UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 219-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

PUBLIC ADMINISTRATION Committee

 

 

EQUITABLE LIFE

 

 

wEDNESday 11 fEBRUARY 2009

RT HON IAN PEARSON MP and MR STEPHEN PARKER

Evidence heard in Public Questions 96 - 171

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Public Administration Committee

on Wednesday 11 February 2009

Members present

Dr Tony Wright, in the Chair

Mr David Burrowes

Paul Flynn

David Heyes

Kelvin Hopkins

Mr Ian Liddell-Grainger

Julie Morgan

Mr Gordon Prentice

Paul Rowen

Mr Charles Walker

________________

Ms Ann Abraham, Parliamentary and Health Service Ombudsman, gave evidence.

 

Examination of Witnesses

Witnesses: Ian Pearson MP, Economic Secretary to the Treasury and Mr Stephen Parker, Head of Legal Advisers, HM Treasury, gave evidence.

Q96 Chairman: Good morning, Ian; good morning Mr Parker, I am glad you are able to join us. We have a limited session in a way because we have to finish before 12 o'clock, so that should focus our minds and make the questioning fairly brisk and I hope the answering fairly brisk as well, so that we can get through it. We are delighted to welcome Ian Pearson, who is the Economic Secretary to the Treasury and Mr Parker, the Head of Legal Advisers at the Treasury; thank you very much for coming along. Ian, we saw you before the Government had given its reply to the Ombudsman's Report on Equitable Life and you said very readily that you would want to come back and talk to us after the reply had been done, which has now happened and that is why we are having the session with you now; so thank you very much for doing that. Do you want to say anything else at all just by way of introduction?

Ian Pearson: Very briefly if I may, Chairman, just to make a few opening remarks. Obviously the Government's response to the Ombudsman's Report into the Prudential Regulation of Equitable Life has, understandably, generated a great deal of interest and I think a key aspect of our response has generated significant interest surrounding the Government's decision not to accept certain of the Ombudsman's findings. The Ombudsman herself talked about this at your previous hearing and at your invitation has supplied the Committee with further details about why she considers the Government's response has, in certain respects, misunderstood or misrepresented the findings she made in her report, and I am sorry she considers that to be the case. The Government will carefully consider the Ombudsman's memorandum and, if it would assist the Committee, we will supply our detailed comments on the points she makes in due course. I am sure you will appreciate that in the time available it has not been possible to give the memorandum detailed consideration and I will not therefore attempt today to deal with the technical issues and points of detail raised in the Ombudsman's paper; but I note that the Ombudsman asked Iain Ogilvie during the course of the previous hearing to give some details and two examples where she thought that there had been misrepresentation; so I thought it appropriate to bring along Stephen Parker to address some of those issues. For the avoidance of doubt let me repeat what I have said previously, and put on report that the Government has great respect for the Office of the Parliamentary Ombudsman and the Ombudsman has made a thorough and extensive consideration of all the issues involved. The fact that we have not accepted some of her findings should not in any way be taken as a criticism of her investigation; nor, let me be clear, does it represent an attempt, as some have suggested, by the Government to limit the number of classes of policy holders who may be eligible for ex gratia payments under the scheme that we establish. We have departed from the Ombudsman's findings only where we believe we have cogent reasons for doing so, applying the legal principles established in the Bradley case, which we discussed when I previously appeared before you. I think we would rightly be criticised if we accepted findings that we did not think that we should, and we have sought to comply at all times with the scheme of the 1967 Act as interpreted by the Court of Appeal. Let me very briefly say something about the other area of great interest, which has been how Sir John Chadwick will carry out his work and what form an ex gratia scheme will take when he has provided his advice to the Government. A lot of the questions that naturally arise can only be answered after Sir John has completed his work and has provided his advice, but we understand and acknowledge the intense public interest in this area. You will appreciate that I cannot second guess the outcome of key elements of his work today; I cannot predict at this stage how much those who have suffered a disproportionate impact might be paid, but within the constraints I am very happy to assist the Committee in any way that I can today.

Q97 Chairman: Thank you very much for that. I am interested that you say the Government is going to produce further cogent reasons beyond the cogent reasons that it says that it has offered already on these areas of dispute.

Ian Pearson: What I did say was that as a government we would respond, if the Committee felt it was appropriate, to the further memorandum that had been issued by the Office of the Ombudsman. I do believe that we have provided cogent reasons in our Command Paper as to each and every finding of injustice and maladministration where they occurred; but we are happy, if the Ombudsman suggests that there have been areas where there has been misunderstanding, to provide further information to the Committee but only if you wish.

Q98 Chairman: We have had the Ombudsman telling us this but we also had the Chief Executive of Equitable Life itself telling us that it thought that the grounds given by the Government were really too thin to make sense of it in some respect.

Ian Pearson: They would say that, would they not? I understand that they have an interest in this and would no doubt come to the views that they have. We are very happy as a government to defend our position, to defend the Command Paper that we have issued. We believe that it is a strong response to the Ombudsman's recommendations and we have accepted her recommendations where, in our view, those recommendations are appropriate; but where we have had cogent reasons for not accepting them I do not think that anybody would suggest that we should be agreeing to something when we profoundly thought that it was not right and there were reasons to depart from it.

Q99 Chairman: That leads me to the question that I have because, as you say, we are not going into the details of these because we do not have time now, but the Ombudsman has said that she thinks - and I quote her latest memorandum to us - "That the Government has in certain respects misunderstood or misrepresented the findings I had made in that report." So there are clearly issues at stake here which will be dealt with in detail, that is why I am interested in what you said about giving further reasons. But here we have a situation where, in some respects, you have the Government at issue with the Ombudsman on whether those reasons that are the grounds for dispute are cogent or not, and you invented Sir John Chadwick, the man who knows about cogent reasons, because he was the judge in the Bradley Case, who announced the doctrine of cogent reasons. So what I am quite puzzled by is why not have him as umpire; why not ask him, as he is going to do all the work, to decide whether these reasons or cogent or not? Instead of that, what you have said to him - and it is a curious brief for a judge - is, "We are going to tell you which evidence you can look at."

Ian Pearson: Let me be clear, we have not invented Sir John Chadwick and we have all along been at great pains to consider thoroughly each and every finding of the Ombudsman and to make an assessment about the extent to which we agree with it, and where we thought we had cogent reasons for disagreeing with the Ombudsman we have done so. When it comes to appointing Sir John Chadwick to conduct the work and the remit that is detailed in the Command Paper, I want to be very clear that we are not asking Sir John Chadwick for legal advice; what we have asked him to do is a piece of work for us that would provide an independent and objective assessment according to the remit that the Committee seeks.

Q100 Chairman: But he is a distinguished former judge and he knows the territory ---

Ian Pearson: Absolutely.

Q101 Chairman: ... and therefore is extremely expert on all this and will become more expert on it. If he, going through the whole stuff again, were to conclude that on some of these crucial areas he thought that the Ombudsman's argument was better than the Government's he would not, under his term of reference, be able to say that, would he?

Ian Pearson: It is not in Sir John's remit to provide legal advice or commentary on this; he has a very clear remit. I really do think, Chairman, with all respect, that while there are points of detail where the Ombudsman suggests that we have misunderstood or misinterpreted what she has said that people need to realise the Government has made a considered decision and that considered decision is reflected in our response to the Ombudsman's Report. The priority for me now, frankly, is to get on with this and to focus on implementation; to make sure that Sir John Chadwick gets the resources he needs to do the work that he needs to do, and at the same time to make sure that the Treasury in parallel does work deciding a scheme so that ex gratia payments can be made. So I really do think that at some time we need to draw the line here and say, "Let us get on with this and let us implement a scheme."

Q102 Mr Walker: I have two questions. First of all, did you take advice before appointing Sir John Chadwick because the Guide to Judicial Conduct, March 2008, says - and I will be very brief - "The conditions of appointment to judicial office provide that judges accept appointment on the understanding that following the termination of their appointment they will not return to private practice as a barrister or a solicitor and will not provide services, on whatever basis, as an advocate in any court or tribunal in England and Wales or elsewhere, including any international court or tribunal, in return for remuneration of any kind, or offer or provide legal advice to any person." You have a former judge, who will by many still be regarded as being heavily involved in the legal field, involved in what could end up being a legal matter if complainants decide to take it further and go to court on this matter. Do you think that could be jeopardising the Government's position?

Ian Pearson: What we did is follow the usual channels when it comes to the appointment of Sir John. The usual channels in this case are not the Whips' offices but the Ministry of Justice and the Lord Chief Justice. We are not aware at all of any irregularity in the appointment or any reason at all why Sir John cannot very satisfactorily perform the remit that we have asked him to do, which is to provide independent and objective advice - but not to provide legal advice.

Q103 Mr Walker: But if this goes to court, as it might well do, you will have a judge giving opinion ---

Ian Pearson: I do not want to speculate about what will happen if this goes to court.

Q104 Mr Walker: But you should speculate, Minister - you should speculate - because this may go to court ---

Ian Pearson: You can if you want to, but I am not going to.

Mr Walker: This may go to court and you have appointed a judge to conduct the review. Did you take legal advice from your solicitors before making this appointment because you may well find that you are in breach of the Judicial Code of Conduct and that could bring this whole thing into question? Mr Parker, you are a solicitor.

Q105 Chairman: Mr Parker, you help us with this.

Mr Parker: Yes, we did advise that it was okay. As the Minister said, we went through the usual channels, through the Ministry of Justice and the Lord Chief Justice's office. The Government is aware of no irregularity in Sir John's appointment and will be responding to the letter from Messrs Bindmans in due course.

Q106 Mr Walker: So you will be publishing the advice that you received for all of us to look at, just to make sure we are comfortable that you followed the right procedures in doing this? You will publish the advice you receive?

Ian Pearson: It is not our practice as a government to publish details of particular advice, as you know, Charles - you have been in the House long enough to know this.

Q107 Mr Walker: You will get a freedom of information request.

Ian Pearson: I really do think that you ought to consider whether you are advocating the position of Geoffrey Bindman and Solicitors and whether that is an appropriate thing for you to do in this Committee.

Mr Walker: I am operating from the briefing that I have received. We are here to hold the Government to account and that is what we are doing; I am sorry if you two gentlemen have a problem with that, but that is what this Committee does.

Q108 Chairman: Charles was asking you if you considered these matters before you made the appointment; that is all I think he is asking.

Ian Pearson: The answer that we have given is Yes and we will obviously reply to the Geoffrey Bindman letter in due course.

Q109 Mr Walker: The very final point is that yesterday we had a group of bankers before another Committee. Regardless of what they have done to this economy many bankers are going to receive billions of pounds worth of bonuses this year - they might not be the usual size of bonuses but they will still receive substantial bonuses largely funded by the taxpayer. Is it not obscene that while these billions are being paid out this year we cannot come up with a billion or two to look after the poor pensioners of Equitable Life who have been failed so miserably by the FSA and others?

Ian Pearson: I am sure that there is more to be said about bonuses and you will all be aware of what the Government has previously said, when we have been very clear that we should not be awarding bonuses for failure. We have, when it comes to Equitable Life and the ex gratia payment scheme upon which we have made a decision, not come to conclusions about how much money should be allocated to that scheme. It is simply not possible to do that at this point in time without being able to understand further information in terms of the relative losses. Sir John's work in the actuarial advice that he receives as well will help him to do that. What I can say to you, Charles, is that we do not as a government, as you appreciate, normally provide any redress when it comes to regulatory failure in terms of compensation. We have said in this case that we are prepared to make ex gratia payments, recognising the disproportionate impact that the regulatory failure of Equitable Life has had on individuals. That is a big step forward for us as a government and, as I say, I think the key thing now really is to focus on how we implement that decision.

Q110 Julie Morgan: Ian, what do you think is the response of the policy holders to what the Government has said so far?

Ian Pearson: Obviously we have had numbers of representations from EMAG directly and from the individuals about the Government's response. Clearly there are a number of policy holders that believe they should have full compensation for all losses. What we have to do as a government is to try and strike a balance between the interests of the taxpayer and the interests of policy holders that have suffered loss that is directly attributable to maladministration. Again, I think the key point to stress here is that it is important to make a distinction between where maladministration occurred as a result of regulatory failure and loss and losses can come about as a result of market losses; they can come about as a result of failings in the company management; as well as a result of failure of regulation. Again, this is an area where we need advice from Sir John on this matter. But we think it is right and fair that the taxpayer should only be looking at making ex gratia payments where there is loss attributable to maladministration, not where there is loss attributable to the actions of the company or to market conditions.

Q111 Julie Morgan: This Committee recommended that any scheme should be speedy and simple. Do you think that is what you have come up with?

Ian Pearson: Yes, I do believe that there is ability for the scheme that we want to design to make ex gratia payments to be speedy. I know that in the Ombudsman's Report she talked about a two, two and a half year period before this could be settled. It will be up to Sir John Chadwick to advise us as soon as he feels able in terms of the factors to be considered and the areas that are in his remit. As Yvette made very clear in the Commons when she made the statement, we do want to get on with this; we do not want there to be any undue delay. As I say, my priority has been to focus on ensuring that we can move forward quickly.

Q112 Julie Morgan: Surely this is the most complicated way of addressing the situation that you could use because to determine whether people have been disproportionately affected and I do not think we are sure of what that means at all. Surely you are going to have to look at all the individual circumstances and that is something that is going to delay it enormously.

Ian Pearson: We have asked Sir John to advise us on the factors that need to be taken into account when considering disproportionate impact, and again the Chief Secretary indicated what some of those factors might be in the statement and the questions that followed when she made the statement. I do not want to get into the detail of that because that is naturally Sir John's remit, but I do think that we need to try and take swift action and if there are ways in which we can do this I am sure that Sir John will be advising us in this matter. Again, to get back to a basic point here, there does need to be some distinction to be made between losses that are attributable to maladministration as opposed to losses that are attributable to failings in company management or market losses as well. So there is inevitably some complexity in this.

Q113 Mr Burrowes: But that very distinction was made by the Ombudsman who focused on the maladministration of the regulatory authorities and not the Society. So if you in your ex gratia payments are recognising that it should be focused on those failings of the regulatory bodies, why do you not follow through with the Ombudsman's Report which has made those very recommendations due to those failings?

Ian Pearson: As I outlined earlier, we have accepted a significant number of the Ombudsman's findings when it comes to maladministration. The Ombudsman can speak for herself but my understanding of her position is that she recognises that not all the losses by Equitable policy holders were attributable to maladministration - some were attributable to other circumstances. I do not think that you would expect the UK taxpayer to pay out for a maladministration on losses that were not as a result of maladministration.

Q114 Mr Burrowes: I am not asking that; I am asking about the Ombudsman's report which concerned maladministration of those regulatory authorities, and do you accept the principle that compensation should follow from a finding of maladministration which is focused on regulatory failures?

Ian Pearson: We do not accept the general principle that the taxpayer should underwrite regulatory failure; that has not been normal practice of successive governments. There has been a scheme with regard to Barlow Clowes but there cannot be a taxpayer guarantee for every example of regulatory failure.

Q115 Mr Burrowes: Is it normal not to accept findings of not just regulatory failure but regulatory maladministration and not to compensate following those failures? Is it normal of a government not to accept, through Parliament, the Ombudsman's findings of regulatory maladministration?
Ian Pearson: In the vast majority of cases, government will accept the findings of the Parliamentary Ombudsman, but you would expect - and I think the general public would expect - that when it comes to complicated areas where there are detailed findings and where we as a government take issue with some of them because we have good reason to do so, then it would not be fair on the taxpayer to say, "We will agree with the Ombudsman" even if we do not think the Ombudsman is right in this case, and we have good reasons for believing that the Ombudsman is not right.

Q116 Mr Burrowes: Aside from the complications, did cost have anything to do with rejecting some of the Ombudsman's findings?

Ian Pearson: No.

Q117 Mr Burrowes: When you made your assessment that the ex gratia payments should be based on disproportionate impact, did you make any assessment of the costs?

Ian Pearson: When we came to conclude our policy stance on this - and, as I say, we considered very thoroughly all the findings of the Ombudsman's report - cost was not an issue when we were deciding whether we agreed with the findings of the Parliamentary Ombudsman's report or not.

Q118 Mr Burrowes: Your response to go down the disproportionate impact focus of ex gratia payments, did cost have an influence on that decision?

Ian Pearson: Let me explain how we came to this. Our starting principle is that we do not believe that the Government should automatically compensate for regulatory failure and, as I have said, it has been the practice of successive governments that that is not something that we do - you cannot have a taxpayer underwritten guarantee. What we did believe when we looked at the Equitable Life situation was that we recognised that there are some people who have suffered as a result of the regulatory failure that is documented in the Ombudsman's report and we thought it right to help those that were hardest hit; that is why we came to the view that the best way by which we could determine that is by looking at those who were disproportionately impacted, and that is why we announced the scheme in the way that we have.

Q119 Mr Burrowes: In that assessment of those who suffered most, in percentage terms who would that involve of the Equitable Life policy holders who have suffered most?

Ian Pearson: We do not actually have that information, David, and that is one of the problems in all this area in the sense that the data that will be required, as the Ombudsman again I think admitted in her report, has not been available. That is again the reason why we need Sir John Chadwick to carry out his work.

Q120 Mr Burrowes: So where are the cogent reasons for going down that line to disproportionate impact if you do not have the data now? How can that be a cogent reason for rejecting the Ombudsman's findings and recommendations on compensation?

Ian Pearson: We have explained all the way through the Command Paper on each and every finding - and I am sure you have read the report - the reasoning behind why we either accept or reject the findings ---

Q121 Mr Burrowes: You do not have the data.

Ian Pearson: ... of maladministration or injustice. What you are talking about is something different.

Q122 Mr Burrowes: No. You have rejected, by implication, the Ombudsman's recommendations.

Ian Pearson: Neither we nor the Ombudsman has the full data here and cogent reasons apply to the findings of the Ombudsman - they do not apply to the data itself. As I say, what we need to do now is to determine, after having received Sir John's advice, those policy holders who have been disproportionately impacted.

Q123 Chairman: In terms of what you have just said there - and the Ombudsman has said this to us and it is a good question - if this doctrine that you are now announcing, which is that the Government never compensates for regulatory failure, had been said to the Ombudsman back in 2004 when she was discussing with the Treasury about whether a further investigation should be done, many arguments were put by the Treasury to the Ombudsman as to whether any investigation was worthwhile doing or not. But what was not put was this doctrine that "we never compensate for regulatory failure" because, as she said to us, "If this had been told to me in those terms I might never have done the investigation or at least Parliament could have discussed this doctrine."

Ian Pearson: I tried to check some of the history of this and certainly there is evidence that the Government's views on compensation were made known to the Ombudsman in 2007 and certainly in 2008.

Q124 Chairman: Yes, but that is when the investigation has been running for several years.

Ian Pearson: Can I just say, with respect to people, ever since Barlow Clowes, the views of Government have been pretty clear about their normal practice when it comes to the issue of regulation and whether compensation should be paid or not. I do not think that any government would want to say that there would be an automatic right for compensation in the case of regulatory failure. No government previously has done that and it has not been the practice of this one either, and that has been pretty well known.

Q125 Kelvin Hopkins: On this point about compensation or not compensation for regulatory failure, should there not be a clear distinction between errors of judgment where regulators do what they think is right and it turns out to be wrong, and culpable errors where regulators neglect their duties - I have suggested go off to play golf - look the other way and fail to understand their powers, as we have been told has happened in this case? There is a clear distinction between doing their best and getting it wrong and clearly not doing their best and getting it very badly wrong, as happened in this case.

Ian Pearson: I agree that that is a clear distinction, yes. The issue then is what conclusions you draw from it in policy terms.

Q126 Kelvin Hopkins: The Government keeps on using this general statement that the Government will not guarantee to compensate in cases of regulatory failure, but there are these clear categories of regulatory failure: one which is nobody's fault really, they might not be as skilled as they might be but they have done their best; and then clearly people who have just not done the job. I said it at our previous meeting, that in an era where government has been engendering and driving forward a spirit of deregulation and at best light touch regulation some of these people can say, "The Government is not that bothered, let us play golf in any case."

Ian Pearson: There is part of the point that you are making with regard to negligence and maybe Stephen wants to say something about that because it does touch on legal issues.

Mr Parker: The first point is that there other forms of accountability besides compensation for maladministration and defective regulation than mere process. And going back to the point about the Ombudsman's jurisdiction that the Ombudsman has actually undertaken the investigation and established, and the Government has agreed, that there was maladministration leading to injustice in the case of some of her findings, is a form of accountability from which lessons can be learned from the future. In terms of the legal position, the Committee may be aware that the Law Commission at the moment is considering the extent to which government bodies and other public bodies should be liable for negligence, but the basic position at the moment is that they are not liable for a number of public policy reasons, including the fact that such accountability would lead to very defensive regulation, which would not be in the public interest; and also issues about diversion of scarce public resources. The Law Commission is consulting on various ways in which the law could be moved forward; and I think the Law Commission is suggesting an approach which is based upon a higher standard of negligence akin to the test which the European Court has established and applies in the case of defective implementation of community law.

Chairman: I do not want to go too wide on this at the moment.

Q127 Mr Liddell-Grainger: Paul Flynn asked you on 9 December about compensation and you said, "I do not wish to comment on it at this stage". Somebody, Ian, is going to have to start making decisions on this, are they not?

Ian Pearson: We have made a decision and we announced in our statement that we made earlier this year that we were going to set up an ex gratia payment scheme and we have asked Sir John to advise us on the factors that need to be taken into account, as has been made clear. What I am trying to suggest to you, Ian, is that we have made a decision and what we need to do now is to implement this decision rather than continually revisit it.

Q128 Mr Liddell-Grainger: One of the other parts he mentioned was what are the figures? You still do not know how many people are affected. Is it going to be means tested?

Ian Pearson: Certainly our preferred option is for there not to be a means test. I want to be clear that we are not asking Sir John Chadwick to advise us on whether or not there should be a means test. What we have in mind - and we have discussed this with Sir John - is that as part of his wider role in assessing the extent of losses suffered by different groups of Equitable policy holders we believe that we will inevitably form views on the different ways in which different policy holder classes were affected in different ways. So we did not seek Sir John's advice on the factors as significantly adding to his significant workload, but we think he would be best placed to let us have his views on the extent of the impact on policy holders from the independent perspective. It is not our preferred option to consider means testing, but we need to really consider Sir John's advice; then we need to consider issues of the public purse because we are talking about taxpayers' money here. But we hope that Sir John will be able to give us advice and that it will not be necessary to undertake means testing.

Q129 Mr Liddell-Grainger: What you have just said is a highly complicated scheme. Sir John is not an expert in that field - none of us are. You are looking at possibly means testing parts of policy holders - who have been most affected. Surely you have to bring more into this than that than just to say that this is going to work or it is not going to work here.

Ian Pearson: You have just said we were talking about a means tested regime and what I said to you was that that is not our preferred option and that is not what we want to do and it is not what we have asked Sir John to do.

Chairman: But when the Chief Secretary made her statement to the House she did explicitly refer to taking account of what she called the wider circumstances of policy holders and she went on to talk about those who were basically rich and those who were poor.

Mr Liddell-Grainger: Which is means testing.

Q130 Chairman: And that has led everyone to think, quite naturally, including Equitable Life itself, that they were going to be asked to find out information about the personal circumstances of policy holders; but you are saying now that this is not part of any scheme?

Ian Pearson: What I am saying to you is that it is not part of Sir John's remit to advise us on means testing. As a Treasury, we will consider this as one of the options when it comes to designing the scheme, but our preferred option would be that we do not have to engage in means testing.

Q131 Mr Liddell-Grainger: I am still not clear; I am sorry.

Ian Pearson: What is unclear about that then, Ian?

Q132 Mr Liddell-Grainger: I will tell you exactly what is unclear about this. In the House of Commons then Ruth Kelly said, "This is what we are going to do," and you have now said, "We are not going to have a remit on this; we might look at it but we are not actually going to do that."

Ian Pearson: It was not Ruth Kelly; it was her predecessor.

Q133 Mr Liddell-Grainger: And now you are saying, "Maybe we are not going to go down this route." Why do you not give him the remit to look at it? Why not just bypass all this and say, "Look, just have a look at this and see what you think"?

Ian Pearson: I think it is rightly the job of government to decide how much money to allocate to any ex gratia payment scheme, and it is also the judgment that governments need to make in terms of whether that should be means tested in the future. We need to be clear about what is the role of government and what is the role we are asking Sir John to perform and we are very clear that Sir John's remit is to advise us in terms of disproportionate impact and the other elements of his remit that have been published and are available.

Q134 Mr Liddell-Grainger: Given what the Ombudsman has said about this whole situation I do not have a lot of faith in this; I am sorry. The Ombudsman has been very clear about what has gone on in the past and where we have got to.

Ian Pearson: You can say that, Ian, and I know we have been criticised for the length of time it has taken for a decision to be taken, but I would hope that at least you would want to welcome the fact that we have taken a decision; we have appointed a very eminent judge to advise on the factors that need to be taken into consideration when determining disproportionate impact. We are working in parallel to look at options and to design a scheme; so we are moving forward.

Chairman: We are trying to understand what it is that you have announced.

Mr Liddell-Grainger: Exactly.

Q135 Chairman: I say that quite seriously, Ian. Let me put this gently: I am not sure that the Government quite knows what it has announced ---

Ian Pearson: I am very clear what we have announced. What we cannot announce, Tony, is how much policy holders are going to get because we simply do not have that information. What we do not know is what differential losses policy holders have suffered as a result of maladministration as opposed to other factors, so what we have announced is a process where we can get advice from Sir John in terms of the factors that we need to take into account. But we have clearly announced the fact that we have made a decision that we are going to have an ex gratia payment scheme, and we have announced that as a government we are going to get on with it, and I think that really is a step forward given the previous period.

Q136 Chairman: The Command Paper that you issued says: "The Government recognises that there has been maladministration and the representations it has received suggest that there has been a disproportionate impact on some Equitable Life policy holders." This is where the doctrine of disproportionate impact emerged. So the Government presumably knows - otherwise it would not have said this - that there has been a disproportionate impact on some policy holders. So we would ask which policy holders has it had a disproportionate impact on, otherwise you would not have made that statement, would you?

Ian Pearson: We have had sufficient representations for the Government to come to a view that we think there have been losses and that some policy holders have suffered a disproportionate impact, but I do not think it would be right for me today to prejudge Sir John's work because Sir John is going to advise us on those factors, having had a thorough examination of all the circumstances.

Q137 Mr Liddell-Grainger: But he is not; he is not being appointed to do that. You said that that is not part of his remit on the means testing.

Ian Pearson: He is not advising us on means testing.

Q138 Mr Liddell-Grainger: He should, should he not?

Ian Pearson: He is advising us on the factors that need to be taken into account. If you read the terms of reference I think they are very clear.

Q139 Mr Liddell-Grainger: I think Charles is saying exactly the right thing; we are still not getting to the bottom of this because who is going to make the decisions, who is actually going to look at means testing? The Government has been found wanting in this - we will not go back over history - and surely it should get somebody else to look at this?

Ian Pearson: The Government overall makes the final decisions on the detail of the scheme and that is absolutely right - we are talking about taxpayers' money here and we should never forget that. We have said that we have taken a decision in terms of wanting to introduce an ex gratia payment scheme. We have asked for advice from Sir John, particularly on disproportionate impact as I have outlined the way that his remit has been set, and we are looking at designing an ex gratia payment scheme. But it has to be government that takes the final decisions in this area, and we need to balance interests and to do what we think is right and fair to the taxpayer as well as right and fair to policy holders who have suffered a disproportionate impact.

Q140 Chairman: You have said you are not going to compensate everybody and we know that - that is clear, you are not going to compensate everybody ---

Ian Pearson: I would be very surprised if Sir John came back to us and said that everybody had suffered a disproportionate impact.

Q141 Chairman: It would have been possible to compensate everybody who had suffered a loss, a loss arising from regulatory failure as demonstrated by the Ombudsman - that would have been a proposition, but that proposition you have rejected and you are not going to do that; you are going to compensate some people on an ex gratia basis and those people are in this category of disproportionate impact. What I am trying to find out is, given all that, whether you know, whether the Treasury knows what that category is because we have had difficulty in identifying this as we have been going along.

Ian Pearson: If we knew the answer we would not ask Sir John to do the work.

Q142 Chairman: No, but you have said that there is a category and presumably you have had enough evidence to suggest that there is a category otherwise you would not have announced it.

Ian Pearson: What we have said is that there are a number of factors that need to be taken into account when discussing whether disproportionate impact might have occurred and we need Sir John to look at those and to advise us.

Q143 Chairman: He might say that you have crafted your reply and selected what to accept and what to reject in the Ombudsman's findings to make sure that 90% of policy holders are excluded and therefore the coverage of any scheme is going to be necessarily limited.

Ian Pearson: With respect to EMAG, I do not agree with that and I do not recognise the 90% figure. I would be very interested if you had any views on where that came from. What we have done is taken each finding in turn and subjected it to a thorough analysis. If you look at some of the details of this you will look at, for instance, the fact that in finding 4, there were two cases of injustice that were recognised and accepted by the Government; that one of the key findings of injustice was to do with the Reinsurance Treaty, and I know that EMAG members feel very strongly that that was one of the major contributors to losses. That finding of injustice has been accepted by the Government.

Q144 David Heyes: You mentioned in reply to Ian's question earlier that Sir John's workload would be "significant" - and that was the word you used.

Ian Pearson: Yes.

Q145 David Heyes: Does that mean you have quantified it? Have you put a timescale on it? Is there a budget for it?

Ian Pearson: I was talking to Sir John yesterday about his role and obviously he is reading into his brief at the moment and, as we are all aware, there is a substantial amount to read when it comes to these matters. I am looking to push ahead in terms of making sure that he has all the support that he needs. He was telling me that he will be looking to produce a work plan and he expects that interim reports would give a likely view on timescales; but until he has actually read into his brief and can produce a work plan then I do not think it is possible to give indications on the likely timescale in terms of the question you were asking.

Q146 David Heyes: In the conversation that you had with Sir John yesterday - he is the expert on cogent reasons, he invented it - did that topic come up as part of your conversation?

Ian Pearson: We were both clear that we are not asking Sir John as part of his remit to offer us legal advice.

Q147 David Heyes: Did it come up in your conversation?

Ian Pearson: We both agreed that his remit was not to offer legal advice and it certainly is not to arbitrate between the Ombudsman and the Government where we have departed from the Ombudsman's findings.

Q148 David Heyes: Let me try again. It is hard to imagine that the country's top expert on cogent reasons, which is absolutely at the heart of what he is being asked to look at and is very constrained by the brief you have given him, that that did not feature in conversation with him at all. Are you saying that it did not feature at all in your conversation with him?

Ian Pearson: I think you are missing the point here, David.

Q149 David Heyes: I do not think so!

Ian Pearson: Because in my experience of dealing with lawyers they are very clear about what their brief is and what their brief is not, and we have been very clear in terms of our terms of reference with Sir John, which we have published. At the risk of repeating myself again, we have been very clear that we are not asking Sir John for legal advice.

Q150 David Heyes: It is almost going to become rude if I keep pressing the question - you still have not answered it. Did the issue of cogent reasons feature at all in the conversation that you had with Sir John yesterday?

Ian Pearson: Cogent reasons no. I think the conversation probably went something like, "Yes, John, we are quite clear that you are not offering us legal advice" and he says, "Yes, that is certainly my view."

Q151 Mr Walker: Then why do you appoint a judge? If you do not want legal advice why appoint a judge? What was unique about him?

Ian Pearson: We believe that we need independent advice and I think Sir John will be an excellent person to give us independent, impartial objective advice and to give these complex questions that we are asking him in terms of his remit a forensic examination. So I have every confidence that he will be able to fulfil his remit in an efficient and excellent manner. It could have been somebody who was not a judge but I think that the independence that comes with appointing a member of the judiciary is something that I would expect the Committee to welcome.

Q152 David Heyes: Can we take it, then, that Sir John, from your conversation yesterday, is entirely comfortable with the brief that you have given him?

Ian Pearson: Yes, Sir John is happy with the brief.

Q153 David Heyes: He did not question it or challenge it in any way?

Ian Pearson: No, he is happy with the brief. He was very clear to me that he is going to be his own man and completely independent and objective and I would expect nothing less - that is exactly what we want to see.

Q154 Chairman: One of our witnesses said that it would give a "judicial veneer" to the exercise and I know from conversations we had some years ago with Chief Justice Woolf at that time that he is very concerned about judges - and I suspect retired judges too - being used to give judicial veneers to administrative exercises.

Ian Pearson: I think that is an uncharitable and unworthy comment to suggest that for somebody to be honest ---

Mr Walker: That is not a good enough response, Minister; it is in the Code of Conduct. It is not uncharitable; it is in the legal Code of Conduct about how judges and former judges should behave.

Q155 Chairman: I am not in any way being disparaging; I am sure he is absolutely excellently qualified in all kinds of ways, but there is that issue which has been raised not just by me but by distinguished judges in the past.

Ian Pearson: Firstly, Charles, I think you are being pathetic and I think we could do with a little bit less of the schoolboy behaviour and more of looking at these seriously.

Q156 Mr Walker: Minister, you are a Minister of the Crown and you are really ---

Ian Pearson: And you are a Member of Parliament and you ought to act like one.

Q157 Mr Walker: ... diminishing your position right now.

Ian Pearson: You are diminishing your role as a Member of Parliament.

Mr Walker: And you are coming out of this far worse than I am.

Chairman: Order! Could I say to both of you that we have limited time - at most we have about seven minutes left and we do not want to waste it on this kind of stuff.

Q158 Paul Rowen: How many staff do you propose that Sir John will have working with him?

Ian Pearson: Sir John has an assistant at the moment who is working with him and reading through papers at the same time. We are discussing with him what resources he will need. He will obviously need actuarial support but we want to make sure that he has an office and the support is sufficient to enable him to do the job in a speedy and effective manner.

Q159 Paul Rowen: Presumably to arrive at a definition of disproportionate every one of the policy holders of actual policies is going to have to be looked at. If you have not already decided what is disproportionate how do you envisage that process to operate?

Ian Pearson: I do not think it is necessarily the case that you would have to look at each individual policy holder's circumstances; I think it is probably possible that you can look at classes of policy holders, but that is going to be a matter for Sir John to decide how he wants to approach this.

Q160 Paul Rowen: How can you do that if you cannot tell us what is disproportionate? How, without having a proper review of every policy holder's case, can you arrive at a decision, unless your disproportionate has already been decided and it is not a definition that anybody else can sign up to?

Ian Pearson: Sir John believes that the remit that we have given him is clear and that he can perform the role that is required of him within that remit. He is going to advise us on the factors that need to be taken into consideration when considering disproportionate impact.

Q161 Paul Rowen: How can he determine those factors without looking at the cases, unless you have already determined what will be pertinent and what will not be allowed or not?

Ian Pearson: As I suggested, Paul, he may well decide that he wants to consider classes of policy holders rather than each and every individual case and I think a number of people have suggested that that might be a sensible way forward ---

Q162 Paul Rowen: How many classes would you envisage for doing that?

Ian Pearson: ... but it will be a matter for him to decide that. As I say, I do not want to prejudge what Sir John is going to do and how he is going to do it; I think these are matters that are rightly left to him.

Q163 Chairman: How long has he been employed for?

Ian Pearson: We have not put a timescale, as you know, on Sir John's appointment. We do not want this to be a "Bloody Sunday" inquiry; Sir John does not want it to be either. He wants to get on with the job and we are keen for him to do that and we want him to be able to advise us as soon as he feels able to do so.

Q164 Chairman: Are you paying him on a daily basis or are you paying him for the whole job?

Ian Pearson: I am not sure of the detail of the remuneration.

Q165 Chairman: I bet he is!

Ian Pearson: I am told that he is paid on a fees basis.

Mr Parker: It is standard rate, so it is for the whole exercise; he is paid on - I do not know whether it is daily or hourly off the top of my head.

Q166 Chairman: It is going to run up to quite a figure, is it not?

Ian Pearson: We will have to see what the final figure is. What I would want to say to the Committee, however, is that we believe it is the right approach to have this independent and objective advice and if it is going to cost some money to do that then I think that is needed.

Q167 Paul Flynn: Do you think a retired judge would attract more public trust than, say, a retired banker, a retired estate agent or a retired MP?

Ian Pearson: It is a good point. Sir John is a person of enormous experience and integrity and I think that people can feel confident that he will approach his task in an independent and objective manner and I think that that is one of the factors that we wanted to take into consideration when we were deciding who to appoint. I tend to agree with you that certainly at the moment a retired banker would not be high on the list of people's choices for doing this sort of work.

Q168 Paul Flynn: I should repeat my own interest in this; I have a financial interest, as do two other members of the Committee. One of the criticisms made by a journalist we invited here, but unfortunately he could not attend, was that the public perception of those who are clients of Equitable Life is that they represented a rich segment of society in general terms. Was this an element in your decision? Would you agree with that; is there any evidence of that; and was it an element of the decision to go for groups of people, one presumes, who are suffering financial hardship now?

Ian Pearson: There may be some public perception that that is the case but certainly from looking in detail at the people who have written to me as a Minister and as a Member of Parliament there are certainly many people who you would not regard as being rich at all and who have found themselves in very straitened circumstances as a result of having a policy with Equitable Life.

Q169 Paul Flynn: A final, brief one: what effect do you think it will have on regulation in future, with this change of policy that you have announced that the Government will accept that they should compensate in cases of failure of regulation, on the conduct of the regulators? Will they be excessively cautious in future if they know they are going to cost the country, the taxpayer billions of pounds if they take a decision? The case I have in point, there was one point in this where there was a possibility of Equitable Life being bought out or continuing and the regulator allowed them to continue into the market. He might have been right, he might have been wrong, but with hindsight we know that the regulator was wrong. Do you think that the regulation in future would be poorer because they will not be able to take a balanced decision, they will be excessively taking decisions that are cautious?

Ian Pearson: There are two points I want to make in response to that. Firstly, we have been very clear that this is an exceptional case and it is not normal practice for government to provide redress for regulatory failure through a payment scheme - there are other means, as Stephen has outlined already. I suppose the second point I would like to make is the broader point about regulation and to stress the fact that the regulatory regime that is in place now is very different to the regulatory regime that we are talking about when we come to the Ombudsman's report on a Decade of Regulatory Failure. There were substantial changes that had taken place. That is not to say that there are not further lessons to be learned in terms of strengthening regulation, but we do believe that it is important to recognise the fact that things have moved on substantially in terms of regulation since the period of time that we are talking about.

Q170 Chairman: Thank you for that. Just as we end, can you confirm that Sir John's advice to the Government, even when you find that advice unhelpful, will be published and that the representations the Government makes to Sir John will also be published?

Ian Pearson: Certainly it is our expectation that Sir John's final report will be published. We have said that we want to produce interim updates and we remain committed to doing that. So I hope that that provides you with the assurances that you seek in that matter.

Q171 Chairman: Textual analysis will reveal whether it does or not. Despite the moment of excitement, we have had an enjoyable and interesting session with you and we are grateful to you for coming along; thank you very much.

Ian Pearson: Thank you.

Chairman: Thank you, Mr Parker.