RUTH KELLY MP, MR JON CUNLIFFE AND MR ROBIN FELLGETT

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 Treasury.
  (Mr Cunliffe) Jon Cunliffe, Managing Director of Financial Regulation and Industry.
  (Mr Fellgett) Robin Fellgett. I am Director of Financial Services.

RUTH KELLY MP, MR JON CUNLIFFE AND MR ROBIN FELLGETT

  86. Thank you very much. Did the Treasury in any way attempt to modify or change the Baird Report before it was published?
  (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 bonus?
  (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 from it.

  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 Inquiry?
  (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 from those.

  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 case?
  (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 consider compensation.
  (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 be—and we obviously do not want to pre-judge Lord Penrose's inquiry—one 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 affair.

  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 Penrose's inquiry?
  (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.