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Finance: Equitable Life

My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chief Secretary to the Treasury. ““With permission, Mr Deputy Speaker, I would like to make a Statement in response to the Parliamentary Ombudsman’s report into the prudential regulation of the Equitable Life Assurance Society from 1988 to December 2001. This is the ombudsman’s second report and was based on a four-year inquiry, and I would like to thank the ombudsman for her thorough and extensive consideration of all the issues involved. The Government have carefully considered this substantial report over some months, as it has raised complex and important issues. We agree that there has been maladministration in particular areas and that government action is merited as a result. As the ombudsman’s report sets out, Equitable Life is a mutual life insurance company whose policyholders share in the profits or losses of the business. Equitable had established a business which involved high volumes of policies with guaranteed annuity rates and a well advertised policy of distributing earnings as bonuses without building reserves for the future. After market conditions changed and the level of liabilities rose significantly relative to its assets, Equitable Life attempted to resolve this through its differential terminal bonus policy. However when this was found unlawful by the House of Lords in 2000 and Equitable Life was unable to find a buyer to cover the additional liability of £1.5 billion, the society closed to new business in December 2000. As a result of these events many policyholders now hold policies worth significantly less than they had originally expected. Lord Penrose’s forensic report into all the events around Equitable Life concluded that the society’s own actions ultimately precipitated its financial difficulties in the summer of 2000. He said: "‘Principally, the Society was author of its own misfortunes. Regulatory system failures were secondary factors’." In addition he found significant problems with the then regulatory regime, which was reactive and unintrusive. Since then we have introduced major regulatory reforms. But it is also right to look at the role of regulators within the regime that applied at the time. The Parliamentary Ombudsman has looked specifically at this issue, the role of the society and others being, of course, outside her remit. Her extensive report includes 10 findings of maladministration and five findings of injustice as a result. The Government have considered the report in some detail. We have also considered the report of the parliamentary Select Committee on Public Administration published in December. We agree with the ombudsman that there was maladministration by public bodies in several areas. In particular, the Government agree that Equitable Life’s regulatory returns from 1990 to 1996 in some cases raised questions that should have been resolved by the public bodies but were not. In some cases, we recognise, this may have led to injustice for policyholders, although in several we believe it did not in the context of the different regulatory regime which applied at the time. The Government also agree that the regulator should not have been satisfied that a reinsurance treaty entered into by Equitable Life justified the credit taken for it from 1998 to 2000. Equitable Life’s regulatory returns gave a materially different picture of the society’s regulatory solvency position because of the credit taken for the reinsurance treaty. We agree that certain statements made by the FSA after 2001 had the potential to mislead and may have caused injustice as a result. The detailed response to each finding and the reasons supporting these conclusions are set out in the Command Paper. The ombudsman’s report states: "‘I am very far from concluding that everyone who has complained to me about the prudential regulation of the Society has suffered a financial loss’." Nevertheless it is clear that people have been affected and have experienced significant distress due to events at Equitable Life. I think that the whole House regrets the mismanagement of the society that caused problems. I apologise to policyholders on behalf of the public bodies and successive Governments responsible for the regulation of Equitable Life between 1990 and 2001 for the maladministration that we believe has taken place. We also need to consider the fairest way to respond to policyholders now. We have looked in some detail at the ombudsman’s proposal for compensation. As the House will be aware, Parliament has recognised over many years that it is not generally appropriate for the taxpayer to pay compensation even when there is regulatory failure. The responsibility to minimise risks and to prevent problems occurring in a particular financial institution lies first and foremost with the people who own and run that institution. The Financial Services and Markets Act 2000 reaffirmed the long-standing exemption of financial regulators from liability for negligence in the courts. The ombudsman’s framework covering maladministration is of course different from the courts’ approach to negligence. Nevertheless, we believe that the underlying principle remains important; it has informed the approach of successive Governments and we believe that it should be sustained for the future. It would have serious repercussions for the taxpayer, for the relationship between Governments and financial markets, and for the nature of regulation, were the taxpayer to provide a remedy for all losses every time the regulator fails to prevent a financial institution getting into trouble. Nevertheless, we are concerned by the representations that we have received from members of this House and others, both directly and through debates, that some policyholders have been disproportionately affected by the events at Equitable. It is on that basis that we believe that it is right in this case for the Government to set up an ex gratia payment scheme to help. To do this in a fair way, there is a series of important issues that we need to take into account. In particular, we need to take account of the role and responsibility of Equitable Life and other parties. As the Public Administration Select Committee said in its report published in December: "‘The current board of Equitable Life and many others have acknowledged the legitimacy of Lord Penrose’s conclusion; few people dispute that its former management were primarily to blame’." Even where there was maladministration, there was also a responsibility on the part of the society. Take, for example, the case of the reinsurance treaty. Although the FSA failed to follow up problems with the treaty, it was still the society’s decision to enter into the agreement in the first place and it was the society which had primary responsibility to ensure that the treaty operated in the way intended. The Select Committee also said: "‘The fairness of requiring taxpayers to compensate Equitable Life’s policy holders depends upon making sure that public funds do not pay for loss that is fairly attributable to the poor performance of the stock market or to the mismanagement of Equitable Life’s former directors that could not have been prevented by adequate regulation’." Secondly, as the ombudsman herself has said, the Government also have a responsibility to taxpayers generally to balance competing demands on the public purse. Her report states: "‘I recognise that the public interest is a relevant consideration and that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case’." It is important to note that neither the ombudsman nor the Government have been able to estimate the cost of her recommendation, as we do not have detailed information on the relative losses experienced by different groups of policyholders, nor on the factors affecting the losses of different groups. Thirdly, we also want to focus on those who have been hardest hit. As the ombudsman herself has noted: "‘The particular circumstances of each complainant vary enormously—in terms of their age, their involvement with the Society, the amount that they claim to have lost as a result of that involvement, and the degree of reliance that they have now, or had in the past, on income derived from their investments in the Society’." Fourthly, we need to take account of important practical considerations. Neither we nor the ombudsman currently have much of the important information or assessments that we need to implement a payment scheme. The ombudsman, commenting on her own proposals, said that, "‘the creation of such a scheme would not be straightforward by any means’." We have considered all these points and we intend now to set up a scheme to make ex gratia payments to those who have been disproportionately affected. To do so, we have today asked Equitable Life to make available its detailed policyholder information. We have also asked the former Lord Justice of the Court of Appeal, the right honourable Sir John Chadwick, to look at the information and to advise us on the following points: first, the extent of relative losses suffered by Equitable Life policyholders; secondly, the proportion of those losses that should properly be attributed to the maladministration accepted by the Government and the actions of Equitable Life and others; thirdly, which classes of policyholder have suffered the greatest impact as a result of maladministration accepted by the Government; and, fourthly, the factors arising from this work that the Government might take into account when reaching a final view on determining whether a disproportionate impact has been suffered. Sir John’s terms of reference are published today. The ombudsman recommended that a payment scheme should be completed two and a half years after the decision to pay out. The parliamentary Select Committee said that it could not assess whether that was viable, and certainly our initial assessment of the ombudsman’s approach is that it might have taken significantly longer than that to fully implement. Many honourable Members have raised concerns about the length of time that policyholders have had to wait for a resolution of this case. Given that many have already retired, we believe that it is important to set up a scheme that can pay out as swiftly as possible, taking account of the difficult practical considerations involved. We have therefore asked Sir John to advise as quickly as he is able, including providing interim updates and conclusions on an ongoing basis, so that work can progress on the practical issues in parallel without waiting unnecessarily for all his work to be concluded. The Government will therefore introduce a fair payment scheme for policyholders who have suffered a disproportionate impact, with the benefit of Sir John’s advice and taking account of the position of the public finances as well as practical considerations. For the reasons that I have explained, we do not believe that it would be right to set up a compensation scheme in the way that the ombudsman proposed, but we believe that this is the right response. I hope that the House will recognise that there is no easy solution to the problems of Equitable Life and the faults that were found. The events of Equitable Life have been very difficult and complex, and have caused problems for policyholders across the country. Consideration of these events has already informed substantial regulatory reform since then, as well as wider reviews of corporate governance. Today’s response sets out plans for new help for policyholders, which we believe is fair to both policyholders and taxpayers and continues to support a sensible approach for the future. I commend it to the House””. My Lords, that concludes the Statement.