Equitable Life

Nick's Speech in the Backbench Business Debate

Nick Herbert (Arundel and South Downs) (Con)

 I congratulate my hon. Friend the Member for Harrow East (Bob Blackman) on securing this debate. I was pleased to support his application for a debate in Back-Bench time because of the importance of this issue to a large number of my constituents who, as Equitable Life policyholders, have suffered loss. They remain gravely concerned that, although in many cases they have been partially compensated for their loss, they have not been fully compensated or compensated at a level that they believe to be just. It is important to restate, as many hon. Members have done, that these are responsible individuals who invested and saved in good faith and with a reasonable expectation of a fair return. They have not in any sense behaved irresponsibly, and did not seek to make investment decisions that had an expectation of an element of risk. They found themselves suffering significant losses, many of which have resulted in hardship, through no fault of their own.

I wish to raise two points in addition to the excellent points raised by my hon. Friend and others. First is the issue of accountability. Regulatory failure was identified in the ombudsman’s report, and that single fact informs us all in this debate that there was maladministration. How is that regulatory failure to be dealt with, and how will future regulatory failure be prevented, if those who are responsible for that failure—ultimately in this case, the Government of the day—can evade liability for that failure? This is, of course, a matter of justice, as my hon. Friend the Member for Richmond Park (Zac Goldsmith) said, but it is also a matter of good governance and accountability, because when institutions for which the Government are responsible fail, the Government must accept responsibility.

The Government were, of course, obliged to step in when bailing out other financial institutions, because a risk to the economy would have arisen had they not done so. Nevertheless, for individual policyholders of Equitable Life there seems to be an unfairness, because while those who may have been depositors or shareholders in banks will receive compensation and redress, those who have saved in good faith but relied on the effective regulation of the vehicle in which they were investing are not receiving full compensation, and that cannot be right.

My second point is about reasonable expectation. It is not as if these policyholders have been told that they do not have a case; it is not as if we are coming to the House to plead, once again, on the issue of principle. The issue of principle has been addressed and settled. The ombudsman has said that there was maladministration, and the Government have accepted the issue of principle because of the level of compensation they provided.

We have the ombudsman’s report and the Conservative party manifesto that pledged compensation. I recognise that this Government set up the compensation scheme, and that they had to address the fiscal environment responsibly. Nevertheless, it remains a continuing source of concern that such a small proportion of many of my constituents’ losses have been addressed, and that they have complete uncertainty about whether there will be further compensation in future. Nobody turns around to my constituents and says, “We will not do this any more”, and they are left with the uncomfortable sense that it would be very convenient if they simply went away or, in many cases, actually died. Thousands of policyholders have died in the wait for compensation, and we have no finality to the situation. Given the reasonable expectation that was set up, the manifesto promise and the ombudsman’s report, it is entirely reasonable to ask on behalf of our constituents whether we can have a timetabled scheme to say, “We will bring closure to this matter.”

I am happy to stand up and say that that closure may not be for 100% of the losses accrued. Many of my constituents might disagree with that, but we must have regard to the fact that there is a continuing deficit and will be for the next three years, and that there are other spending priorities. Nevertheless, it seems that compensation of only 22%, and the ongoing uncertainty of whether there will be any further compensation at all, is deeply unsatisfactory.

Mrs Gillan Mrs Cheryl Gillan (Chesham and Amersham) (Con)

 Does my right hon. Friend agree with my constituent who e-mailed me and stated:

“If we were to receive this money it would not be lost. I am sure it would soon find its way into the economy at large and would not languish in savings accounts because we’ve done the saving already!?”

Nick Herbert

My right hon. Friend’s constituent makes a good point and it is true that the compensation that the banks have had to pay, for example in relation to mis-selling payment protection insurance, has had a beneficial effect on the economy by putting cash into people’s hands, but that is by the bye. As many have said, this is a matter of justice, but also of accountability and good governance. We cannot allow a situation where the regulation of an institution such as Equitable Life fails and no one will step up to the plate and say, “We accept responsibility for that failure” even though thousands of people have been hurt by it. That is the long and short of the story. The Government have a duty. They had to balance the interests of taxpayers fairly, but there is a strong feeling in the House, and among many of my constituents, that more must be done.

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The Economic Secretary to the Treasury (Andrea Leadsom)

I add my congratulations to my hon. Friend the Member for Harrow East (Bob Blackman) and the hon. Members for Leeds North East (Fabian Hamilton) and for Eastbourne (Stephen Lloyd) on securing the debate. Their tireless work on this important issue is greatly appreciated by our constituents. Prior to my ministerial appointment, I was a member of the all-party group on Equitable Life policyholders and a number of my constituents have been badly affected, so I am deeply sympathetic to policyholders’ losses in this sorry tale. I shall explain what the Government have done to resolve the long-standing issue of Equitable Life and set the record straight on some of the history.

This situation has been a key priority for the Government. While Equitable remained solvent and continued to pay premiums to its members, its problems caused a great many of its policyholders to suffer significant emotional and financial distress. When we came to office, we made a commitment to implement the ombudsman’s recommendation that the Government should make fair and swift payments to Equitable Life policyholders in recognition of the part that the Government played in Equitable’s problems. Those payments were swift, in that within six months of taking office, we introduced the Bill that became the Equitable Life (Payments) Act 2010, and payments started to be made to policyholders in June 2011, which was within six months of Royal Assent. They were also fair because the scheme’s rules are based on the Government’s full acceptance of the parliamentary ombudsman’s findings of maladministration and, importantly, on the assumption that all policyholders would have decided to invest elsewhere had the maladministration regarding regulatory returns not occurred. Of course, that is a conservative assumption.

The ombudsman did not quantify the relative loss, which is the difference between the amount received by Equitable Life policyholders and what they would have received if they had invested in the same way in a similar company, but this Government assessed the total as £4.1 billion. That was significantly more than the final figure of £340 million that was arrived at under Sir John Chadwick’s methodology, which was based on the previous Government’s limited acceptance of the ombudsman’s findings. In the 2010 spending review, after taking account of the need to be fair to all taxpayers, we announced that up to £1.5 billion would be made available for payment to eligible policyholders.

Mr Christopher Chope (Christchurch) (Con)

Is my hon. Friend going to address the part of the motion that calls on the Government to pay full compensation n the next Parliament? The right hon. Member for East Ham (Stephen Timms) did not deal with that point, but our constituents want it to be addressed.

Andrea Leadsom

Yes, I am.

In line with representations received, out of that £1.5 billion, we covered the relative losses of the with-profits or trapped annuitants in full. Those annuitants were unable to move their funds elsewhere or to mitigate the impact of their losses by seeking employment. They were also generally the oldest policyholders. The remaining available funding, on the advice of the independent commission, was distributed pro rata to other policyholders, representing 22.4% of their relative loss. I know that that was deeply disappointing to many. These difficult decisions were taken in the light of the position of the public finances and in the interests of overall fairness to all taxpayers.

The motion notes that

“the Parliamentary Ombudsman recommended that policyholders should be put back in the position they would have been in had maladministration not occurred”.

However, the ombudsman went on to say that the impact on the public purse should also be taken into account when considering payment. She also stated that she was acutely conscious of the potential scale of what was recommended. She has subsequently written to the all-party group to say that the Government’s decisions on affordability and eligibility cannot be said to be incompatible with her report.

I congratulate all Members who contributed to the debate. It is clear that they have been assiduous in representing their constituents and have done an excellent job. My hon. Friend the Member for Southend West (Sir David Amess) talked about Ernst and Young as the auditors of Equitable, so he might be interested to note that in 2010, for its part in Equitable Life, it was fined £500,000, plus costs of £2.4 million, and received a reprimand by the accountants’ joint disciplinary scheme.

The hon. Member for Airdrie and Shotts (Pamela Nash) asked for a regional breakdown of amounts paid. No breakdown by region has yet been compiled, although we could produce a basic one if that would be particularly helpful. However, I assure her that regionality does not influence the scheme’s operation in any way.

My hon. Friend the Member for Harrow East, as well as the hon. Member for Coventry North West (Mr Robinson) and my hon. Friend the Member for Southend West, talked about the situation for the pre-1992 annuitants and the fact that they are elderly and financially vulnerable. The first regulatory return from Equitable Life that would have been different had there been no maladministration was that of 1991. This was available on request from Equitable Life from mid-1992 and could not, therefore, have been expected to influence investor decisions before late 1992. Therefore no relative loss was suffered by this group. However, as hon. Members have recognised, the Government agreed that this group of pre-1992 annuitants, although they are not affected by maladministration, have suffered significantly from a loss of income that they would have expected. For this reason the Government made an exceptional ex gratia payment of £5,000 to this group, with a further £5,000 to those on pension credit, in December 2013.

The hon. Member for Leeds North East and the right hon. Member for Knowsley (Mr Howarth) raised the question of compensation for the Icelandic bank savers in Icesave and why Equitable Life savers are being treated differently. The ex gratia payments to UK depositors in Icelandic banks were made as a result of a decision by the previous Government to guarantee all qualifying retail deposits specifically to protect the financial stability of the UK. The financial compensation scheme was simply the agent for these payments and we expect to recover all those sums from the Icelandic banks and are continuing to do so.

Specifically in the case of failed banks and why they receive compensation, the Financial Services Compensation Scheme is funded by a levy on financial services firms, so again those compensations do not come from the public purse.

In answer to the hon. Members for Moray (Angus Robertson) and for Airdrie and Shotts who asked when the scheme stops tracing people, all policyholders are either written to at their last known address or put through electronic tracing methods, such as looking them up against the electoral roll. Attempts are made through the Department for Work and Pensions to trace those owed more than £250. I should tell hon. Members that about 50% of the remaining policyholders are due less than £100.

My hon. Friend the Member for Poole (Mr Syms) asked whether we could re-allocate the remaining £500 million. That remaining £500 million is to make ongoing payments to annuitants for the duration of their annuity. Finally, the hon. Member for Stretford and Urmston (Kate Green) and my hon. Friends the Members for Bromley and Chislehurst (Robert Neill) and for Southend West asked what we had done to ensure that people were not put off the idea of saving for their retirement. As hon. Members know, the Government have undertaken a fundamental reform of the regulatory system, and put in place the Financial Services Act 2012 to establish a new system of specialised and focused financial services regulators. They abolished the FSA and set up new regulators within the Bank of England and the independent conduct of business regulator, the Financial Conduct Authority. These reforms are designed to ensure that the conduct of firms, and with it the interests of consumers and participants in our financial markets, are at the heart of the regulatory system and are given the priority that they deserve.

The recent news on the improvements that this economy has made since 2010 is to be welcomed and shows that this Government’s long-term economic plan is working, but we have a long way to go to restore the public finances, and the public purse remains very constrained. It is right that we have taken action on the Equitable issue, but we must balance this with the need to continue to address the difficult position of the public finances and the impact on fairness to all taxpayers. That is why his Government have no plans to change the funding available to the payment scheme. Our focus is rather to complete the small number of remaining payments. We have continued to make excellent progress with the scheme itself. Only this week I was pleased to report that over £1 billion has been paid to nearly 900,000 eligible policyholders.

In conclusion, I genuinely have deep sympathy with those who carefully saved for retirement and are not receiving the income they expected. Resolving the Equitable Life issue, and doing so swiftly and in a way that was fair to all taxpayers, has been a priority for the Government.

You can read the Hansard of the full debate here.