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Mr. Butterfill: My hon. Friend makes a point about the information from the scheme. I am sure that he will agree that many scheme trustees and actuaries gave misleading information because they saw an opportunity to get rid of some of their liabilities and gave an assessment of the value that was lower than reality.
Mr. Greenway: That is true. There is a problem in some cases because schemes merely sent a cheque, so there is no other information, and there is disparity between what it cost to transfer out of the scheme and what it cost subsequently to transfer back in. That is all old territory and we accept that.
I suggest to the Economic Secretary that the problem lies in the insistence by the Financial Services Authority and the PIA that if--
Mr. Willis:
Will the hon. Gentleman give way?
Mr. Greenway:
In a moment. I want to make an important point. The regulator is saying that if the financial viability test reveals that the advice was reasonable, the policyholder should still be sent a questionnaire asking him to recall exactly what was discussed at the time. We understand why: in those days, the standard of record-keeping was not so high and we did not have the detailed files that we have now. PI insurers have taken great exception to the questionnaire because they see it as an admission of guilt--a confession that there might be something wrong. Of course, that wholly undermines the legal basis on which the PI insurance was underwritten and generally predicated.
In many cases, it will be clear from a simple look at the financial viability test that the advice given was bad and that compensation is due. However, it will speed the phase 2 process considerably if we have the financial viability test without the questionnaire, or perhaps with a questionnaire that is phrased rather more sensibly than the one now proposed.
I ask the Economic Secretary to consider two other crucial points. First, in suggesting that the arrangements for phase 2 should be marginally different from those for phase 1, we are not saying that phase 1 was wrong. It is not our intention to criticise the way in which phase 1 was conducted. My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) and I have had this argument many times. I have always taken the view that under phase 1, the majority of cases were clearly going to require compensation. As I have said in the House before, I am appalled that so many insurance companies accepted much of the business in question. They must have known that it was wrong for them to do so.
Phase 2 is quite different. Many of the problem cases are transfers. The House passed the primary legislation that provided the opportunity to transfer, so Parliament must have thought that it was a worthwhile exercise. In effect, however, to judge by the way in which it seems that phase 2 is likely to be conducted, it is almost inevitable that almost all the transfers will be non-compliant. That cannot be right. We are not in denial; we are simply asking whether things can be done fairly and sensibly.
The second point involves the serious problem of professional indemnity insurance. No one has yet mentioned the Rothschild Assurance plc v. Collyear judgment, which was passed on 29 September. I am not surprised that no one has referred to it because these are very technical matters. That judgment effectively says that it is in order for an IFA to give a blanket declaration to his PI insurer. Until that judgment, PI insurers were refusing to accept blanket declarations. The consequences of what has now happened are extremely dire.
Our business faced a threefold increase in its premium. We managed to make our own blanket declaration before the end of October and negotiated a better arrangement elsewhere, but only with a £25,000 excess on each and every claim. That is now commonplace in the market. If we are not careful, we shall find that IFAs, whether or not they survive the phase 2 review, will be driven out of business because they cannot afford the PI cover. The cover that they have is not adequate, and it may well prove unacceptable to the regulator because the excess is too great in relation to the total volume of business.
We have to restore some stability to a collapsing professional indemnity insurance market. That is why resolving the problem of the questionnaire in respect of the financial viability test is utterly crucial. The PI insurers have taken grave exception to the questionnaire, but I hope that in the few weeks that we have left before the phase 2 process starts--we are not asking for it to be delayed--we can find an acceptable solution. My hon. Friend the Member for Beckenham (Mrs. Lait) said that the Association of British Insurers is still not satisfied with the detailed arrangements, a point which it made to the all-party insurance and financial services group only two weeks ago, at our previous meeting.
Mr. Laurence Robertson (Tewkesbury):
I wanted to take part in the debate because I believe that a major injustice is being inflicted, especially on independent financial advisers, on some insurance companies and possibly on a great many policyholders.
Like many hon. Members who have spoken, I make it clear from the outset that people who were genuinely mis-sold pensions need compensation, and we must all support any moves towards that. To provide adequate and fair compensation, without destroying many independent financial advisers and without penalising other policyholders, the review must be fair. I believe that it is not.
I shall outline some ways in which the review is unfair, both in its concept and its application. There is an automatic assumption that pensions were mis-sold; indeed the title of the debate is "Personal pensions mis-selling". The letter that companies are forced to send to their clients is headed "Your Pension: Were you badly advised?". Mis-selling is presumed to have taken place, before the company has even had a chance to get a response from its clients. It is assumed to be guilty in every case, without those cases having been proven.
Consideration of how the process starts perhaps explains what I am getting at. The client does not approach the company with a complaint, as is the case in every other walk of life. The company, as we have heard, has to write to all its clients, in a prejudicial way, inviting them to request a review of a policy which they may have been totally happy with.
That process not only undermines companies and the industry, which is not in the best interests of the public, but is grossly unfair and against the spirit of natural justice. Companies are required to badger their clients into requesting reviews, even though many of them have shown, and will show when contacted, that they have no interest at all in such reviews.
Once a request for a review has been received, the review begins and firms are, in the words of the Economic Secretary's letter to hon. Members dated 14 October, required to put matters right if they have broken rules in force at the time of giving advice, and if the investors concerned have suffered financial loss. In my view, however, the rules which prevailed at the time the advice was given were not rules at all--they were guidelines.
People in large companies were employed to sell pension plans, although, as I said in an intervention, that is not strictly true because they were self-employed and existed on that basis with the blessing of the regulator and the Inland Revenue. They were not taken on as advisers, nor as consultants; they were salesmen who often worked on a commission-only basis, and were rewarded when they made sales and fired when they did not. There are differences between the way in which people were allowed to operate at that time and the stricter conditions that they now have to work under.
The practice of best advice was introduced in 1986, but if the regulator had been serious about ensuring that best advice was given he should have introduced a
professional qualification for financial services at that time. I understand that such a qualification exists now, but it was barely a requirement for the selling of insurance products during the period covered by the review--1988-94.
It is therefore questionable whether the rules referred to in the Minister's letter were broken. It is my submission that, 10 years on, it is virtually impossible to assess exactly what advice was given, and even more difficult to judge that advice against the background and the economic conditions that prevailed at that time.
A judgment on whether a pension was rightly or wrongly sold should be made against growth rates at that time and not against current rates. A personal pension plan sold in 1988 may have appeared to all concerned far more attractive an investment than it does now, especially given the raid that the Labour Government have made on ACT credits.
The advice given during the period in question was somehow supposed to take into account factors that could not have been known at the time. The decisions taken at the time must be put in context. It is not right to penalise someone for giving the best advice at that time, even if it did not turn out to be correct. It is a long-standing principle of British justice and democracy that legislation should not be retrospective. It is not fair to judge the sales of pensions in the 1980s against the standards and penalties that apply in the 1990s.
Even if it were possible to look back 10 years accurately, a financial comparison cannot be made. The review must compare the actual and stated provision offered by an occupational pension scheme with the likely benefits of a personal pension plan. However, that is not a comparison of like with like. Growth rates have fallen from their 1988 level; personal pension plans may compare less favourably with occupational schemes at today's level. But what if growth rates increase over the remaining life of the pension plan? How would the two then compare? It is impossible to say, so it is impossible to satisfy the second requirement in the Minister's letter--that a financial loss must have been suffered by the investor before compensation is payable.
The only time such a judgment can be made is when the person retires and draws on that pension. A comparison made in any other way is pure guesswork, and is unfair to the firm and possibly to the policyholders. It is like accusing someone of murder when the victim has not yet died.
That is especially so during the second phase of the pension review, which considers the cases of younger people. Younger people may have 30 years to go before they claim their pension. How on earth can an estimate be made of what their pension will be worth in 30 years' time? What about the effects of inflation? Younger people will not stay in one job--as people did years ago--and that will have an impact on the value of an occupational pension. Personal pension plans are flexible in that they are linked to the person, not the job. Occupational schemes, for all their merits, are not.
Are charges for a transfer from one occupational scheme to another to be taken into account when assessing the relative values? Are they judged separately for every person for whom the review is being carried out?
Precisely how has that been carried out? How do the regulators know to which company individuals are likely to transfer, or for how long they will stay in their present job, to which the occupational pension is linked?
A further consideration when making a comparison between occupational and personal pensions is the viability and sustainability of occupational schemes. Some schemes, which could be called in-out schemes, have recently come under pressure, and their continued funding puts pressure on the resources of the services provided by the organisations that run them. The teachers' pension scheme and the police pension scheme are two such examples. Are those carrying out the review able to judge the financial and non-financial aspects of the respective schemes? I suggest that that is impossible.
What about the other benefits that a private pension plan offers which are not merely financial? Such benefits include the flexibility that such a plan offers, allowing policyholders to draw their pension at any time between the ages of 50 and 75. How many occupational pension schemes offer that degree of flexibility?
Provision for early retirement is now threatened in a number of these in-out schemes. Is allowance made for that when calculating the respective worth of occupational schemes and private pension plans?
What about the death-in-service benefit comparisons? People dying in their 20s would undoubtedly have more money credited to their estates from occupational schemes than people in private schemes; but people dying in their 50s could have accumulated far more capital in private schemes than they would have in occupational schemes. How have the regulators assessed that factor?
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