Examination of Witnesses (Questions 85-99)|
MP, MR JON
TUESDAY 30 OCTOBER 2001
85. Good morning, Minister. May I ask you to
identify yourself and your officials for the record?
(Ruth Kelly) Ruth Kelly, Economic Secretary to the
(Mr Cunliffe) Jon Cunliffe, Managing Director of Financial
Regulation and Industry.
(Mr Fellgett) Robin Fellgett. I am Director of Financial
MP, MR JON
86. Thank you very much. Did the Treasury in
any way attempt to modify or change the Baird Report before it
(Ruth Kelly) Not at all. We published it exactly as
it was presented to the Treasury. I do not think a word of the
report was changed in any way at all.
87. What other submissions to the Penrose Inquiry
is the Treasury planning to make, apart from the Baird Report?
(Ruth Kelly) I think the Baird Report would clearly
form a significant piece of evidence. It is up to Lord Penrose
himself within his terms of reference to decide what other pieces
of evidence he wants to see, so he will clearly be calling witnesses
and be examining all the written evidence. If he wants us to provide
any evidence to him then of course we stand ready to do so.
88. I referred to Baird, paragraph 4.18.7. That
shows the Economic Secretary to the Treasury of the Day in a very
perceptive light regarding the proposed Treasury guidance on reserving
for GAOs. It is a fact though that over the following months the
Treasury did not change its advice but managed to bring the Economic
Secretary to the Treasury round to its way of thinking, Baird
4.18.8-12. In November 1998 your predecessor expressed reservations
about the proposed Treasury guidance on reserving for GAOs on
grounds that, perceptively, anticipated the judgments of both
Lord Woolf and the House of Lords. What were the arguments put
forward by officials to support the premise that policyholders
exercising the guarantee should suffer material reduction in terminal
(Ruth Kelly) Chairman, you are asking for the justification
of the insurance guidance that went to the Economic Secretary
to the Treasury at the end of November 1998. I think it is fair
to say, that although this documentation is not now in the hands
of the Treasury but is in the hands of the FSA, that then the
Economic Secretary to the Treasury, Patricia Hewitt, was not at
first satisfied with the document with which she was presented.
However, there was a clear call from the insurance sector for
guidance which the insurance regulators of the time thought they
had a duty to respond to in some sense. What they made clear both
to her and in the guidance was that first of all there should
be a charge, implicit or explicit, associated with guaranteed
annuities which could be reflected in a lower terminal bonus;
also that each life insurer would need to consider the guidance
in the light of its own documents that it presented to policyholders,
including how it presented bonuses and so forth, and lastly that
the guidance was not prejudicial to any court proceedings which
would ensue. With hindsight it is probably fair to say that the
guidance was not helpful in that situation. There was a clear
call from the industry for a statement from the Treasury at that
time which it was thought wise to react to. Of course what the
Treasury did was set out the opinion that was prevailing widely
at that time and, as I said, with hindsight it would probably
have been preferable not to issue guidance.
89. The Baird Report makes clear that there
have been regulatory lapses. In the light of that is the Treasury
prepared to say today that it will consider compensation?
(Ruth Kelly) I do not really see the Baird Report
in that light. In some sense your question misconstrues the nature
of what the Baird Report was supposed to be. The report itself
was always conceived first and foremost as an internal audit of
how the FSA was conducting its own stewardship of the regulation
of Equitable Life and the life assurance industry. The author
of the report, Ronnie Baird (and it is a very professional report)
clearly interpreted his terms of reference in quite a narrow sense,
to look just at how the FSA was working. In particular he did
not see a need to go beyond his terms of reference and look at
the actions of the Equitable Life itself, to talk to the Equitable
Life or any of its advisers, to look back in any sense deeply
into the history of the affair, so I see the Baird Report as,
yes, a significant but necessarily a limited part of the overall
picture. I think it would be unwise to draw too many conclusions
90. I will abstain from drawing too many conclusions
from the Baird Report just for now. What about Lord Penrose's
investigation? Without prejudicing his inquiry do you think it
is possible that compensation issues may arise from the Penrose
(Ruth Kelly) The terms of reference I gave to Lord
Penrose in August when it became clear to me that there were very
considerable issues at stake here. I ought to use this opportunity
perhaps to say that I understand the plight that Equitable Life
policyholders currently find themselves in and I have great sympathy
with them. It became clear over the summer that there were very
deep issues at stake here. The purpose of asking Lord Penrose
to investigate was to make sure that the lessons were learned
from the current situation at Equitable Life and how it evolved,
both the conduct of the administration and the regulation of the
life assurance industry. Clearly within his terms of reference
it is open to him to ask whatever questions he sees fit. I would
emphasise to you that this is a completely independent inquiry,
that I have no direct contact with Lord Penrose, I seek in no
way to steer or not to steer his inquiry. It is up to him how
he pursues that line of questioning and how he makes his own inferences
91. I have asked you a very specific question
about compensation and you have given me a general answer about
the relationship between the government and the inquiry. Could
you have another go at answering the question which is of interest
to many policyholders out there, of whether the Treasury will
consider compensation? You did not like my attachment of Baird
to the question of compensation. The question of Penrose and compensation
has been moved into another pigeonhole. We have now got an inquiry
by the Ombudsman. Ombudsmen's reports sometimes carry recommendations;
they are not binding, they are not statutory as they are in some
other countries. Will the Treasury say now whether it will consider
carefully any recommendations (again without prejudicing his report)
that may come out of the Ombudsman's inquiry into maladministration?
Can there be any prospect of compensation by the Treasury in this
(Ruth Kelly) I would emphasise that both of those
inquiries are completely independent. It is up to the authors
and investigators to decide what they recommend to the Treasury.
92. We are agreed on that. I am asking you whether,
whatever they may say, it is possible that the Treasury might
(Ruth Kelly) Their terms of reference are clearly
very different. Lord Penrose's terms of reference are clearly
set out as to learn the lessons from the Equitable affair, and
I think people can make their own minds up as to exactly how he
is likely to interpret that.
93. Can you say whether that is a yes or a no?
I just want to know whether the Treasury will be prepared to consider
compensation in this case.
(Ruth Kelly) If the Ombudsman reaches a decision that
a grave injustice has been carried out for the policyholders,
then of course that is something we would look at. If Lord Penrose
decided that compensation was within the terms of reference of
his inquiry and decided to go down those lines, of course we would
look at anything seriously which he proposes.
94. So you will be prepared to consider compensation
in the light of these reports? Is the answer to that a yes?
(Ruth Kelly) I think it would be ridiculous of me
to speculate on the outcome of those reports, but of course whatever
recommendations they put to us we will consider carefully.
95. It is possible, is it not, Minister, that
there could beand we obviously do not want to pre-judge
Lord Penrose's inquiryone foreseeable outcome in the conclusion
that there has been gross regulatory failure? That is a possibility,
is it not?
(Ruth Kelly) Lord Penrose can come out with whatever
he sees fit and whatever conclusions he draws from the Equitable
96. You would open the possibility, would you
not, that if there were instances, not in this particular case
but in general, of gross regulatory failure, then there might
be a case for compensation?
(Ruth Kelly) Clearly if people think there is a case
against the regulators it is always open to them to sue the regulators
directly and to test that in a court of law. In fact, I believe
Equitable Life itself has engaged Herbert Smith, the law firm,
to look specifically at issues of culpability, so in theory these
options always exist. What I do not want to do is to try and speculate
about how these inquiries are going to be conducted and what conclusions
they are going to arrive at.
97. Of course we do not want to pre-judge Lord
Penrose at all. I cannot imagine Lord Penrose is going to come
up with a sort of £49.50 compensation figure. He is presumably
going to look into these matters and conclude whether or not there
has been serious regulatory failure. Once his report is out would
it then be open to people to go through the Ombudsman route if
there were to be a case for compensation, or would the Treasury
under those circumstances consider paying compensation directly?
(Ruth Kelly) The Ombudsman is an officer of the House,
I believe, and completely independent to pursue whatever avenues
he wishes to pursue. I believe yesterday he has already said that
he will look at the post-1999 period of the FSA stewardship in
the light of the Baird Report. As far as I understand the position,
he could equally at the moment look further back into the history
of the affair and pursue any avenues he wished to.
98. His view of compensation is to a large extent
an open one and it is open dependent upon the results of Lord
(Ruth Kelly) I do not want to speculate on the outcome
of the inquiry or indeed the avenues that Lord Penrose himself
will wish to pursue.
99. It is an option that remains open if his
report proved that there was serious regulatory failure?
(Ruth Kelly) The Ombudsman can choose to investigate
at whatever point he wishes to.