSA value diversity in promoting competition and ensuring that consumer needs are fully met.