Equitable Life

Liam Byrne Excerpts

Thursday 22nd July 2010 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

With permission, Mr Speaker, I would like to make a statement on Equitable Life.

Both coalition parties are committed to justice for Equitable Life’s policyholders; we each made manifesto commitments, and these are reflected in our programme for government. No one should be in any doubt about our commitment to policyholders, who have waited a decade for justice. We are committed to implementing the parliamentary ombudsman’s recommendation, made two years ago, and

“to make fair and transparent payments to Equitable Life policyholders through an independent payment scheme for their relative loss as a consequence of regulatory failure.”

We have taken important steps towards implementing that commitment. We announced in the Queen’s Speech that a Bill would be presented to Parliament in this legislative Session, and today we are doing just that.

When I came into office, I reviewed Sir John Chadwick’s terms of reference and asked him to complete the work that he had started. I can tell the House that Sir John’s report, alongside the extensive actuarial advice underpinning it, has been published today, and copies have been placed in the Vote Office. I want to thank Sir John for his dedication in completing this complex and challenging task. Sir John has helped to progress the aim to establish a scheme that is fair both to policyholders and to taxpayers. He has proposed a flexible approach to determining losses that eliminates the need for policyholders to show what they would have done if the maladministration had not occurred.

I want to stress, however, that Sir John’s review is just one of the building blocks in resolving what is a complex matter, and that there are other judgments to be made in determining the final shape of the scheme and the amounts that will be paid out. I have always been committed to dealing with this matter with the utmost transparency. I therefore want to set out to the House today the key elements of Sir John’s methodology and the figures calculated at each intermediate step in quantifying losses according to his approach. First, however, let me make it clear that these are preliminary figures. There is further work to be done before a final estimate can be produced. These figures have been produced for the Treasury by Towers Watson, and I have placed a copy of its letter in the Vote Office.

Let me remind the House that the ombudsman considered that the financial loss suffered by policyholders was a consequence of the reduction in policy values in July 2001. These amounted to a reduction in the gains they expected to make from their policies, rather than the sums they were contractually entitled to. As a result, Equitable Life’s policies are lower in value today than they would have been without these cuts. The difference is the absolute loss, which Towers Watson estimates as being between £2.9 billion and £3.7 billion. Sir John then goes on to identify relative loss—that is, the difference between the returns that policyholders actually received from their Equitable Life policies and the returns they would have received if they had invested in a comparable product in an alternative life insurance company. This step produces a loss of between £4 billion and £4.8 billion.

For a number of policyholders, because of the strong performance of comparable life companies, their relative loss is greater than the absolute loss they suffered. Consistent with the ombudsman’s recommendation, Sir John has advised that relative loss for an individual policyholder should be capped at the absolute loss they suffered. It is hard to see how it would be fair either to the taxpayer or to other policyholders if some policyholders received more through redress than they had actually lost. If the proposed cap is adopted, then the figure will be £2.3 billion to £3 billion.

Sir John and the Equitable members action group—EMAG—are in agreement that not all policyholders would have decided against investing in Equitable Life had its regulatory returns not been subject to maladministration. There is scope for debate about by how much investment would have been reduced. Sir John advises that the majority of policyholders would have invested in Equitable Life irrespective of maladministration. He therefore proposes that policyholders should receive only 20% to 25% of the capped figure that I mentioned. I know that some stakeholders will dispute this proportion. This results in a figure of £475 million to £650 million.

Another difficult aspect of Sir John’s methodology is the assessment of internal relative loss—the loss that policyholders have suffered as a result of keeping money in Equitable Life when it was not being regulated properly. Taking this step into account, Sir John’s final loss figure is £400 million to £500 million. This figure is lower principally because a number of policyholders made relative gains as a result of maladministration.

As I said earlier, Sir John’s work is a building block that helps us to produce a fair and transparent payment scheme. I am aware that some of his findings will be contentious and are based on complex analysis, so I will reflect on his report and I will listen to representations by interested parties, including Equitable Life and EMAG, which has campaigned tenaciously on behalf of policyholders. As is apparent from the letter from Towers Watson, further work needs to be done over the summer to produce a final estimate of loss.

As the ombudsman noted, it is appropriate to consider the impact of any scheme on the public purse. The scheme will be a significant spending commitment for this Government and will therefore be considered in the light of what is affordable as a part of the spending review. I will set out the funding available for the scheme at the spending review on 20 October, alongside the final loss figure.

The ombudsman also concluded that the design of the scheme should be independent of the Government. I support this view, and I announced on 26 May that I would establish an independent commission to advise on the best way to allocate payments to policyholders and help to develop the design of the scheme. Today I can announce that Brian Pomeroy, John Howard and John Tattersall have agreed to form the independent commission on Equitable Life payments. I believe that their experience and expertise will be invaluable to the commission, and I am confident that we have the right people to do the job. The commission will start work imminently so that we can begin making payments as soon as possible. I have asked the commission to report by the end of January 2011.

The final question that I would like to address is how soon policyholders will receive payments. I would like to end the plight of policyholders as quickly as possible, and I aim to begin making payments in the middle of next year. If we are to achieve this goal, however, it is important to avoid any unnecessary delays. I will do all that I can to make sure we stick to this timetable, and I hope all interested parties will help us to do so. This is, however, a very complex task. We have made much progress since the Government were formed, but there is a great deal left to do. We need a simple, transparent and fair scheme that meets the needs of 1.5 million policyholders who have between them 2 million policies and have made 30 million premium payments. It is in the interests of each of those policyholders to complete this task quickly, but also carefully and thoughtfully.

In the past two months, we have published Sir John’s report; set up the independent commission on Equitable Life payments; published the first robust figures surrounding the calculation of relative loss; opened up the process, making it much more transparent; put in place a framework for the payment scheme; and produced legislation to give the Treasury statutory authority to make payments. We have achieved more in two months than the last Government did in the two years since the ombudsman reported. The coalition Government have demonstrated their commitment to justice for Equitable Life policyholders, and I commend this statement to the House.

[Mr Liam Byrne (Birmingham, Hodge Hill) (Lab)]

I thank the hon. Gentleman for early sight of his statement and for the opportunity to review Sir John’s report in full at the Treasury this morning.

I would like to start by repeating the words of apology to Equitable Life policyholders that I made to the House earlier this year for the failure of regulation of Equitable Life under successive Governments between 1990 and 2001.

I thank Sir John Chadwick for his detailed report, which we commissioned. He has taken on an extraordinarily complex matter, and he has done an admirable job. I also thank officials at the Treasury for the work that they have done over the past six months in getting ready the legislation which I am glad to see that the hon. Gentleman has published today. I, too, thank EMAG. I am grateful for the work done by the all-party Equitable Life policyholders group, chaired by the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski) and my hon. Friend the Member for Leeds North East (Mr Hamilton).

When I came to the House earlier in the year, I said that there was a clear ethical obligation, even if not a legal obligation, for compensation for Equitable Life policyholders. Equally, however, I knew that case-by-case compensation for policyholders, as suggested by the ombudsman, was not practical. I said that there were two tests for the right solution—speed and justice. I went on to say that we expected the Government to produce a report within two weeks of Sir John’s final report, which we wanted to see in May. So here we are in July, and there are a few questions that I should like to put to the Minister this afternoon.

First, is the Minister actually accepting Sir John’s recommendation? Earlier in the year he did a good impression of wanting to ditch Sir John’s approach and revert to the one set out by the ombudsman. Today, Sir John makes it clear in paragraph 10.17 that the ombudsman’s approach

“poses very difficult issues of principle, and would be impossible to implement within any realistic time-frame.”

Can the Minister confirm that Sir John’s approach is the right one? He called it one of the building blocks, but will he set out whether he is accepting Sir John’s report?

The second question that the House will want to know the answer to is who precisely will be entitled to help. Sir John states in paragraph 6.3 that help should cover new investments made between 1 September 1992 and 31 December 2000. Does the Minister agree with that approach? How many policyholders will be included on that basis, and how many will be excluded?

Thirdly, how much are policyholders actually going to get? Part 6 of the report sets out an approach and a method for calculating losses. Can the Minister confirm that what he has just said is that the maximum compensation will be based on a quarter of the relative losses faced by policyholders, and that that figure will itself be capped at absolute loss? Many policyholders will find that hard to square with what he said in the House earlier this year. What the House will want to know this afternoon is how much, on average, policyholders will actually get.

Fourthly, how quickly does the Minister want to complete this process? I am glad that he wants to get started next year, but the House will want to know how quickly he wants the final payments to be made. Finally, what appeal mechanism will the Government put in place for those policyholders who want to challenge their individual determinations?

It is incumbent on all of us to speed this matter to resolution. I am glad that the Minister has set out legislation this afternoon, and we will support it going through as rapidly as possible, but there are questions that our constituents will want answers to today. I hope that he will be as full as he can in replying to what I have asked.

[Mr Hoban]

I find the right hon. Gentleman’s comments rich, as he was a member of the Government who for nine years sought to frustrate, block and delay investigations into Equitable Life and its regulation; who ignored Lord Penrose’s findings of maladministration in 2004; who did everything they could to stop the ombudsman’s second inquiry; who bombarded the ombudsman with new documents and comments on her draft report; who took six months to reply to her report when it was published; and who set up a review by Sir John with a report carefully timed to be released after the general election. I will take no lessons at all from him about speed of response.

Sir John’s report sets out a range of approaches to calculating loss. As I said in my statement—the right hon. Gentleman had sight of it, as he said—I have not accepted that report. I will reflect on Sir John’s findings and think very carefully about them. The amount that policyholders will receive will be determined by a number of factors, and partly by the compensation figure set as part of the spending review process, as I said very carefully in my statement. The independent commission will need to respond to that matter when it designs the payment scheme, which was a key recommendation of the ombudsman that the right hon. Gentleman and his colleagues rejected but we are prepared to accept and put in place. He will have to wait until that scheme design has taken place and we have worked through its implications across 1.5 million policyholders, their 2 million different policies and the 30 million transactions that they entered into.

I am determined that the scheme will proceed as quickly as possible and that we can resolve the problems faced by Equitable Life policyholders—problems that the right hon. Gentleman and his party did little to sort out over the course of the past nine years.