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Lord Haskel: I spoke to this matter at Second Reading. The noble Lord, Lord Joffe, has put the case so well and in such detail that there is no need for me to cover the ground again. However, I indicate my support for his amendment.

Lord Jenkin of Roding: Perhaps I may offer a word or two, having spent some years as chairman of a mutual life assurance company. I listened with great interest to the noble Lord, Lord Joffe, who made a convincing case. In the case of a mutual company, the policyholders have all the power in their hands. We were a statutory company. The directors were elected by policyholders and only policyholders had votes at the annual meetings. We were under considerable restraints, both under our rules and general laws, to the extent to which the board could use the policyholders' money in, for instance, taking over another company. There had to be procedures before

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a court with an assurance that the policyholders had been fully informed, were properly consulted, and had consented to the change.

If people want the benefits of a with-profits policy, they should go to a mutual company. Perhaps I may add that I now have nothing whatever to do with the company I chaired, nor have I been briefed by it. However, the problem faced by directors is what to do when the same policyholders learn that a bid has been made for their company. Policyholders want the money now. They put themselves into precisely the position described by the noble Lord, Lord Joffe, concerning the "Pru". I have always found that to be a disappointing trait in policyholders.

I had a short answer to questions I received in correspondence or those raised at an annual meeting. I would say, "You are in this for the long term. You have taken out a long-term life policy or pension policy in order to protect your family or yourselves in your old age. You cannot have it twice. If, when a company comes in and buys up the company, you take it as a payment, you are then a policyholder in a proprietary company and the amount of money you would have had when your policy matures will be reduced. You cannot have it twice".

I have a great deal of sympathy with the point made by the noble Lord, Lord Joffe. I do not know whether it is susceptible to rules. However, it seems to me that the mutual companies are fighting a losing battle. It has been the same as regards the building societies. A few have succeeded--the Nationwide remains where it is--but most have succumbed. Why is that? Because most of their members wanted money now rather than money in a few years' time. My faith in this form of saving in modern society has been somewhat undermined, notwithstanding that of course very large sums of money are invested regularly and entirely properly for the long term--until a bidder comes along and makes an offer of money now.

I believe this to be a real problem and I hope that, in the course of its general work of protecting consumers and giving out information, the Financial Services Authority will be able to indicate that those who take out life insurance and pension policies for the long term should almost always be advised to stick with them for the long term rather than to take a quick buck now.

5.30 p.m.

Lord Lipsey: I am aware that after such expert speeches, a few words from me may be perceived as possibly otiose. However, I believe that it is worth emphasising that the Committee will be grateful to the noble Lord, Lord Joffe, for raising this matter.

In this area we are looking at very big bucks. Some figures were published in The Sunday Times: £7.8 billion for the Prudential; £1.4 billion for Britannic Assurance; £3.8 billion for CGU; £2.1 billion for Legal & General and £2.1 billion for AXA. That total would just about fund the defence budget for a year. These are very large sums. Surely in principle it is intolerable that such sums should be

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dealt with by secret deals made in the back room, free from the light of publicity which would allow all those with an interest to express their opinion. No doubt the Minister will address whether the Bill deals with this question.

While I do not necessarily press this particular amendment, I hope that in the course of our debate this afternoon we shall have at least forced the issue out into the open. If we ensure that the matter is dealt with, we shall have done a service.

Lord Blackwell: While I understand the sentiments that lie behind this amendment, I have grave doubts about its practicality. If directors are conducting a business in the interests of their shareholders, the FSA has the right and obligation to put controls around the use of reserves so as to protect policyholders. However, to impose an obligation to consult with-profit policyholders on the use of those funds seems to me to present a complication in terms of who the directors are supposed to be serving and what would be the rules and appropriateness of taking decisions on the use of those reserves.

I believe that it would be cleaner if policyholders who have taken the decision that they want to invest their money in a with-profits company then left it to the directors of that company to run the business so that it delivers returns in the long run that continue to attract new policyholders, and for the FSA to establish rules to ensure that policyholders are protected, rather than confusing the issue by imposing a duty of consultation. I can see that situation ending in a great deal of confusion and added bureaucracy on how decisions are taken.

Lord Grabiner: I should disclose a professional interest in some of the questions that have been raised by this proposed amendment. Having said that, I wish to comment on the drafting of the amendment rather than on its underlying merit. Perhaps I may say only that I certainly agree that the noble Lord, Lord Joffe, has identified an area of real concern here.

So far as subsection (a) is concerned, on the face of it, it is confined to the need to make rules requiring an authorised person to consult in relation to the,

    "appropriation of reserves or surplus assets to shareholders".

The example given by the noble Lord in his opening remarks concerned the activities of the Prudential, in particular the payment of victims of mis-selling. Subsection (a) would not help because the victims of mis-selling are generally not shareholders--they may be, but that would only be by chance. In that regard, the drafting is not adequate. I can think of one or two other examples, such as the use of such moneys for the payment of windfall tax. It may be that we have not yet seen the end of windfall tax. If we have not, this would obviously provide a way of meeting those liabilities. Furthermore--dare I say--there is also the possibility of such moneys being used for the purpose of paying directors' bonuses. However, I had better not say anything more about that. However, in subsection (a), the use of the word "shareholders" is not a satisfactory piece of drafting.

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As regards subsection (b), I should like to home in on the word, "rights". My concern here is that the expression, "rights of such policyholders" is simply too vague and uncertain for the following reasons. First, there is no statutory definition of the expression, "reasonable expectations" in the context of a discussion about the reasonable expectations of policyholders. I believe that the only place where an attempted definition can be found is in the context of the obligations cast on a scheme actuary when he comes to advise the trustees; otherwise, one is not told what that expression means. It obviously includes statements that may have been made at the point of sale, but it could include all kinds of other things as well. Indeed, in a sense it is a highly subjective point, because one policyholder's expectation may bear little or no relation to that of another. That is one area of uncertainty.

The second area of uncertainty that I see is that, if these are rights as defined in subsection (b), I suggest that it will almost certainly be the case that what is being done with the money should not--ex hypothesi--be done with the money. That is because if the policyholders' rights are being infringed, the money should not be used for any other purpose. That leaves an inherent incongruity in the drafting which presupposes that there are rights which, so to speak, sit outside rights. That, of course, cannot be right.

The third area of uncertainty that I have identified is that it is not at all clear from the drafting of subsection (b) whether it would encompass the manner in which the money was invested. The subsection states:

    "decisions on the application or investment of assets or reserves which could adversely affect the rights of such policyholders".

That might--I suggest that it would--encompass poor quality investment. However, how does one judge that or draw attention to it? How can one substitute oneself for the person whose professional role may be precisely to deal with the investment of those assets?

With respect, I suggest that the drafting is not adequate. However, viewed as a probing exercise, perhaps I may say that the amendment raises extremely important questions.

Lord Elton: Perhaps the noble Lord, Lord Joffe, could offer a little further clarification on an important issue? I apologise to the noble Lord if I should have gathered this already. If the policyholders are to be able to require the authorised person to be accountable to them, that suggests that the policyholders will hold something approaching a veto. The noble Lord may have already explained this, but what I cannot see from the drafting of this amendment is whose will is to prevail where there is a conflict of opinion between the policyholders and the shareholders? Either a nihil obstat, as it were, will prevail, or someone on the board must have the last word.

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