Financial Services Bill

Debate between Mark Hoban and Jonathan Evans

Tuesday 22nd May 2012 Commons Chamber

[Mr Hoban]

It depends on risk management and the business model that mutuals follow. There is a different set of constraints around building societies, which helps to ensure their stability, but that does not mean that they are immune from some of the mistakes that have caused failure in the past.

The clear intention of the Bill—we discussed this at length in Committee—is to ensure that regulation does not discriminate against mutuality, or indeed any other type of ownership, simply because it diverges from the norm of public or private ownership. I believe that the Bill delivers that result. For example, in clause 22, new section 138K requires the Prudential Regulatory Authority and Financial Conduct Authority to analyse the impact of the proposed rules on mutual societies. This will help to build up a base of impartial evidence to allow the regulators to continue to assess whether mutuals are being treated appropriately within the regulatory system. It is important that regulators think through very carefully the impact that their rules will have, particularly on mutuals.

[Jonathan Evans]

My hon. Friend will recall coming to our all-party group on insurance and financial services, when we asked him some questions on these issues. In fact, the regulator thinks that the Financial Services Authority has changed its processes in order to recognise the specific position of mutuals. What it is that the Government have changed, other than their even-handed approach?

Northern Rock

Debate between Mark Hoban and Jonathan Evans

Monday 21st November 2011 Commons Chamber

[Mr Hoban]

We should think about those dates very carefully. It was demutualised in 1997 and failed in 2007. The hon. Gentleman needs to remember that the regulatory architecture put in place by the previous Government meant that Northern Rock could act as an outlier and become over-dependent on wholesale funding. Nobody did anything about that at a time when there was an asset price bubble in the UK economy. Those factors in the regulatory architecture led to some of the financial problems in the economy in 2007, 2008 and 2009. We are acting to strengthen the regulatory architecture, to tackle those problems and to ensure that the Bank of England has the powers it needs to supervise the banks properly and look at systemic threats to financial stability. We have also set up the Independent Commission on Banking, which is looking at ways of making the banking system in the UK safer while remaining competitive at an international level.

[Jonathan Evans (Cardiff North) (Con)]

My hon. Friend will recall that when he appeared before the all-party group for building societies and financial mutuals he was asked to arrange for the publication of the advice received in relation to UKFI and the start of this sale. Bearing in mind the reliance he has placed on advice today, when does he anticipate that advice being published?

[Mr Hoban]

My hon. Friend will understand from his own business experience that received advice can be subject to commercial confidentiality. I assure him that we looked carefully at the remutualisation of Northern Rock—that is why I went before his all-party group. We reached out to people in the mutuals sector who wanted to see the remutualisation of Northern Rock but, sadly, no one came up with a viable and workable plan to enable that to happen.

Financial Mutuals

Debate between Mark Hoban and Jonathan Evans

Wednesday 16th February 2011 Westminster Hall

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

It is a pleasure, Mrs Main, to serve under your chairmanship for the first time.

I congratulate the hon. Member for Harrow West (Mr Thomas) on securing this debate. He roots his support for financial mutuals in the co-operative movement, which he represents in the House. Many on the Government Benches would see financial mutuals as a coming together of communities to meet the needs of their members, which may be an early articulation of the big society.

We should not forget the role that mutuals play in providing financial services. They hold about 20% of UK retail deposits, and provide financing for 17% of outstanding UK mortgages—including mine. They employ 70,000 people and half of the UK’s population are members of mutuals. The one member, one vote ownership model sets mutuals apart from their plc peers, as it enables them to focus solely on the needs of their members. It is unsurprising that mutuals frequently rank highly in surveys of customer satisfaction. As we know, many mutuals operate in areas of economic and social deprivation throughout the UK. They provide services that would be seen as sub-scale for big banks, including as the small loans offered by credit unions whose customers might otherwise turn to doorstep lenders.

The hon. Gentleman made an important point about access to credit unions. When I read the transcript of a recent debate on high-cost credit, I was struck by the fact that one of the challenges is to increase access to credit unions as an alternative to doorstep lenders. In a moment, I shall discuss some of the measures that we will take. It is the importance of mutuals and the choice and diversity that they provide that drives our commitment to see them thrive and prosper.

The causes of the financial crisis have been stated many times, and I do not intend to rehearse them here. None the less, it is important that we learn from the crisis and take steps to ensure that the same mistakes are not repeated in the future. The Government want to create a financial services sector that works differently and is driven by different values, which is why we are committed to implementing measures that will foster diversity in financial services, promote mutuals and create a more competitive banking industry.

The Government have established an Independent Commission on Banking to make recommendations on both structural and non-structural measures to change the banking system and promote stability and competition for the benefit of both consumers and businesses. A strong sustainable mutual sector, which has the ethos of working in the interests of members, can support that.

We must be realistic and recognise that the financial crisis and the subsequent economic climate have posed many challenges for mutuals. Those challenges include greater competition for retail deposits, more intensive supervision and tougher capital requirements. I do not apologise for the tougher regulatory environment that we are now in. Adapting to this new world has been, and remains, a key challenge for financial mutuals as well as for the whole financial services sector. The Government are keen to ensure that the legislative framework is in place to enable mutuals to fulfil their role.

There are number of changes to which we are committed to help create a more equal playing field in financial services. Let me turn now to the point about capital that the hon. Gentleman rightly raised. We are committed to achieving high capital standards across the financial sector, including for mutuals. At the same time, it is right that we have capital requirements that are appropriate for mutuals. The Government seek to address that issue in negotiations on the capital requirements directive. This is a matter that the Treasury and I take very seriously, and we are leading the debate on this in Europe to ensure that the specific nature of mutuals is taken into account while, at the same time, not compromising the quality of capital in the banking system. We expect a proposal from the Commission on that later in the year.

I say to the hon. Gentleman that one of the driving forces behind our reforms on capital is that we want to ensure that financial institutions never again turn cap in hand to the taxpayer for financial support in a financial crisis. That is why it is important that all deposit-taking institutions, regardless of their form of ownership, have access to loss-absorbing capital.

Capital is a key issue for mutual insurers, too, which is why the FSA is considering the use of with-profits funds. It will be publishing a consultation paper on that shortly. I do not want to pre-empt the proposals that have been made today, but having extolled the virtues of the mutual model, it is reasonable to expect that mutual with-profits policyholders should expect at least as favourable an outcome, if not a better outcome, than proprietary with-profits policyholders. It is important that mutual insurers ensure that they treat their with-profits policyholders fairly, too.

[Jonathan Evans]

The hon. Member for Harrow West (Mr Thomas) alluded to the previous ministerial statement. He knows that it was a statement that I made, but it related to the position of stock-owned companies. It deliberately excluded the position of mutuals, because it was an assessment of what policyholders’ reasonable expectations were and it was based on previous experience. Those factors have been erased from the way in which the FSA has taken the matter forward, so will my hon. Friend agree to revisit that area?

[Mr Hoban]

My hon. Friend makes an important point and it is one that he and I discussed before this debate. His argument, which he has expressed publicly, is that his statement was not intended to be applied to all forms of with-profits funds. The FSA is aware of that view. None the less, it is important that this issue is treated very carefully. I am well aware that for many mutual insurers, their capital comes from with-profits funds. Without that with-profits fund, they would not be able to function in the way in which they do now. It is also fair to say that for a proprietary-owned business, the with-profits fund belongs to its policyholders. We have seen a number of firms go through a reattribution process in recognition of the fact that those funds belong to the members of that fund. There is a challenge there that we need to address and we need to be very careful about the impact of decisions on the ecology of the mutual insurer sector.

Equitable Life (Payments) Bill

Debate between Mark Hoban and Jonathan Evans

Wednesday 10th November 2010 Commons Chamber

[Mr Hoban]

The parliamentary ombudsman’s findings were clear: she said that the maladministration started in 1991, but that it would not have been obvious to policyholders until September 1992.

Let me deal with two issues that hon. Members should have take into account in assessing the point. First, as has been mentioned, there are challenges around getting information for the pre ’92 period. Secondly, there is the point made by my hon. Friend the Member for Cardiff North about the timing of losses. We recognise that pre ’92 with-profits annuitants were affected by how Equitable Life was run. Sir John Chadwick and Towers Watson looked into what those WPAs would have received from Equitable Life had there been no maladministration. They concluded that they received more from Equitable Life as a result of maladministration than they would have done had it been properly regulated. That was because Equitable Life paid out more to them in the early years than it would have done had there been no maladministration. Let me give an example to prove that.

If a with-profits annuitant had purchased their policy in 1989 and gained through that purchase an income of £7,200, by 1993 the policyholder would have been receiving an annuity of approximately £10,000 per annum. Part of that sum was a result of the bonuses that had been declared on the policy since commencement. It is recognised that Equitable Life was paying higher bonuses than it could afford during the late 1980s and early 1990s. If Equitable Life had not been over-bonusing during that period, Towers Watson has calculated that the policyholder would have received only £9,500 per year. It is a consequence of the maladministration that the policyholder is receiving £500 more than he or she should have during that period.

Equitable Life continued to overpay bonuses throughout most of the 1990s. As a result, by 2002 that policyholder was receiving £17,000 per annum. If the over-bonusing had not taken place, the policyholder would have received only £15,800, so he or she was still receiving more as a consequence of maladministration.

In 2003, Equitable Life cut the rate of annuity payments to its with-profits policyholders by about 20%. In the absence of maladministration, the value of payments to with-profits policyholders would also have been cut, although, owing to market performance, by only 18%. After the cuts in 2003, our example policyholder was receiving £12,900 per year from Equitable Life. Had there been no maladministration, he or she would have been receiving only £12,300. I hope that that example has helped to clarify the consequences of maladministration, namely that even after the cuts in 2003 policyholders are still receiving more than they would have if Equitable Life had been properly regulated. For a range of reasons, their plight is not as it has been represented.

The first question to be asked, then, is “When did maladministration affect policyholders and the decisions that were made?” The second relates to the practicality of extracting data pre-1992, which is well established and has been well aired in the Chadwick report and elsewhere; and the third concerns the consequence of maladministration in Equitable Life, which is that with-profits annuitants are receiving more over the lifetime of their policy than they would have received if that maladministration had not taken place.

[Jonathan Evans]

I was interested in the way in which my hon. Friend dealt with my point about over-bonusing, but I feel that he has undermined another point that I made: I suggested that it was not possible to make such calculations, but my hon. Friend has suggested that Towers Watson has done so. In a sense that also undermines the thrust of why the pre-1992 policyholders should be excluded. I had assumed that they might not have been disadvantaged and that it was too difficult to work out the numbers, but if Towers Watson has worked out those numbers and there is no relative loss, it seems a bit odd not to include them, at least for the purpose of calculating the position and telling them that there is no loss.

[Mr Hoban]

I was trying to make two points. First, those policyholders were excluded from the calculation of relative loss as a consequence of the ombudsman’s findings and her view on when maladministration had taken place. According to the example that I have given, they would not have suffered loss in any event. I am merely saying that, in my opinion, there is a strong case in principle for the exclusion of those policyholders, and in practical terms they have not suffered loss.

--- Later in debate ---

[Mr Hoban]

That is an important point. I am sure that a range of issues will emerge as we move through the scheme’s design to payment. People who have had Equitable Life policies throughout the period and bought them post-September 1992 will receive compensation even if they have exited from Equitable Life’s current arrangements. I hope that that provides clarification.

[Jonathan Evans]

Will my hon. Friend take the opportunity, perhaps later, to issue a fuller statement on his very important announcement in response to my right hon. Friend the Member for Wokingham (Mr Redwood)? I intended to raise the matter on Third Reading. There is no doubt that many policyholders will be delighted to hear the news, and it should be made more widely available to all policyholders so that they are aware of it.

[Mr Hoban]

My hon. Friend is right. The old saying is that the best way of keeping a secret is to make a speech in the House of Commons. I am sure that those of my hon. Friends who are in contact with Equitable Life policyholders will take the opportunity to write to them, and I hope that the Equitable Members Action Group, which is the main lobbying organisation on behalf of policyholders, will also take the opportunity to pass the information on to its members. It is important information for them, and we will continue to make policyholders aware of it as we communicate further details of the scheme.

Before that series of interventions, I was reflecting on amendment 8, and I want to say a little about why we are treating the with-profits annuitants differently from others in regard to payments. We need to recognise that the nature of the policies of that particular group of people is very different from that of other Equitable Life policyholders. Their losses relate not just to what has happened in the past, but to what will happen in the future. They will continue to receive a stream of income over a number of years from their with-profits annuity policy. We are now able to match that stream of income with their historic losses and their future losses. It makes sense for them to receive their payments in a way that reflects the income stream that they have lost, which is why they will receive their losses in regular payments over their lifetime.

In the light of that, I hope that the right hon. Member for Holborn and St Pancras will decide not to press amendment 8 to a vote, because the approach that he suggests is not appropriate for with-profits annuitants. We are determined to make swift progress on making payments to other policyholders, however, and they will get lump sum payments that will be free of tax.