I welcome the opportunity to debate personal pensions mis-selling. It is a matter that directly affects the lives of many people, but it also raises deeper questions that affect us all, about the way in which the pensions industry is run, how it is structured and what role it can and should play in helping people provide for their futures.
The scale of pensions mis-selling is profoundly shocking. Hundreds of thousands of people have been mis-sold pensions and as many as 2 million people's cases will need to be looked into. The sheer scale of the problem makes its resolution a priority for the Government.
The matter is also of central strategic interest to the Government. We are facing a future in which people increasingly need to save. Employment is less certain. Increasingly, people can look forward to long periods in retirement and it is not possible through the tax system alone to help everyone to enjoy the standards that they have come rightly to expect.
However, before saving, people need to have confidence in the products that they use and the companies that look after their savings. The pensions mis-selling episode of the late 1980s and the early 1990s was a terrible betrayal of that confidence and forceful action is needed to put it right.
Does the hon. Lady recognise that she and her ministerial colleagues substantially damaged the very real hope that people have of providing for themselves by giving the impression that the whole industry is riddled, if not with corruption then certainly with incompetence? She has seriously damaged people's opportunity to provide for their future while at the same time the Government are constantly raiding the state pension.
That is absolute nonsense. The damage was done to people's confidence in the financial services industry by those responsible for the mis-selling of personal pensions. It was compounded by the failure of the previous Government, whom the hon. Gentleman supported, to put right the scandal of that mis-selling when it was first discovered. I shall return to that matter.
The performance of the financial services industry is also a vital ingredient in the future success of the United Kingdom economy. Many of the failings that led to mis-selling, and indeed to the delays in putting it right, are symptomatic of deeper problems within some—not all—pension firms. Senior management have to take their responsibilities seriously and ensure that their firms have effective management systems and that due priority is given to proper customer care. Firms must deal with those issues in their own commercial interests. Any firm that fails to look after its customers properly can scarcely expect the public's confidence or custom.
Delay is one of the problems that has dogged the review. Mis-selling started in 1988, and the research that confirmed the extent of the problem was published in 1993. The review was started in 1994. The first deadline for completing the priority review was December 1996. The deadline came and went and only a tiny proportion of cases had been dealt with—delay after delay.
Thanks to my predecessor and to determined action by the regulators, the industry was finally jolted into action last year. Now, genuine progress has been made. More than three quarters of the most urgent cases—the priority cases—have now been resolved. The life companies in particular have made big strides. On average, they have now resolved approaching 90 per cent. of their priority cases, and some have done even better. By the end of the year, all firm priority cases, or face the consequences.
Even after that milestone is finally reached, much will remain to be done. I intend to see that the momentum that we have established since the general election is maintained. Now, all the firms must gear up to tackle phase two of the review, which broadly speaking will deal with the cases of younger people. In other respects, it is simply an extension of the phase one process, although there is a new approach—an innovation—to identifying which investors should be in the review, building on the experience of the first phase. Because of that, the phase two review process should be less onerous for firms.
In maintaining the momentum of the review, I regret to say that the main challenge that I face—still—is resistance from parts of the industry. That is not to say that all in the industry are of the same mind. I am pleased that many, including some independent financial advisers, are now genuinely committed to the review process and see the benefits of getting on with the job. Some have even gone so far as to re-examine the way in which they do business and to learn the lessons of the past, because they know that that is the best way forward. I urge all firms to follow their example of constructive action.
The industry has to pull together if it is to haul itself out of the hole that it dug for itself in the late 1980s and shape up to the challenges of the new millennium. I believe—I am sure that right hon. and hon. Members would agree—that the life industry can and should be a world-class industry, but first it must face up to its weaknesses and deal with them. It is not all good news. There are still some deep pockets of resistance.
The message from the Government has been clear and consistent: all firms must get on with their reviews or face the consequences. I find it extraordinary that there are still some people in the industry who seem to think that they are different and that this message does not apply to them.
Does the hon. Lady agree that it is surprising that some firms against which no complaint was made and in which no fault was found in phase one, are still being asked to go through phase two, look into every policy that they sold as independent financial advisers and conduct a total review, when there is not a shred of evidence to suggest that they engaged in any mis-selling?
I thank the hon. Gentleman for that comment. It is encouraging that there are firms that found in their phase 1 review that they had not mis-sold any personal pensions. That should give them confidence as they move forward to phase 2. However, the fact that they achieved a satisfactory result on the priority cases—the older investors—does not mean that they can be excluded from the process of reviewing the advice that was given to younger investors. The younger investors also matter, and are entitled to have their cases looked at.
Does not the hon. Lady understand that many of the smaller independent financial advisers, who are struggling to make ends meet and to run a successful business, do not have the resources or vast amounts of time to waste on investigating matters that there is no need to investigate? The ludicrous naming and shaming approach that the Economic Secretary has adopted, and the idea that no one could ever lose money in any circumstances, will have one result: there will be no independent financial advisory sector, because she will have put all the IFAs out of business.
That is nonsense. I shall develop my argument about what is going on among some independent financial advisers. Some of them seem to think that their inaction during phase 1 of the review was defensible. Faced with phase 2 of the review, they still choose to blame everyone except themselves. There are hundreds of thousands of people—constituents of all of us—younger as well as older, who have lost out as a result of being sold products that were wrong for them, in breach of the regulatory rules that were in force at the time. The firms concerned have a clear responsibility to establish whether any of their customers deserve redress as a result, and to make redress where it is warranted.
Does not the hon. Lady recognise that those regulations were not in place? They were applied retrospectively. That is the kernel of the problem for the small independent financial advisers, who acted in good faith and now find, with rules being applied retrospectively, that they are caught up in an awful debacle.
I am extremely sorry that every Member of the House, whether in personal meetings with constituents who are IFAs or through the circular letters that have come from the Independent Financial Advisers Association, has repeatedly been misled as to the true situation.
The first thing that I did when I took responsibility for the review of personal pensions mis-selling and encountered the lobbying from the IFA Association was to press the Treasury and the regulators on the issue, to find out what rules were in force at the time. The regulations that were in force at the time, under the regulatory framework—inadequate though it was—put in place by the previous Government, stated that products that were sold by independent financial advisers or by life firms had to be suitable for the investor. The regulations also required those selling products to keep records of the sales. One of the difficulties facing many—not all—of the IFAs in the current review is that they did not keep adequate records—
When an assessment is made of the advice given to their customers, will IFAs be deemed to have acted reasonably in working on the basis of the market conditions at the time, or is the suitability of their advice to be assessed in retrospect, in the light of the extraordinary changes in market conditions that have occurred over the past 10 years, in particular the dramatic fall in annuity rates?
The hon. Gentleman, possibly, and the IFAA, certainly, are confusing two different issues. One is whether the product was sold in compliance with the rules in force at the time. The judgment as to suitability can be made only in the light of the regulatory conditions in force when the product was sold and in the light of the then market conditions. If it transpires that a product was mis-sold, the issue of whether there was a loss as a result of that mis-selling must be addressed. The loss can sensibly be calculated only by reference to what has happened since the product was sold. Those are two different parts of the test that must be considered before a decision is made to give compensation to the investor.
Does my hon. Friend agree that financial advisers who give good advice have nothing to fear from the regulations? Many of them will welcome the fact that good practice is being promoted and encouraged. Financial advisers who gave and give sound professional advice will benefit from a transparent system. Not only should we be on the side of the consumer and the investor, but we should aim to drive up good practice. Any financial adviser worth his salt will want to function in an industry where those who provide sound professional advice flourish, and those who do not are held to account.
On the hon. Lady's point about loss, may I ask her a question? Losses will be calculated in the next year or two years. If market conditions change again, which is entirely possible, and the loss ceases to be a loss, and if the person concerned does not get the pension for another 20 years, which is very likely under phase 2, will redress be made at a later stage if the loss disappears?
I shall return to that and other points. I want to develop the argument. However, I observe—I hope this will not be thought unfair—that the right hon. Gentleman is a director of one of the companies that was substantially fined by the Personal Investment Authority for not making adequate progress in the review.
No, I am not giving way at this point. I have seen the leaflet, and the implication is entirely clear. The IFAA is an organisation whose track record has been to put its members' commercial interests ahead of the rights and welfare of their customers. It went as far as to take the regulators to court over the priority review in 1995. It lost that action, but it held up the review.
In all our constituencies there are people who trusted poor advice by some IFAs, and whose future may well be much poorer as a consequence. On average, in each constituency represented by a right hon. or hon. Member, for each IFA firm in that constituency, there are about 100 victims of poor advice from an IFA or a life office. If the IFAA and its supporters had their way and delayed or even stopped phase 2, those people would be left high and dry. Neither the Government nor the regulators will allow that to happen. The second phase of the review will go ahead. We will not allow the IFAA to wreck people's entitlement to the redress that they deserve.
I take the opportunity presented by this debate to ask the industry as a whole to think long and hard about the consequences of seeking to frustrate progress on phase 2. What would happen if it succeeded? The first damaging effect is that the industry would prolong the uncertainty for the victims of mis-selling, adding insult to injury. Secondly, it would prolong the agony for the industry as a whole. Despite a slow start, many in the industry have come to the view that the sooner it puts the shameful pensions mis-selling episode behind it, the better. The last thing that respectable firms want—or should want—is further delay and postponement of the day when the reputation of the industry recovers.
The hon. Lady has asked many questions of the industry, but I have a fundamental question for her that she has not addressed so far. What is the sense or justice in persuading IFAs to compensate those who have been mis-sold pensions and extracting large amounts of money out of life offices and pension companies without making any attempt to get those managers and salesmen who were responsible for the mis-selling to make a contribution? As things stand, 90 per cent. of the burden of compensation in the case of proprietary companies and 100 per cent. in the case of mutual companies is being borne by other innocent pensioners. One category of the innocent is compensating another category of the innocent while the guilty—the managers and the salesmen who undertook the mis-selling, often very cynically and dishonestly—get away scot free. What is the sense in that?
We have looked very carefully at where the costs of compensation should fall, and we have settled on a very clear and proper principle: the costs of compensating the victims of mis-selling should be shared and borne by those who profited from the mis-selling. Hence, the burden is distributed between policy holders and shareholders. Within mutual companies, it is borne by the policy holders.
The hon. Lady has clearly not understood my question. She is talking about distributing the cost of compensation between pension holders and shareholders. I am not talking about that. The really guilty ones are those individuals who did the mis-selling: the managers and the salesmen. There has been no attempt whatever to get them to pay up. Why not?
I am astonished that the hon. Gentleman did not succeed—perhaps he did not try—in persuading the previous Government, whom he supported so strongly, to initiate the action that we are now taking to resolve this scandal. If the hon. Gentleman listens, as I do, to those who work in the industry, he will find that a substantial degree of pain has been experienced by those who have faced the consequences of their actions and, in some cases, lost their jobs as a result.
I pay great tribute to the hon. Lady and to her predecessor for the vigour with which they have pursued the mis-selling of personal pensions. However, the Treasury seems to have washed its hands of the mis-selling of free-standing additional voluntary contributions—which seems to be the same sort of issue. Will the hon. Lady give an assurance that she will pursue the mis-selling of FSAVCs with the same vigour as she is pursuing personal pensions mis-selling?
I thank the hon. Gentleman for making that point. The Financial Services Authority has just published the results of its research into the mis-selling of free-standing AVCs. However, it is important to stress—I am sure that the hon. Gentleman understands this—that the problem involving the inappropriate sale of free-standing AVCs compared with AVCs into occupational pension schemes is of a very different, and fortunately lesser, order than the mis-selling of personal pensions. The latter removed people entirely from their occupational pension schemes.
I return to my point about the Independent Financial Advisers Association. If it and its supporters were successful in delaying phase 2, they would send a clear message to the customers of all IFAs that they are dealing with a second-class part of the industry, which—if it possibly could—would deny them the usual regulatory procedures. It would send the message that customers are dealing with people who appear not to believe in the need to put right past wrongs and take responsibility for their actions. Any firm that puts its weight or its money behind that campaign should not expect—and will not receive—any sympathy from me or my colleagues.
No, I will not give way. I have done so repeatedly during my speech. The IFAA should not expect any sympathy from the public or from the more forward-looking parts of the industry. Following the IFAA would be an act of blatant folly and, frankly, commercial incompetence.
It is perhaps not surprising that the life companies that are sympathetic to the IFAA's cause have been rather slow to identify themselves. Perhaps they are embarrassed—I can understand that—or perhaps they are aware of the damage that it would do to their reputations. My advice to any life company or any IFA that is pondering whether to lend its weight to the IFAA's campaign is to consider whether a more constructive approach might serve its interests better.
I have given way repeatedly and I have made it clear that I do not intend to take any further interventions at this point. Hon. Members will have a chance to contribute to the debate, and I shall respond to their points later.
The Association of British Insurers has taken a laudable lead in this area. In a display of considerable foresight, it is launching a lifeboat facility to assist IFAs with processing cases and financing the costs of redress. It is up to the industry to make that initiative a success. I regret the fact that support for the initiative among the life companies is apparently incomplete. It is a very constructive and cost-effective way forward, and it is disappointing that some elements of the life industry have not yet decided to support the ABI initiative.
It is fundamental to the industry's recovery that the contempt for the public that was shown in the past becomes a thing of the past. Support for the ABI's initiative, which will assist the process of starting, progressing and completing phase 2 successfully, would help to restore public confidence. I urge all right hon. and hon. Members to emphasise to their IFA constituents that the existence of their industry is precisely the stake with which they are gambling. The path that some of them are pursuing will only damage their business.
In the longer term—my hon. Friend the Member for Bury, South (Mr. Lewis) made this point well—if compliance is poor and remedial action taken grudgingly, if at all, will reputable providers continue to sell through IFAs and risk the recovery of their own reputations? Will the public want to buy from them? Why should people be prepared to buy from IFAs when they believe that their complaints will not be dealt with if things go wrong?
Looking ahead, the Government are determined to act to ensure that scandals of this kind cannot easily occur again. We have learnt the lessons of the past and our clear conclusion is that we need a more effective system of regulation. One of the main reasons why the regulatory system failed to prevent or deal more swiftly with the mis-selling of personal pensions was that firms simply did not abide by the regulatory rules. Proper enforcement of the rules must be the cornerstone of good regulation.
It is true that the regulatory structure for investment business established under the Financial Services Act 1986 is not capable of delivering the standards of investor protection that the industry and the public have the right to expect. The multi-regulator system—with the old Securities and Investments Board at the top and the self-regulating organisations, such as the Personal Investment Authority, on the front line—allows too much opportunity for overlap, gaps and confusion.
Some of the regrettable delays that occurred—and to which I referred earlier—in getting the pensions review off the ground were a direct result of one organisation, the SIB, setting out the framework for action but others, the self-regulating organisations, having to carry it through. The Government's published plans for reform will ensure that none of the problems associated with the two-tier structure arise again. The regulators will be given a structure and powers that are more conducive to speedy and effective action.
We also intend to ensure that the interests of consumers receive due weight in regulation and in Government policy development. The previous Government's failure to do that contributed to the mis-selling of pensions on a shocking scale.
We need also to empower consumers. People need to be much better able to understand what it is that they are buying. Education combined with the regulatory requirement on firms to provide key information on the products that they are selling will have a powerful effect on consumers' ability to compare products and will help people to help themselves.
Looking to the future, the Government are reforming the way that financial services are delivered. I recently announced our plans to set CAT—charges access terms— standards for individual savings accounts. That will give consumers the information that they need to understand what they are getting, so that where necessary they can exert genuine pressures on providers to offer good value. Pension reform is also on the agenda. The lessons that we have learnt from the pensions mis-selling episode are very much at the front of our minds as we set about that task.
I am also pleased to say that the Financial Services Authority is working with the thrust of the Government's productivity agenda to develop a better understanding of the competitiveness of United Kingdom financial services and the ways in which intelligent, better regulation can be a key source of competitive advantage in the modern global economy.
Does my hon. Friend agree that that is the sort of phase that we want to see? We want to see this phase of financial services put behind us, with Ministers shouting at the industry and the industry shouting back. From my experience in other industries, I believe that co-operating to give a world-class service to consumers is what we should be about.
My hon. Friend is absolutely right. I have no desire to shout at anybody. I never shout at anybody. However, I am not prepared to let anyone in the industry get away with some of the misrepresentations and delaying tactics that have been used. My hon. Friend is right to stress that it is in the interests of a competitive world-class financial services industry, including the providers and the advisers within it, to get phase 2 under way and successfully progressed as quickly as possible.
The FSA will have a specific duty under our proposals to have regard to the desirability of maintaining the competitiveness of our financial services. It will be working also to promote disclosure and customer understanding of the risks and benefits of investing in different financial products and services.
The Government inherited a terrible scandal affecting very many people. The previous Government simply did not have the guts to put things right or to give the regulators the tools and support that they needed. Since May 1997 giant strides have been made. The pressure that my predecessor and the regulators put on pensions firms has worked. We will continue with that pressure and, if necessary, increase it until this sorry episode is at an end.
I welcome this opportunity to debate the issue of pensions mis-selling. The Economic Secretary was right to say that it is an important issue which has affected thousands of people. However, I have to say that I regret that the hon. Lady has continued the practice of her predecessor in concentrating on attacking those firms and individuals that were guilty of mis-selling, but failing to acknowledge that the vast majority of those working in the financial services industry do an excellent job for their clients in an honest and conscientious way.
I would have hoped that the Economic Secretary would take more seriously the real concerns of those in the industry about the next phase of the review. It is perhaps more understandable that the hon. Lady chose to say nothing about the Government's actions towards those trying to provide for their retirement, as on any account the Government's record is a disgrace.
I am sitting in the Chamber taking lectures from the hon. Gentleman, but would he like to comment on the fact—I am referring to a reply in Hansard—that the Department of Health and Social Security ran a campaign about "breaking the chains" which cost taxpayers £1.2 million? It was intended to lead people in a new direction. Many in the industry feel aggrieved that they have not received an apology from the previous Government.
I am glad that the hon. Gentleman raises that point because it allows me to say something about the background to the issue that we are debating, and in particular to point out that it was not the Social Security Act 1986 that was responsible for the mis-selling that occurred. Instead, responsibility rests with the actions of some of those in the industry who abused the opportunities that the Act provided.
The 1986 Act created personal pensions. For the first time, it removed the division between those who had the advantage of their own occupational scheme and those who did not. For those who were self-employed, for those who worked for employers who did not offer their own scheme and for those who moved frequently between employers, the Act gave an opportunity to have a pension scheme personal to them and fully portable as they moved from job to job. Not only did it give freedom and choice in pension provision to many who did not have it before, but for millions it meant that they are or will be better off in their retirement.
I entirely accept that for others, that was not the case. Mis-selling occurred as providers took advantage of the provisions of the 1986 Act to persuade investors to opt out of their existing occupational scheme or not to join one when it was clear that that was against their financial interests. In doing so, those providers were clearly acting in breach of the rules of the regulatory organisations of the time. The central principles of those rules were the requirements to ensure that the product was suitable to an investor's circumstances and that the advice was in his or her best interests. In too many instances, those principles were clearly breached.
As soon as it was apparent that that was the position, action was taken. The review announced in 1993 by the Securities and Investments Board was unprecedented. When the evidence showed that there had been systematic mis-selling, the SIB issued guidance which established the priority groups and which required its members to seek out all cases within them.
The hon. Gentleman has referred to the rules that were breached in many instances. Will he take the opportunity to distance himself from the letter that we have all had from the IFA Association, which states that the rules were imposed retrospectively?
I want to come on to the concerns of the Independent Financial Advisers Association, which I think are entirely genuine. Where mis-selling occurred, the IFAs are the first people who want to see that situation tackled and for redress to be given.
I return to the background to the issue that we are debating. I accept that initial progress was too slow. The information required was detailed and complex, making the process far too lengthy and bureaucratic. However, that, too, was addressed by the issue, in 1996, of simplified guidelines by the SIB to speed up the process. They were backed up by a statement of policy by the new Personal Investment Authority.
It is not true, as I think the Economic Secretary implied, that the Government stood by. Indeed, I would like to pay tribute to the work of Angela Knight, who when she was Economic Secretary, was assiduous in pursuing these matters and putting pressure on the industry to act. The only change since then has been the volume at which the words of the Economic Secretary have been delivered. All the regulatory mechanisms and sanctions that are being applied to the industry were put in place by the previous Government. The Economic Secretary is pursuing, as did her predecessor, exactly the same policy towards this issue as was established under the Conservative Government. The requirements on the industry to put right cases of mis-selling were laid down under the previous Conservative Government and the regulators were ensuring that they were put into practice.
Of course the Government are right to bring public pressure to bear, but they should acknowledge that the progress that has been made is as much, if not more, to do with measures taken before the general election as it is the result of accusations and threats made at press conferences by the Economic Secretary and her predecessor.
If I catch your eye, Mr. Deputy Speaker, I will expand on this declaration of interest. Many hon. Members know that I am the chairman of the Federation of Insurance and Investment Intermediary Associations, which includes the IFA Association. The federation is not saying that there should not be remedies under phase 2. Central to my hon. Friend's point is that the 1994 assessment of what should be done in the review on phase 1, which has been replicated in phase 2, is the cause of the difficulty. My hon. Friend is making the valid point that the previous Government took action. The IFA Association's quibble is not with this Government and the need for action, but with whether those 1994 rules should be applied without being reconsidered.
My hon. Friend is absolutely right. He has considerable knowledge and expertise on this matter, and I hope, Mr. Deputy Speaker, that he will be successful in catching your eye later in the debate.
My hon. Friend mentioned IFAs and I turn now to phase 2 of the review, which is about to start. While the bullying and the intimidatory tactics of the previous Economic Secretary may not have been entirely necessary to achieve progress under phase 1, they are wholly inappropriate and unjustified for phase 2. The issues are much less clear cut and mainly concern younger people who are several years away from retirement, and we are considering advice that was given at a time when standards and market conditions were very different.
The burden of the phase 2 review is likely to be crippling for many small firms, but its justification is far less obvious. Under phase 2, advisers are required to seek out claims by writing to clients in envelopes that say on the outside, "Are you owed?" If investors request a review, it has to be conducted not according to the market conditions prevailing at the time, but according to the conditions of today's market which are vastly different.
In the 10 years since many of the transfers took place, annuity rates have fallen dramatically. The result is that those who took advice to transfer accrued benefits into a personal pension in 1988 today require 37 per cent. more in their retirement fund to provide the same pension. Nobody could have foreseen such a change, but under the rules, advisers are expected to provide compensation for its effects, although it is by no means clear that investors will ultimately suffer any losses as a result since investment conditions may well have swung back by the time that investors eventually retire.
I admire my hon. Friend's ability to find a silver lining in the cloud of the Chancellor's statement. In that at least I hope that she is correct.
As I said, nobody could have foreseen the changes that have occurred. It is hardly any wonder that the industry is beginning to view the review as not about providing compensation where mis-selling has occurred, but about ensuring that no one loses any money under any circumstances.
Advisers are also being judged retrospectively on today's standards. In the vast majority of cases, advisers may well have made clear to their clients the potential risk involved, but 10 years ago, there was not the stringent requirement that now exists to keep records of advice given. The Economic Secretary said in her speech that the industry was misleading people by claiming that it was not required to keep proper records, but many of the IFAs that are now being criticised for not keeping records were at the time subject to several inspections by the regulatory organisations, and at no point did the regulators make any comment about the lack of records. Yet the burden of proof will now be placed on the advisers to show that they are not guilty of mis-selling rather than the reverse.
If phase 2 proceeds as intended, it will offend natural justice and lead to hundreds of long-standing and reputable firms going out of business. Unlike the big providers, they do not have policyholders or reserves to meet the costs of the review, let alone any compensation that might have to be paid.
It has been estimated that to assess the loss on any single case will cost about £1,000. The average cost for a firm of completing phase 2 is likely to be about £600,000, but the average annual turnover of an IFA firm is around £200,000—a third of that amount. On top of that, IFAs are now experiencing substantial increases in the cost of professional indemnity insurance, as a direct result of the potentially horrendous liabilities that they may face under phase 2.
The pensions advisers support systems scheme put together by the providers is welcome, but it deals only with the problems of phase 1 and it will not be enough to stop many small IFAs being tipped into bankruptcy if phase 2 of the review goes ahead under the present rules. Many of those firms, in the high streets of towns and villages across the country, have been providing sound and sensible advice to their clients over many years. They have never been found guilty of any kind of mis-selling and they are as anxious as anyone in the House for there to be redress for anyone who has been genuinely wronged.
However, as a member of one such typical small firm in my constituency said to me:
We are being judged as guilty by everyone including the press before we have had a chance to prove our innocence and in any proper court of law we would not be subjected to the rules and regulations that we are in this current environment.
He went on to say that
my fear is that there is a hidden agenda by this Government to actually wipe out the whole of the Independent Financial Market".
Such concerns appear all too real when one hears the belligerent noises made by Treasury Ministers. Statements such as the press release issued by the right hon. Member for Airdrie and Shotts (Mrs. Liddell), headed:
Helen Liddell has IFAs in her sights",
are not helpful. Instead, they seem to confirm the industry's worst fears and undermine the public's confidence in the financial services industry.
I therefore appeal to the Government and the regulators to listen to the industry and work with it rather than shout at it. The industry is asking not for phase 2 to be stopped, but for its concerns to be dealt with. I am worried when I hear from the IFA Association that it has been seeking to meet the Minister to discuss its concerns and work out an acceptable solution, and has not been able to achieve even that. Of course we want proper redress for those who are entitled to it, but we also want a viable, successful financial services industry.
I turn now to the actions of the Government, who are themselves guilty of robbing pensioners of thousands of pounds. In the 18 months during which the Government have been in office, they have launched an unprecedented attack on those seeking to provide for their retirement and on savers generally. Within a few weeks of the election, the Chancellor introduced a pension tax that will cost pension funds over £5 billion a year. As a result, more than 10 million people will have to pay more into their pension schemes or else find that they receive less than they had planned when they retire.
Of course, the Government introduced that measure by stealth. They hoped that nobody would notice that they had been fleeced until many years later when they came to retire. Those are double standards of the worst kind. Millions of pounds are being devoted to an advertising campaign to alert investors to phase 2 of the pensions review, but investors are being deliberately keep in the dark about the fact that the Government have raided their pension schemes and cut the income that they can expect when they retire.
The full cost of the Government's pension tax is now becoming clear. The recent report of the trustees of the universities superannuation scheme estimates that the loss to the fund is approximately £70 million a year. That is not a possible loss; it does not depend on investment conditions or annuity rates; it represents a loss to the fund of about £500 each year for every beneficiary or future beneficiary of the scheme. There will be many more such trustees' reports to come.
On top of that, we now learn from the Daily Mail that the Chancellor may be planning a new stealth raid on our savings. In order to fill the black hole in his finances, he is considering restricting tax relief on pension contributions to the basic rate, hitting millions of higher rate taxpayers and providing a further disincentive to save. I ask the Economic Secretary to take this opportunity to make it clear that this report is untrue and to reassure investors that the tax relief at the higher rate will not be removed.
My hon. Friend has just been talking about double standards. Does he agree that the title of this debate ought to be "Government policy on pensions: mis-sold"?
I entirely agree with my hon. Friend. People will think that while many of those in the industry might have been guilty of mis-selling, in many ways what they have done pales in comparison with this Government's record in fleecing the pension funds of every single occupational pension scheme member.
If all this were not enough, the Government have also scrapped tax-exempt special savings accounts and personal equity plans, two of the most successful savings schemes ever devised, and are to replace them with an inferior, unpopular and ill-conceived product that is already being rejected by the public and the industry alike.
While the Government are saying that they are attempting to persuade savers to invest in equities, there is a deafening silence about the much-vaunted stakeholder pensions. Nearly a year after the discussion document was published, we appear to be no nearer to an announcement. Indeed, according to today's Financial Times, the whole scheme has now been torn up by the Treasury which has gone back to the drawing board. It is hardly surprising that the whole pensions industry is now beginning to suffer from planning blight.
The cumulative effect of the relentless attack on savings has been, not surprisingly, to reduce the amount that people want to save. Eighteen months ago, when the Conservative Government were in office, the savings ratio stood at 10.3 per cent. The latest figures show a fall of nearly 25 per cent., far steeper than was predicted in the Government's own Red Book. That is bad for investors, bad for business and bad for the country.
The mis-selling of personal pensions was a scandal that should be put right, but when it comes to defrauding those who are seeking to make provision for their retirement, the real offenders are the Government. Theirs is the real scandal, and it is they who should be providing redress.
I thank the House authorities for arranging this important debate on a subject that affects the lives of very many people, and I hope to be able to correct some of the false impressions given by the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale).
Britain is justifiably proud of the size and strength of its financial sector. In this sphere, it can truly be said that Britain remains a world-class player. We can boast about the size of the sector and the excellence of the services that it provides. The phrase "City of London", which denotes the financial services sector in the United Kingdom, has also always been regarded as coterminous with the highest standards of moral rectitude. Sadly, a substantial part of the sector fell significantly below the standards to which it ought to aspire in the matter of personal pension mis-selling.
The sales forces of some of the most prestigious names in the City misled huge numbers of people. Furthermore, even when the scale of the mis-selling of personal pensions became evident to everyone, the same companies proceeded to drag their feet. They failed to meet almost every deadline, even those deadlines that had been agreed by the industry itself. What is more, they were aided and abetted by the Tories.
In government, the Tories had created the statutory regime that allowed the mis-selling to take place and then proceeded to prevaricate themselves, which allowed the issue to drag on for years. When Labour took office in May last year, only 2 per cent. of the pensioners who had been identified as having been mis-sold pensions had received compensation. That is the scale of the Tories' indolence or, worse still, complicity in the process.
It is to the eternal credit of this Government that they acted with determination and speed to bring a resolution to the scandal. I congratulate my hon. Friend the Economic Secretary on continuing to pursue the matter with energy and vigour. She will clearly need all that energy and vigour because, to judge from my case load and that of many hon. Members to whom I have spoken, it seems that many personal pensions companies will, I am afraid, continue to drag their feet and prevaricate for a long time.
I represent the former mining seat of Hemsworth. I wish to inform the House precisely how the pensions industry operated in the coalfields, especially the Yorkshire coalfield. Its record has been scandalous. The mis-selling of personal pensions was at its height at precisely the time when the coal mining industry was suffering an industrial cataclysm. For reasons that are known and which have been debated many times in the House, the coal mining industry was decimated. That was a great economic error but, in human terms, it represented a personal tragedy for thousands and thousands of families.
In my constituency alone, nearly 10,000 men lost their jobs in a matter of a few years. It was obvious that few miners in the communities that I represent would have immediate access to a new job. Many of the older men knew that they would probably never work again. Indeed, I am aware of the fact—it is more than anecdotal evidence—that many of the older men were told by the jobcentres and by the very civil servants who were meant to be finding them work that they would never work again.
The men had two assets. First, most of them were in receipt of a redundancy payment in the order of £20,000, or perhaps a little more. Secondly, they frequently had pension funds in the miners' pension scheme. However, as we know, the MPS has a rule whereby a pension does not commence until the pension-holder attains the age of 65.
The miners, their families and their communities saw the pit closures as a great tragedy, but the pension companies saw things a little differently. They saw redundant miners as a marketing opportunity. It does not take a mathematical genius to calculate that, in my constituency alone, 10,000 redundancy payments at £20,000 a piece resulted in a very large potential market of around £200 million, in addition to the funds already in the pension scheme.
The pension companies marketed their products hard. Many thousands of people in my constituency and elsewhere in the coalfields were sold inappropriate products. Miners had been told that society would be unable to find them another job, and now their only assets—their pensions and their redundancy moneys—were placed in jeopardy by some of the most prestigious household names in the country. That is a great scandal, but behind that scandal lies an even greater one, and that is the mechanism that the pension companies utilised to sell—or mis-sell—their personal pension schemes in the former mining communities. I shall describe the process to make sure that it is on the record.
It was quickly apparent to the pension companies that such communities are tightly knit and that there was little point in dispatching their conventional sales forces, with their gold cards, designer clothes, yuppie telephones and so on, to those areas. Instead, ex-miners were recruited by the pension companies, given rapid and inadequate training, and then sent out into their own villages and townships to prey on their former mates. Conservative Members are nodding their agreement.
The training that those people received was wholly inadequate. Those ex-miner trainees were supposed to pass exams before they went out selling, but I am aware, and can prove, that there was widespread cheating, aided and abetted by the companies, in that process. I have been told of the complicity of senior regional managers of nationally known and supposedly reputable pension companies in assisting former miners to complete exams so that they could go on the road to sell, or mis-sell, pensions to their former mates.
Such regional managers had been given sales targets by people higher up in the organisations. They considered the redundancies to be not a great human tragedy unfolding before this nation, but a golden opportunity.
What the hon. Gentleman is describing is not only a personal tragedy for the miners concerned, but an absolute insult to those communities, which no one would condone. Does he have evidence that independent financial advisers were working in those communities and mis-selling in the same way?
I will come to the case of an independent financial adviser. It is clear to me that independent financial advisers were part of the mis-selling of pensions in the mining communities, but that was a different type of process from the one that I am describing.
The regional managers and the large companies, as well as the smaller companies, considered the redundancies to be not a great national tragedy, but a golden opportunity. They were prepared to close their eyes to such practices. As a consequence, ill-trained and inappropriately recruited former miners donned their Sunday-best suits and went back into their own communities to sell inadequate schemes, which they did not fully understand, to their neighbours, friends and former workmates. It is a great scandal that huge commissions were offered to that sales force to identify pension transfers from the miners' pension scheme.
The abuses that the hon. Gentleman is so vividly describing indeed took place, and he is absolutely right to say what he has said on that subject, but, in those circumstances, does not he think it quite extraordinary that those managers have kept their bonuses, those dishonest salesmen have kept their commission and his Government, as the Economic Secretary has told us, propose to do absolutely nothing about it? They intend that the full burden of compensation should be paid by innocent pension-holders.
My point is that the culture of dishonesty, which is all that it can be described as, ran from top to bottom in those organisations. It is entirely inappropriate for the hon. Gentleman to say that the salesmen were dishonest. They were innocent dupes—ex-miners who were down a pit hacking coal and contributing to the wealth of this country one minute, and put into their Sunday suits and sent out with inadequate training the next. There was no dishonesty, other than the dishonesty of the pension fund managers.
Precisely the same process was in place in respect of the regional managers of the pension funds. I have spoken to some of them, and I understand the pressures that they were placed under. A culture of greed, which was encouraged by the previous Tory Government, infiltrated the industry throughout and led to the most scandalous processes taking place.
I have recently assisted one of my constituents, who operated in exactly the manner that I have described. He was promised massive earnings by a national company, which it would not be prudent to name. He was given training, encouraged to cheat in his exams and then put back on to the streets and into his own communities. He failed to sell—I should say mis-sell—pensions in adequate numbers. The company then lent him money in lieu of wages and of commission that should have been earned, which was a further disgrace.
When I met my constituent, he was being threatened with court action by one of the largest companies in the financial services sector in Europe. It was proposing to take him to court to recover the so-called loans with which he had been provided as a substitute for wages and for commission that he had failed to realise because he was not competent to sell the goods that he had been employed to sell. That is a disgraceful episode.
I will not name the company, but I have given a clue, if the hon. Gentleman chooses to find it.
I then entered into correspondence, as hon. Members would expect, with the chief executive of the company, who is a public figure of some stature and whose company is a household name. Hon. Members might anticipate that such an individual would be ashamed of his company's behaviour. He was not, and he is not. The company wanted to recover all its so-called loan from my constituent. It used the interesting argument that it did not want to concede in my constituent's case, although it was accepted that he had been treated unfairly and badly, because of the precedent that that might create for others in the same position.
The logical deduction is that many people were put in the same position as my constituent. It is evident that the industry paid scant regard to the manner in which its products were sold in the coalfields and in the country at large. The high moral reputation of the financial services industry seems to have been little merited in relation to either its customers or even its own sales force.
Part of the industry is once again engaged in special pleading in respect of the second phase of the pensions review. I know that the Government will stand firm. On that issue, as on so many others, the Government will show that they stand on the side of the many, not just of the few.
I have no doubt that we will be remorseless in representing the consumer interest and that we will press on to phase 2. May I respectfully ask the Economic Secretary to find time to address the issue of the many pension-holders who have had their cases reviewed, but have not yet received compensation? They are having to wait inordinately long periods for their compensation to be paid. The procedure is necessarily detailed—I understand that, as do my constituents—but it is in danger of being over-bureaucratic and cumbersome.
I am particularly concerned about those pensionholders who go through the whole process only to find that the agency which mis-sold the pension is no longer in a financial position to pay compensation. I am aware of one such company. It is still trading and acknowledges that it should be paying a series of pensioners compensation for mis-sold pensions but, over the past few months, it has deliberately cancelled its indemnity insurance cover, thereby making itself unable to pay compensation. That means that my constituents will have to wait further inordinate periods to receive what is rightfully theirs. They are the poorest in a community drowning in poverty.
There is an investors' compensation scheme, which acts as a safety net in such cases. Unfortunately, it has been my experience that the scheme is operating far too slowly and, moreover, leaves too much responsibility in the hands of individual pensioners, who frequently face mighty financial institutions.
Today, I received from the investors' compensation scheme a further letter about a particular case. We are now back in a loop that we have already been around three times in relation to my constituent. I wonder why the scheme cannot take action to address his problems. Will my hon. Friend the Economic Secretary consider reviewing the scheme's operation, with a view to expediting matters for those unfortunate individuals whose situation requires them to have recourse to it?
I shall begin by declaring an interest. First, I was a non-executive director of London and Manchester and I have recently become a non-executive director of Friends Provident. I joined the London and Manchester board early last year. The fines that were applied to both boards related to periods well before I was a non-executive director. As the Minister raised this matter, I want to assure her that I have been assiduous in trying to ensure that we deal with pensions mis-selling as quickly as possible. I want to make it clear that I am not defending the previous position.
I am pleased to say that I am a non-executive director, because I believe that it is important that people who have some knowledge of what is happening out there in the industry contribute to such debates. I was delighted to join London and Manchester, because I have had a lifelong interest in the encouragement of long-term savings, especially in relation to owner-occupation and the property-owning democracy. That is what brought me into politics. I want to see the widest possible extension of savings, and I am very much aware of the importance of savings for the younger generations if they are to have a happy retirement.
Savings are particularly relevant for lower income groups, at whom the Government were aiming their pension reforms. London and Manchester has concentrated on those groups. I was particularly keen to play a part in carrying that forward. Friends Provident has strong Quaker origins, and the Quaker influence is still very strong. And I agree with the Minister's remarks about customer care in such companies.
My second interest is as chairman of the House of Commons pension fund trustees. We do not have personal pensions, but we have free-standing additional voluntary contributions. That experience gives me further insights into the responsibilities and some of the difficulties involved in these issues.
I want to make a balanced and positive contribution to the debate. I want to put my points to the Minister in a constructive spirit. I welcome her to her new post, and I congratulate her on it. She has a heavy responsibility to ensure that we get the balance right. That is what I want to try to explain in my contribution.
The starting point for all of us is the recognition that we need to encourage many more people to make long-term savings, particularly for their pensions. We all know that the state pension will be a smaller proportion of average earnings in 20 or 30 years' time. That is common ground between us: it is also the Government's view. We all want to encourage second pensions, and we all recognise the difficulties faced by low-income groups, people who frequently break careers or who never have a career. Encouraging long-term savings is one of the most important priorities for the Government.
I was going to say that we are looking forward to hearing what the Government have to say about building on the second pension, whether compulsory or not. I was also going to say that, when the proposals are presented, the help that the industry can give the Government will be important. However, I noted the headline story in today's Financial Times, which suggests that the Government have dropped their plans for sweeping pension reforms.
I hope therefore that, in her wind-up speech, the Minister will tell us that that is untrue, and that she will make the position clear. If there is any question of the Government dropping their plans for substantial reform, the need to establish a regime that will encourage many more people to save on their own and will encourage companies to introduce these schemes will be all the more pressing.
The omens are not particularly good. The surveys that I have seen show that a substantial proportion of people, including young people, realise that the state pension will be far from sufficient when they retire. About 85 per cent. of people understand that, so that message has got through, which is good. When they are asked whether they are doing anything about it on their own initiative, only about 12 per cent. reply in the affirmative. There is a huge gap, and thus an enormous challenge.
Final salary schemes, which are the most attractive schemes, will decline as a proportion of company schemes, because companies, for a variety of reasons, are moving to money purchase schemes. It is important that we promote money purchase schemes with company contributions, and that we encourage people to take out personal pensions. That will be right for them in principle if the pattern of their working life is different from what it used to be, and if they change career several times. The introduction of personal pensions was entirely right in principle, and we must build on them and increase their role.
The report in today's Financial Times showed the complexity of these problems:
Members of the government admitted compulsion was 'dead' and that the review had shifted away from initiating low-cost, funded 'stakeholder' policies and towards modifying the regulatory
environment to encourage industry provision of such schemes. 'We've been impressed how fast the private sector and trade unions have set up low-cost stakeholder lookalikes,' said a minister.
Friends Provident was one of the first into this market, and is working with trade unions. That is a highly attractive way of tackling the problem. The report goes on:
'It's now a question of how we shape the market place and the Treasury is at the forefront of deciding this,' said another government member.
The hon. Lady may say that none of that is true, but if it is an indication of the Government's thinking, there needs to be strong co-operation between the Government and the industry to achieve the objectives we all seek.
I envisage two major problems. The first has been referred to already. The abolition of advance corporation tax and the reduction in the income of pension funds introduced by the Government last year will have a profound effect on the provision of pensions in the period ahead. Indeed, if there is a pension scandal, pension robbery or devaluation of benefits, the Government's action will, in the long run, be a stronger example of that than any of the pension mis-selling.
I have heard of companies that have already experienced the impact of these measures in their triennial valuations, because they considerably reduce the income stream. It is the income stream on which those valuations are based and from which the pensions eventually come. At the time, the Government argued that the valuation should be based on the capital of the funds, but we have seen in the past few months how fickle and dangerous that can be: it is the income stream that is important in the long term. The change that the Government made last year was a retrograde step.
The right hon. Gentleman referred to pension robberies. Will he comment on the value of the basic state pension in 1976? Given what happened to SERPS during the Conservative regime, the state pension has been reduced to such an extent that someone retiring in 2028 will draw a SERPS plus basic state pension that is less than the value of the basic state pension was when the previous Labour Government left office.
The present Government have exactly the same policy, because of the difficulties of funding a state scheme. Hence the importance of ensuring that we get the corporate and private sector position right.
I heard about the reports in the Daily Mail yesterday of possible further moves by the Government to reduce pension contributions if they reduce the tax relief on contributions to private sector schemes. I asked the Chancellor this afternoon to make it clear that the Government do not intend to take further action on pension funds and contributions. He muttered quickly that there were no such proposals, and then talked about bank windfall taxes, which had nothing to do with the point I was raising. I suspect that he may regret muttering under his breath, but I profoundly hope that there will be no further moves to attack pension funds. I should be grateful if the hon. Lady confirmed that in more detail.
The second major problem concerns pension regulations and the mis-selling. I do not condone the mis-selling, and in no way do I defend it. People were taken out of occupational pension schemes—the NUM case is a good example—or, if they had the choice of an occupational pension scheme, they were persuaded to go for a personal pension without any company contribution. I do not condone that at all, and I recognise the need for compensation in all the relevant cases; but we must get the balance right. We must recognise the existence of many beneficiaries of the introduction of personal pensions, and its substantial contribution to the provision of pensions, improved living standards for many retired people, the encouragement of self-help and a reduction in what would otherwise be a much higher level of taxpayer-provided welfare benefits. The introduction of personal pensions is a positive development; it is the consequences of the mis-selling of a small proportion of the total that we must put right.
I shall come to the £11 billion later. My point is that, given the importance of personal pensions in the future and the need to attract many more people to them, the amount resulting from mis-selling will constitute a comparatively small part of the amount that must be raised. It should be remembered that the total value of the United Kingdom's pension fund industry— I know that that includes company pension schemes—is currently well over £600 billion.
Many companies were slow to embark on the pensions review, and did not recognise quite what enormous resources would be needed. That was clear to me when I first became involved. We must recognise that there will be a high cost—and here I refer not to compensation, but to complex administration.
The process is taking a long time, not just because potential beneficiaries do not always respond and organisations such as the national health service have, during the first stages, been slow to give details. It can take many hours of highly qualified work by those calculating the consequences of a single case of mis-selling to reach a conclusion. I have examined some cases myself. Qualified actuaries—including retired actuaries—often have to be brought in. I am very much aware of the effort expended by the company in which I was involved.
It is rather like the millennium and the computer industry, in that a whole new industry is being created in the short term to sort out the problems, with large salaries being paid. I make no complaint about that; I merely observe the phenomenon.
Other policy holders will often have to pay the cost. There is a balance to be struck there as well. As my hon. Friend the Member for Maldon and East Chelmsford (Mr. Whittingdale) pointed out, those policy holders are innocent, and are looking forward to good pensions themselves. So we must exercise a sense of proportion in the future.
In the early stages, the regulatory bodies—especially the Securities and Investments Board—were slow to issue guidelines, and then kept changing them. To an extent they are still changing them, and that remains a problem for many companies. I understand that different life companies have been influenced by differing guidelines that they have received from regulatory bodies, which is adding to the confusion and uncertainty.
Against that background, let me make a specific point to the Economic Secretary. Just when it is crucial for the Government to create an atmosphere that encourages people to take out pensions, they are in danger of doing the reverse. Vilifying the industry makes consumers unwilling to consider the product. It is no good the Government saying that people should take out more pensions; an industry is needed to sell the pensions and to give appropriate advice, and if that industry retreats into its shell, or large parts of it disappear, the whole cause is badly served.
May I put the contrary view? How can the public have confidence in those who sell pensions until this whole unfortunate incident is put behind us? Does the right hon. Gentleman not agree that we need to crack on and finish the matter before there can be confidence in the industry?
That is precisely what I have been saying to the industry: that we must conclude the process as soon as possible. I think that that has almost happened with phase 1.
Let me make some positive suggestions. The first relates to phase 2. There are, I think, some issues to be revisited. As the hon. Member for Stafford (Mr. Kidney) implied, there is a danger that, if phase 2 lasts for a long time—it could well do so, given the way in which it is currently constructed—an image that is the opposite of what the Government want will persist for the next five years. Phase 2 is different from phase 1, in that it deals with different types of case and different types of person. It should not be subject to the heavy, costly, complex and time-consuming regime that affected phase 1.
There is a genuine difficulty, which needs to be resolved. Let me make two points. First, I think that it is worth looking again at the rebate-only cases. There cannot be much of a loss to individuals in such cases, because they made no extra contributions themselves. I have not had an opportunity to examine the losses in detail, but phase 2 involves many rebate-only cases; and I am not sure that, if they all had to be examined in detail and it was then found that the loss was de minimis, we would have achieved much of an objective.
Secondly—this was the point that I tried to make when I interrupted the Economic Secretary—we should look again at the assessment of loss. What should be considered are the conditions that obtained at the time the policy was taken out. Those conditions cannot be changed some years later. Let us suppose that I took out a life policy—as I have—and then found that we had moved into an era of low inflation and low interest rates. I would then receive a much smaller terminal bonus than I might have expected five years earlier, but that would be no reason for me to say that the policy had been mis-sold to me in the first place, or that I should be compensated for the fact that interest rates had fallen.
If the argument about loss is taken to extremes, the Government will start saying that the unit trust industry should be held responsible if at any time, when people cash in their unit trusts, they are worth less than they were two months or two years earlier. That is clearly absurd, but there is an element of it about the way in which loss has been calculated in relation to phase 2. My hon. Friend the Member for Maldon and East Chelmsford was quite right.
We now have low interest rates, low returns and low annuity rates. Let us suppose that a loss is being assessed now, 10 years after a policy was taken out. If the pension will not be paid for another 20 or 30 years—which, in many phase 2 cases, is quite likely—the person concerned is being compensated for a loss that may never actually happen, because the calculation was made at a particular time. It may be necessary to recalculate the whole thing two years later—because the programme is not finished— and it may then be found that the loss is no longer a loss. The Economic Secretary will have to address such problems.
Some cases were examined in 1995. It was discovered that those who had been sold the pensions were selling at a profit, in one instance a profit of £2,500. Because of changes in the market, however, that person is now shown as having suffered a £38,000 loss. Is that not ludicrous?
That is exactly the point that I am trying to make. There will have to be some way of dealing with the problem; otherwise there will be another scandal. It will be found that the whole matter was badly organised by the regulator, and by the Government.
Phase 1, of course, dealt with people who had retired or were close to retirement. In their case, the loss could be calculated, but that does not apply to most phase 2 cases.
Does my right hon. Friend agree that, with personal pensions, as well as financial considerations, two other benefits are to be taken into account? First, they are completely portable, and secondly, they allow for a 25-year retirement age. Many occupational pensions would not have those benefits. Should not that be taken into account when assessing their value?
Those are certainly some of the benefits of personal pensions. That is why it is right to go on making it clear that they have a large part to play.
In the whole of this regime, we do need the certainty of a set of guidelines that are laid down at the start and adhered to throughout the process. One of the difficulties has been that they have changed throughout the process and that many of the providers and IFAs—independent financial advisers—were not aware of what the guidelines were when they were operating their marketing.
I am sorry. I should go on.
We should avoid retrospective regulation; it is also important to ensure consistency throughout the whole regulatory system. If that is not done, my worry is this: there will be far fewer IFAs. The professional indemnity loss business that is coming through shows what the marketplace thinks about that. IFAs will be constantly at risk, including from people whose career changes may be significant, which may lead them to try to exploit the whole regime to the disadvantage, unfairly, of an IFA. IFAs will not have the resources to ensure that they can meet all regulatory requirements in future. That is why it is important to have certainty and a clear system from now on for them.
It would be a serious tragedy if there were a substantial reduction in the IFA industry. Of course, there are some poor operators in the industry—we all know that—but there are many genuine people who give good advice throughout, and that advice is needed by many of the people who should be taking up pensions.
I saw this particularly at London and Manchester, whose home service industry goes out and gives advice to people who would not otherwise think of taking out long-term savings. Recent independent market research shows how much that service is valued. If it disappears, something important disappears.
Incidentally, there is a danger in moving to exclusively multi-tied IFAs. I hope that the Government are not contemplating that because it would lead to a considerable loss of independence.
The next consequence will be that companies, both providers and IFAs, will concentrate on execution-only. That is already happening with Marks and Spencer's, Scottish Widows and many others, and it is driving a coach and horses through the regime.
It looked as though the Government were going to encourage execution-only in the low-cost stakeholder pension that they were going to introduce. Supposing those execution-only schemes did not give as good pension outcomes as those that were done with advice. Who is then guilty of the pension mis-selling scandal? The people who would be guilty would be the Government who had insisted on exclusively execution-only. That again shows the importance of recognising that advice is desirable; and that it comes at a cost, inevitably.
In many cases, the fact-finds that companies are undertaking through all their sales men will be counter-productive. They involve two long meetings and detailed reason-why letters. Often, it will simply be unprofitable to carry that process through. Why are the companies doing it? The answer is that they have to give themselves complete protection against any future, retrospective changes in the regulatory system. That, too, will lead to a diminution in the amount of pensions sold.
I recognise that the regulatory authorities—the Personal Investment Authority or Securities and Futures Authority, whichever it is—have a difficult job. I recognise that there has been mis-selling and we must avoid that, but we must ensure that we get the balance of the regime and phase 2 right because, at the moment, the risk is that the pendulum will swing too far in the other direction—which will be in no one's interests, least of all the Government's. The Government, like me, desire to see many more occupational pension schemes taken out and much more long-term saving. That is our objective, and we must ensure that we do not diminish or destroy it by an over burdensome and badly worked out regulatory regime.
I welcome this opportunity to introduce to the debate the need for personal pensions and how that fits in with the whole picture of personal pension misselling. The Ross report, which was commissioned by the Labour Government, makes it clear that there is a future for personal pensions, and recognises that it will always be true that personal pensions are not suitable for everyone and that the state continues to have a role. It recognises the continuing need for private-public partnerships in this sector, but also makes it clear that we must learn from the past; we must learn from the mistakes.
I tried to make the point in an intervention that what the previous Government had done to SERPS made it clear that some Government provisions were not free from Government interference. Therefore, if we want to encourage the public at large to provide for their retirement with confidence, we need far more robust vehicles in its place.
Pensions mis-selling—how did it come about? It started with encouraging people to opt out of SERPS. With hindsight, and in the light of actuarial assessment, the previous Government were somewhat too generous, certainly in the first 10 years, in the SERPS opt-out arrangements, which may have encouraged people to opt out who should not have opted out.
Similarly, when, in 1988, it was no longer compulsory to be part of an occupational pension scheme, that in many ways opened the floodgates for personal pension mis-selling. There was an argument that early leavers from occupational pensions paid too heavily, so that option should have been given, but the situation has been remedied to quite an extent.
What have we now? If my information is right, and I have no reason to doubt it, in this quarter, for the first time, the number of personal pensions being taken out has dipped, which is serious. Some people say that it is a sort of planning blight. Individuals are looking at where the Government are going with individual savings accounts and therefore holding back, but it shows a serious crisis of confidence in the insurance industry's performance.
Whose fault is mis-selling? It is interesting that the debate goes from greedy salesmen to insufficiently trained salesmen to the previous Government's hasty push of people into personal pensions, but no one suggests that it is the fault of policyholders; yet, when we look at who should pay for it, we ask the policyholders of the large companies to do so. The people who have the least fault in this fiasco are being asked to pay the bill. It is somewhat bizarre.
If an insurance company is owned by its shareholders, it is clear that, provided there is no with-profits policy in the company, the shareholders are involved in this. With mutuals, of course, it is the policyholders who have to pick up the whole bill, but one company is in a difficult position: the Prudential. It is a company with shareholders which also issues with-profit policies. That means that the return depends to some extent on the profits that are made by the company.
The Prudential is also the worst offender in terms of pension mis-selling. Last July, it had to increase its estimate of the cost of mis-selling from £450 million to £1.1 billion. It was suggested that, in the light of the whole size of the pension industry, that was not significant. I still suggest that for one company to run up a liability from mis-selling of £1.1 billion is extraordinary. Sir Peter Davis told the Treasury Select Committee that the mis-selling bill would be set against an estimated £12 billion surplus capital on its long-term life insurance fund. Of that £12 billion, about half is needed to meet policyholders' reasonable expectations.
In my innocence, I used to assume that, if I took out a with-profits policy with an insurance company, I got the profits made by that company. In fact, I get what that company's actuary deems to have been my reasonable expectation. It is a case of losing every which way. The figure involved for the Prudential was £12 billion. If one argues how much of that does not have to be met by reasonable expectations, the agreed figure is probably about £7 billion.
All that is rather quaintly called orphan assets. It is not clear who owns the orphan assets. This is beginning to remind me of a debate that was held in the late 1980s and early 1990s about who owned the surplus in occupational pension funds. It was the issue of the surplus in occupational pension funds that got me into politics, and I am beginning to suspect that orphan funds will keep me here.
Who owns the assets? The Consumers Association argues that the assets should be treated as an exercise of demutualisation, and that they should be paid out to the current shareholders or policyholders. I am reluctant to do that, because the orphan funds have been built up over generations, and they would be paid out over only one generation of fundholders.
There is a strong argument for the shareholders having access to the orphan funds. I understand that the Department of Trade and Industry is currently holding discussions with companies about what should be done with the funds. Alternatively, it could be left to the courts. It was ultimately the courts that decided that the surplus in occupational pensions should be seen as deferred pay. In that way, the matter was resolved.
What could companies do with the extra assets? They could pay extra dividends, help to fund acquisitions or help to expand the business. What is unacceptable is that the funds have been used to pay for pensions mis-selling. We are again asking those who have no responsibility to foot the bill.
I saw another problem when reading a press release from the Prudential insurance company. It refers to the company's appointed actuary. I understand that the duty of a company actuary is to represent the interests of the policyholders. The current Prudential actuary, Peter Nowell, has significant shareholdings and share options with the company. I believe that, even if declared, his interest as a shareholder is contrary to the interests of the policyholders. I ask the Institute of Actuaries to look at that because it is unsatisfactory.
Where do we go now? One of the largest and most respected companies is and continues to be one of the worst offenders. We have the unresolved situation of orphan funds being used to pay for the mis-selling, which is inappropriate. It is obvious that we need better and clearer information. We can look for benchmarking. If we look to see whether the insurance industry has learnt anything, the evidence is not encouraging.
A total of 1 million free-standing additional voluntary contributions have been sold, with an investment of about £4.5 billion. Recent newspaper reports suggest that we may be looking at compensation claims of up to £675 million, affecting some 50,000 to 70,000 people. How did free-standing AVCs come about? There were people in occupational pension schemes who could have paid AVCs into their own schemes, but who were encouraged to look at free-standing ones. It was argued that free-standing AVCs were preferable to company AVCs because of their portability, wide investment choices and privacy. They were also said to be convenient for people who move jobs.
In October 1998, Bacon and Woodrow said that the advantages of free-standing AVCs over in-house AVCs were "largely illusory". Something that was never mentioned on free-standing AVCs was that the salesman received commission. That was an unmentioned major advantage.
The major players in the selling of free-standing AVCs were Allied Dunbar, Pearl and Prudential. It was said earlier that companies making home visits may be thought to give better and more appropriate advice. That fact does not seem to be borne out if we look at the companies involved in free-standing AVCs. The companies that may be most implicated in selling inappropriate free-standing AVCs may be some of those companies making home visits.
Free-standing AVCs are not suitable for many people. For example, schemes such as those for the armed forces have high accrual rates, and those in the pension schemes quickly run up against Treasury limits. The industry feels that the area where one might find most mis-selling is where the trustees of a pension scheme have arrangements with a company to supply AVCs on special terms but the salesman does not pass on those special terms. The individual involved may have heard the name of a company and thought that it was a good deal without looking at the small print. I am not suggesting that the inappropriate sale of free-standing AVCs in any way comes close to pension mis-selling, but it is a clear indicator that the industry is not listening or learning.
The average return on an in-house AVC is 10 to 15 per cent. higher than for a free-standing AVC. Over 10 years, we could be talking about the equivalent of one year's premiums. So not only are the theoretical advantages largely illusory, but the financial returns do not come up to scratch. Any person considering free-standing AVCs in the future should be provided with clear information about how they compare with in-house AVCs. The trustees of occupational pension schemes could pay more attention to that issue, and provide clearer advice.
We are told that the industry is learning, that it is becoming more transparent and open. That has to happen if it is to deal with this. However, this week I saw a statement on personal pension PEPs from NPI. I compared it with a statement issued six months ago. The earlier statement was clear—it showed what was paid in, the current value and how the investment was performing. In fact, the returns on the policy involved meant that it was now worth less than the amount that had been paid in over 18 months.
Surprise, surprise, over the six months, the statement format had been changed. The categories and boxes had changed, and it took a great deal of leafing through to work out that the value had dropped. If we want to educate people so that they can make informed choices, we must be up front.
One of the biggest illusions about pensions is that there is a risk-free pension investment. Whether it is the Government, private industry or whatever, pensions involve risk. Unless we give people appropriate information, which we are not doing now, they cannot make choices on risk. The industry is still hiding facts from policyholders.
The Association of British Insurers came to talk to a group of Members of Parliament on occupational pension schemes. I questioned one of the representatives about the Which? report which had been published a week before. That report looked at 80 personal pensions, but found none of them satisfactory and would not recommend any of them. I asked the insurance industry for its response. I was told that the Which? criteria are phoney, and that the report made bizarre statements, such as that pensions would be a bad buy if. cashed in within three years. I became angry, because it was on the very day that the Financial Times had run a huge article stating that 60 per cent. of personal pensions are cashed in within the first three years. Industry representatives therefore came to Parliament to talk to hon. Members about occupational pensions, and thought either that we do not read newspapers or that, if we do read them, we cannot match what we read with what we are being told. It shows the industry's unwillingness to be honest. Unless and until the industry is honest, there will be no faith in it.
Some pension companies have a worse track record than others in the number of policies issued for which payments are not up to date. Although I should not say that there is a direct relationship between track records on payments and the quality of advice given, it is interesting to note that Britannic Assurance, Old Mutual, Royal and Sun Alliance, Albany Life and United Assurance have a particularly high withdrawal rate in the first few years, because people stop paying in. Perhaps such high rates show that personal pensions were not the right policies for those people.
I very much hope that the Government's individual savings accounts will be a vehicle that allows people to build up assets. It has been interesting to see Opposition Members shake their heads and reject ISAs before the public have had a chance to give their verdict on them. Nevertheless, Radio 4 is running a wonderful competition to find a slogan to sell ISAs, and I should tell the House that the slogan "There is nothing nicer than a Government ISA" has been banned.
Where do we go from here? I think that it will increasingly be recognised that there will continue to be a public-private relationship in pension provision, and that the insurance industry has a significant part to play in it. It is no good the insurance industry continually assuring us that people trust their personal adviser but mistrust the industry. Such a statement tells me only that personal advisers individually are doing a good selling job. I think that people are right to mistrust the insurance industry.
There must be accountability and openness for people trying to build a personal pension. There must be a stage at which people of any age can ask, "How much have I built up? Will it pay for my old age? What are the likely returns?"
People must also be aware that investments are never safe, and that we take risks. However, the current system does not allow us to take risks. As there is an interesting selection of trustees of the parliamentary pension fund in the Chamber, I shall use myself as an example. Before deciding whether I should put everything into the parliamentary pension fund, I should know whether I will be re-elected. Therefore, in about three years, I will know what I should have done—which is clearly an unsatisfactory situation.
I welcome the Government's continued insistence on dealing with pensions mis-selling. However, some of the industry is still in denial and is not recognising its responsibility. Moreover, as events of the past few years have shown, the industry tries always to be one step ahead and just that little bit cleverer than everyone else. It must realise that it has to work within a very robust framework, which I hope the Government will create.
It is somewhat intimidating to speak after two of the House's leading experts on pensions—the right hon. Member for South Norfolk (Mr. MacGregor) and the hon. Member for Birmingham, Edgbaston (Ms Stuart)—both of whom spoke eminently good sense in a non-doctrinal manner, leaving the rest of us with a rather reduced amount to say.
I should like to pursue the "who-who" question of who benefited from pensions mis-selling and who is now paying for it. It has been estimated that about £11 billion will have to be paid in compensation for pensions mis-selling, and it would be a useful exercise to trace where that £11 billion might have gone.
Four categories of people or institutions benefited from pensions mis-selling, the first of which—as the hon. Member for Grantham and Stamford (Mr. Davies) said in a couple of interventions—was composed of salesmen and executives. They benefited from mis-selling, but have fled the scene. Moreover, under the current regulation system, they were not liable for those transactions. They cannot be traced, and carry no personal liability for events.
The second set of beneficiaries comprises the companies, or some of them, that sold the pensions. They benefited from enhanced earnings, and therefore improved share prices and improved dividends. Nevertheless, there remains the fundamental question—which the hon. Member for Edgbaston pinpointed at the beginning of her speech—of where within companies the benefits accrued. Did they accrue to shareholders, or to current policyholders? Moreover, how should costs now be spread between those two groups? I shall return in a moment to the latter point.
Other groups of beneficiaries of pensions mis-selling have not been mentioned. One major group were employers generally. As employers did not have to make contributions, companies earned 5 to 12 per cent.—a large sum. Strangely, although we attach great stigma to those who gave bad or inadequate advice, it has never been suggested that employers in either the private or public sector were reprehensible for failing to warn employees of the cost of not maintaining their occupational pension scheme.
A fourth set of beneficiaries comprises occupational pensioners themselves. They have benefited from the fact that transfers out of occupational schemes were often made on very disadvantageous terms. Everyone with an occupational pension is therefore better off because of pensions mis-selling. They may not be aware of that benefit or feel a sense of guilt about it, and it is almost certainly impossible to trace them, but great income redistribution among pensioners has been occurring, for which there is no account.
The problem is that people in several of those categories can no longer be traced, so that the £11 billion cost will have to be paid by specific groups that can be identified and targeted. Although it is absolutely right that the Government should have aggressively pursued the compensation issue, and that pensioners should be compensated promptly when possible, as several hon. Members have already said, two specific categories have been forced to carry a disproportionate share of the costs.
One of those categories is independent financial advisers. Although I do not want to labour the point—my hon. Friend the Member for Harrogate and Knaresborough (Mr. Willis) has the largest number of IFAs of any constituency and will speak later in the debate about that issue, which has already been clearly stated—IFAs are, in some but not necessarily all cases, being punished not for mis-selling but for lack of foresight, which is the crucial distinction. The only appropriate basis for compensation would be what an occupational pension scheme would have produced for the pensioner when the private pension was sold. That principle of compensation is not being observed.
As the hon. Member for Edgbaston eloquently said, the other category of people with whom we are concerned is current policyholders. Ministers have said that, as a matter of principle, within companies, shareholders should be carrying the cost burden of pensions mis-selling. However, it is not clear how the matter is being pursued, or whether the burden is being carried appropriately. It would be helpful if the Minister dealt with the matter in his reply.
I do not want unduly to delay the House, but I conclude with a couple of forward-looking conclusions. Although it is easy to be wise and virtuous in hindsight, the key issue for us is to determine what lessons we have learnt from the whole sorry escapade.
The first lesson should be the danger of dogma, and that a "one size fits all" approach to pensions was not right. Although personal pensions—which many of us have—were a good advance, and are appropriate for those who are occupationally mobile, they do not fit everyone, just as owner-occupation is not the only style of housing. I hope that we, and especially the previous Government, have learnt a lesson about such an approach.
Before the hon. Gentleman leaves the first conclusion, will he say whether he agrees that it suggests that, in pensions, CAT marking is no substitute for advice?
The hon. Gentleman is right. CAT marking creates an expectation, at least in some people's minds, that the Government stand behind a financial product. In 10 or 15 years, perhaps there will be people who believe that they have been sold products that had an implicit Government guarantee. We can all appreciate the dangers of that.
The hon. Member for Grantham and Stamford has led me to my second and final comment. The conclusion that we should draw from the matter is that the principles underlying financial sector regulation are complicated. It is very difficult to strike the right balance between over-regulation and under-regulation. We have been through a phase when, arguably, financial services have been under-regulated, and the only relevant principle was caveat emptor. That is a correct principle, as people should be careful when they are buying, but we know what happens when that principle is dominant—there is dishonesty, and people lack the information to operate properly in the financial services market.
Now, however, there is a danger of lurching in the opposite direction, with the system becoming over-regulated so that products are priced out of the market, and providers do not offer new products. We have to get the balance right. That is why it is absolutely crucial to have legislation as soon as possible on financial services regulation. That will help us to understand whether the right lessons have been learnt and the right balance struck.
As the hon. Member for Twickenham (Dr. Cable) said, we have heard a number of constructive speeches that have drawn on the lessons of the past and sought to apply them to the present and the future. Today's debate is particularly well timed as the Government are about to embark on some enormous policy changes. The first, which has been alluded to several times today, is the long-awaited Green Paper on pensions, setting out the next generation of pension policy for Britain. We are all looking forward to that important document, particularly to see whether it includes a new design of stakeholder pensions or citizenship pensions for those such as carers who are unable to make continuous contributions.
The second policy change, involving the new individual savings accounts or ISAs, starts next April and has also been mentioned in the debate. There are implications for ISAs as a result of pension mis-selling in the past.
The third development in the near future, to which the hon. Member for Twickenham referred at the end of his speech, is the draft legislation in respect of the Financial Services Authority. The hon. Gentleman looks forward to reading the Bill when it is published, but it will obviously be based on the draft Bill on which there is currently consultation.
Clearly, there are important lessons to be learned from how the regulations under the Financial Services Act 1986 operated when pensions were being mis-sold as to what should be in the next financial services and markets legislation.
Fourthly, I should mention almost as a footnote to the debate on pensions, that a draft Bill was published for consultation over the summer on pension sharing between spouses when marriages break down and how existing pensions should be split.
For all those reasons the timing of the debate is most apposite. However, for the Treasury Select Committee on which I am pleased to serve, the timing of the debate is slightly awry. As hon. Members will see from the Order Paper, although the minutes of evidence from hearings held over the summer are available to inform today's debate, the Select Committee report has not yet been published. Perhaps hon. Members will take it as a plug that the report will be produced very shortly. I hasten to add that what I say now is entirely my own view and not the view of the Treasury Select Committee or the contents of its report.
The value of the debate lies not in the apportionment of blame, although I am happy that many hon. Members accept that things went wrong and that there are lessons to be learnt. Rather it is to face up honestly to what went wrong and to identify the lessons to be learnt so that we can avoid making the same mistakes again and anticipate offshoots of those mistakes arising in future.
It is helpful, however, to ask what went wrong and to say, as my hon. Friend the Economic Secretary to the Treasury did, that between 1988 and 1994 some 5 million personal pensions were sold in Britain. Astonishingly, more than 2 million of them need to be reviewed for the possibility of mis-selling.
What is meant by mis-selling? According to current regulations, three criteria have to apply. First, did the seller breach a regulation requirement at the time of the transaction? In other words, was there a compliance fault? Secondly, has the buyer suffered a loss? Thirdly, was that loss caused by the seller's compliance fault? If the answer to all those questions is yes, it can be said that the pension has been mis-sold.
So how did buyers lose out? Overwhelmingly, as the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale) pointed out, the problem affected people who were persuaded to opt out or not to join or to transfer away from an occupational pension scheme, thereby usually losing the benefit of employers' contributions. The Financial Services Authority estimates that about 1.4 million personal pensions sold at that time will be found to have been mis-sold at a total cost to the financial service industry of a massive £11 billion, including the compensation paid to individuals who were mis-sold pensions and the administrative costs to the companies involved.
My hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) mentioned the actuaries Bacon and Woodrow, who estimated total costs of £22 billion, but most in the industry have difficulty with that estimate.
On the subject of what went wrong, one has to ask where the regulators were. As Opposition Members have said, there were regulators who visited premises and inspected paperwork, yet between 1988 and 1991 when mis-selling was at its height, we heard not a word from the regulators. When research disclosed that mis-selling was taking place on a huge scale across the entire country and the regulators announced that there would be action, which eventually comprised a review with a deadline of 1996, nearly everyone missed the deadline. Phase 1 of the review should have been completed by the end of December 1996, but at that time hardly anyone had started the process. It is now likely that phase 1 will be completed by the end of this year—two years late—and only then will phase 2 reviews start.
It is also important to recognise that the buyers who were mis-sold pensions were not the only ones affected, but that a great wrong was done to the reputation of Britain's financial services sector—in which we all take pride—as a world-beater. The industry has certainly been damaged. It is vital to complete the review, pay the compensation, learn the lessons and then to move on.
Although we are studiously avoiding apportioning blame, it is important in learning the lessons to see how the candidates for villain performed during the period in question. I intend to go through the cast of the Government of the day, the regulators, the insurance companies and their sales teams and the independent financial advisers.
It was clearly the policy of the Government of the day at the time of the Social Security Act 1986 to shift large numbers of people from the state earnings-related pension scheme to personal pensions. Apparently, there was the attraction of cost-free pensions paid for by national insurance rebates topped up in order to look as though they would represent a better deal than SERPS. In addition to the policy aim of persuading people to leave SERPS, there was an expensive advertising campaign to persuade people to do so. I refer the House to an excellent debate on the subject on 10 May 1995 when the present Minister of State for Social Security, my hon. Friend the Member for Southampton, Itchen (Mr. Denham), made an excellent speech that still reads well today and was extremely prescient. I should like to borrow one reference that he made to a memorable advertisement of the day, which showed someone tied up in chains upside down, representing their existing pension provision. The advertisement said of the new personal pensions:
employees will be able to choose their own Personal Pension scheme instead of staying in SERPS or an employer's pension scheme.
I accept that the Government of the day did not intend that people should be mis-sold personal pensions. It is a valid policy to want to persuade people to leave SERPS and take out personal pensions, but the unintended consequence was that lots of people were persuaded to leave occupational pension schemes in which they were well off and take out personal pensions instead.
I am sure that the hon. Gentleman recognises that there were occupational pension schemes in which people were not particularly well off or that were not suitable for them. It is wrong to suggest that everybody would have been better off remaining in an occupational scheme.
I gladly accept that. When I was explaining how people made a loss I said that it was mostly those who left occupational schemes to which their employer had made a contribution. I accept that there were advantages for some people in having a personal pension rather than being in their employer's occupational scheme.
The final accusation against the Government of the day is that they set the regulatory framework that was intended to police the selling of pensions. The Financial Services Act 1986 established a mix of agencies and self-regulatory organisations—nine in all—which overlapped in some areas and left gaps in others on the policing of pension selling.
I shall now leave the charge list against the Government of the day and move on to the regulators. As Opposition Members have already said, every year the regulators made their checks of independent financial advisers and companies that were selling personal pensions, looking through their paperwork and making spot checks, and apparently found nothing to comment on, even though it is clear that there was an immense amount of pension mis-selling at the time. That is a clear failure on the part of the regulators. They failed to work in concert, resulting in overlaps and gaps in consumer protection. One memorable occasion was in 1994 when the Securities and Investments Board eventually issued its guidance, leaving the SROs to promulgate it as rules. The SROs took a further six months to convert the guidance into rules to be enforced.
I commend the hon. Gentleman on the accuracy of his trawl through what went wrong. I know of one firm regulated by the Investment Management Regulatory Organisation that was commended in the late 1980s and had its records described as exemplary. In the post-1994 regime, even though it took time to get going, the firm was fined £200,000 for the same records.
I thank the hon. Gentleman for illustrating my point. I do not encourage him to take that argument too far, because the Government of the day established the regulators. When research disclosed that there was a problem and the regulators finally swung into action to stem the problem, they took years to bring matters to a conclusion—indeed, we have not yet seen the conclusion. I remind the hon. Member for Grantham and Stamford (Mr. Davies) that the Government of the day did not give the regulators the power to impose fines on individuals, such as directors of companies, found guilty of mis-selling pensions.
I turn now to insurance companies and their sales teams. Did an unhealthy dependence on commission payments from employers to employees contribute to the problem? Employers paid by results, paying only for sales achieved. There was pressure on employees to complete sales because their pay depended on it. How did the companies check what their sellers were doing in their name and on their behalf? Where were the internal checks on compliance?
The hon. Gentleman describes the employment of salesmen in those days. He will recall that they were often not employed at all, but were self-employed. That was legal. Does that not suggest that the conditions under which pensions were sold in those days were very different from the conditions now?
I accept that. One of my hon. Friends who is no longer in the Chamber earlier made a compelling point about redundant coal miners who were trained and sent out. I accept that some of them were employees and others were classed as self-employed for taxation purposes. They had so much difficulty earning their commission that they had loans to tide them over. That would have been an added pressure to make sales.
The last charge against the insurance companies is that they were slow to respond to the regulator's requirements for a review. In recent years whacking great fines have been imposed on the companies—not the directors, of course—for missing deadlines that were imposed on them.
The last group in the cast are the independent financial advisers. I am a fan of IFAs and have a great deal of sympathy for their difficulties. I have met IFAs in my constituency to talk about the phase 2 review. IFAs claim that they are responsible for half the sales of personal pensions. Some of those pensions have been found to have been mis-sold. However, their share of mis-sold pensions is very modest compared with the insurance companies.
IFAs complained that there was not sufficiently detailed guidance in the rules when they made the sales, but they pride themselves on being—and advertise themselves as—the givers of best advice. It ill behoves them to complain if their advice sometimes fell below that standard.
Some IFAs have been slow to respond to the request for reviews of their cases. Had there not been such a delay in dealing with the reviews, they might have found that the cost of paying the compensation years earlier would have been less. I shall not go as far as my right hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell), the former Economic Secretary to the Treasury, in calling them laggards, but I support the initiative that she took immediately on arriving in that post in calling in the major players in pensions mis-selling and laying it on the line to them that the Government intended to see the end of the episode.
What lessons can we learn from those experiences? I should like to take us through some of the same cast. The first lesson for the Government is to have clear policy objectives.
The Government of the day must also show sufficient competence in putting their policy objectives into effect, so as to avoid unwanted and unexpected side-effects. The third lesson for the Government is that it is their responsibility to set an effective regulatory framework for those objectives.
Curiously, the Financial Services Authority is carrying out much of its work of regulation under a set of contractual arrangements with the existing regulators, because the statutory backing for its activities is not yet in place. The first lesson for the regulator is that it must have the clear chief objective of protecting consumers. We shall return to that subject when we debate the Bill that will put the FSA on a statutory footing, but as things stand it is noticeable that several of its objectives appear to have equal standing, so there is a danger that priorities will become confused. The number one objective, at the top of the list, must be the protection of consumers.
Secondly, the FSA must have the flexibility to adjust to changing markets and new products. It is important that once the Government have legislated, there is sufficient ability, in terms of rule-making and secondary legislation, to move on from time to time and keep pace with the fast-developing market in financial services.
My third point for the regulators has already been commented upon several times. The authority needs the power to hit where it hurts, and to hit those whom it should hurt. Compensation must be ordered to be paid by those who should pay, such as companies whose shareholders stand their loss. The authority should also be able to impose fines on those responsible, including directors and controllers of the activities of individuals. It should be able to withdraw authorisation from those who repeatedly breach the regulatory requirements.
My final point in examining the lessons to be learnt by individual organisations is that the insurance companies need to review their policies on payment by commission. It is not for the Government to tell insurance companies how to reward their staff, but it would be right for the FSA to say that it wanted to know precisely how they intended to do so. If there appeared to be an unhealthy reliance on commission in making up a reasonable salary for employees, it would be fair for everyone to expect the authority to pay closer attention to the activities of such a sales force. If pensions mis-selling were then found, it would be fair to expect fines to be imposed and compensation ordered. Such an approach would make most companies think carefully about the proportion of pay made up of commission.
As my hon. Friend the Member for Edgbaston said, insurance companies must also learn the lessons of what has gone wrong, and put in place proper internal compliance processes to check what their staff are doing—in their name—in the street and in people's homes.
My third point for insurance companies is that it is vital for them to pay more attention to persistency rates—to how long the pension policies that they sell last. It is good business for companies to want to follow up the sales of their pensions by going back to customers and checking whether their needs have changed, and if so, selling them more business. They would then have more contented customers, who would pass on the company's name to their friends and families.
There are three further issues, all of which have been mentioned by previous speakers. The first is that of kitemarking, benchmarking or CAT standards—CAT standing for charges, access, terms.
I shall gladly do so. The second issue is consumer education, and the third is companies' so-called orphan funds.
I have come to the conclusion that kitemarking would be an unwise and unsafe development in personal pensions selling. Every personal pension needs to be tailored to the needs of the individual who buys it, and I do not see how kitemarks can assure buyers that the product suits their personal circumstances. If a product carries the kitemark, there is a danger that it may lead some people to believe that they have been given such an assurance.
Benchmarking is the other side of the coin. We want to see some kind of comparison between the products of different providers. The problem is that each provider devises its own brand of product. Sometimes it seems that providers go out of their way to devise a product, and the information that they give out about it, so as to prevent comparisons between their product and someone else's.
One challenge for the new FSA will be to work for more common standards between financial services products, to enable consumers to make informed comparisons. In furtherance of that aim, CAT standards may have a part to play in the debate. If there could be minimum components of a product, which people could be sure about, that might be of some help to consumers. It could go some way towards answering the Consumers Association's call for the new system to be a regulation of products rather than of the processes by which the products are sold.
that brings me neatly to the subject of consumer education. As the hon. Member for Twickenham said, all buyers have some responsibility to take care to ensure that the product that they buy is of some value to them. That responsibility is so well established that it still has its Latin tag—caveat emptor, or let the buyer beware.
However, buying pensions is a serious business, and I am not entirely sure that most of the public, including many hon. Members, have a full understanding of the pensions industry. We shall not be able to say to consumers, "You must take more care to inform yourselves about what pensions are available in the market," unless we also make the sellers of pension policies put their cards on the table and reveal precisely what their products mean.
That comes back to the point that I made earlier about common information and common standards, which would enable comparisons to be made. There is a role here for the Financial Services Authority, and it is more than policing the small print; it is promoting the kind of public debate that will encourage a greater understanding of the products between which people are being asked to choose.
Finally, we come to orphan funds. Companies are paying out billions of pounds in compensation, but where do the costs fall? Do they fall on shareholders or on the contributions made by other policyholders? Overwhelmingly, at present, it is other policyholders who pay.
As my hon. Friend the Member for Edgbaston said, policyholders pay their premiums and expect their money to be invested for their benefit—but they may find that it is going to pay compensation to other policyholders instead. How can that be? Companies have amassed funds bigger than the sum that would be needed to satisfy the reasonable expectations of existing policyholders. Excess funds have built up over the years which are now being used to pay the compensation.
There is no legislative definition of what "reasonable expectations" means. There is no record of any Government intervening to disagree with a company's decision about what those "reasonable expectations" are. However, I concede immediately that every company must have a company actuary to defend the policyholders' fund, and the Government have an actuary who is available to be consulted by the company actuary about the "reasonable expectations". I believe that policyholders deserve their own champion—someone with a higher profile than those actuaries and with tougher powers to intervene.
It is a matter of intergenerational fairness—as the Chancellor of the Exchequer said in last year's Budget statement—that we solve the problem, once and for all. In the case of Prudential, the problem has gone on for 150 years. How many more years will it take before we grasp that nettle?
In summary, the pensions business has been through a decade of disaster. Innocent consumers—in their hundreds of thousands—have been sold pensions that have caused them loss. We are now many years later on, and more of those innocent buyers are still waiting for compensation than have received it. It is a stain on the reputation of the British financial services industry, and I hope that we, the legislators, will face the failings of the past 10 years honestly and fully.
As we prepare for a new pensions settlement and one powerful regulator for all financial services, it is essential that we learn the lessons of this dismal record. Only in this way can we look forward with confidence to a clean and efficient market in financial services for the next decade—nay, the next millennium.
On a point of order, Mr. Deputy Speaker. Twice now, in an otherwise extremely well-informed and excellent debate, an hon. Member, having delivered a speech, has simply walked out of the Chamber without waiting to listen to the successor speech. On one occasion, it so happens that it was a Labour Member—on the other, it was a Liberal Democrat Member. I take the liberty of drawing this to your attention, Mr. Deputy Speaker, because there is a general feeling that it would be a great pity if what is not merely a long-standing courtesy of the House of Commons, but also an essential aspect of the very notion of debate should be eroded without its being at all remarked upon.
Order. That is not officially a matter for the Chair—it is a convention of the House. However, I have made it known privately that I feel that hon. Members should listen to the following speeches if they have taken part in the debate—particularly when they have been called early. It is bad manners not to do so.
Order. My memory has returned. The hon. Member for Twickenham did mention to me that because of the debate on the pre-Budget statement, he would be going to a television studio. The point made by the hon. Member for Grantham and Stamford (Mr. Davies) is on the record, and it should not be the practice of hon. Members to leave the Chamber after making a speech.
It is very rare—perhaps, unfortunately, all too rare—that I find that I agree with almost every word spoken by Labour Members. The speeches from the hon. Members for Stafford (Mr. Kidney) and for Birmingham, Edgbaston (Ms Stuart) have been quite outstanding and extremely well informed.
I speak as the chairman of the all-party group on occupational pensions, a position I have held for some years. I should declare that, for some years, I was an adviser to the British Insurance and Investment Brokers Association and the Independent Financial Advisers Association. I am also one of the trustees of the parliamentary pension fund. I have taken a long-standing interest in these matters; indeed, I am one of the guilty men who served on the Committee discussing the Financial Services Act 1986.
It is perhaps worth saying that we should take a broad view of the situation as it relates to pensions in the UK. It is true that we now enjoy a much more favourable position than almost any other country in the world in terms of the proportion of money in pensions savings. We now have more pensions savings than those accrued in the rest of the EU.
To a great extent that is due to the policies of the previous Government, who gave great encouragement to the acquisition of personal pensions and to savings in general. Although we are now debating a very serious issue—the mis-selling of personal pensions—it would be wrong to assume that, overall, the actions taken by the previous Government to encourage personal pensions have not contributed tremendously to our national well-being. We should put the problem in that perspective.
There has been a lot of criticism of the Financial Services Act 1986, which has all sorts of deficiencies—some of which I pointed out at the time of its enactment. However, it is also true that we would not be having this debate about mis-selling if the previous Government had not created the offence of mis-selling. It would not exist but for that Act. In most other western countries—and most other countries in the EU—the offence does not exist.
That reminds me of Mr. Al Fayed saying that had it not been for his honesty, the whole affair of his trying to bribe a Member of Parliament would not have come to light. It is disingenuous of the hon. Gentleman to say that had it not been for the mis-selling, the previous Government would not have set up that wonderful organisation which made that practice an offence.
The hon. Lady may have misheard me. I said that there would not be an offence had it not been for the legislation. In many EU countries, there is no such legislation, and what we are debating would not be considered an offence in most other countries. That fact does not excuse what took place, which was disgraceful, and I condemn it unreservedly. For all the faults in the legislation—and there were many—it was well intentioned and went a long way towards controlling a problem which could have been a good deal worse.
I was very much opposed to the multiplicity of regulators listed in the 1986 legislation. I made several speeches on that subject and argued that because there were far too many, that could lead to regulatory arbitrage—as, indeed, it did. The idea that we should have so many different bodies—including the Securities and Investments Board regulatory organisation itself—was a farce because people chose to be regulated by the regulator they thought would give them the easiest time.
That was wrong, and part of the industry is to blame. The large direct sellers said that they were highly respectable and would not need regulation. They would accept the Investment Management Regulatory Organisation or the Life Assurance and Unit Trust Regulatory Organisation, but they wanted nothing to do with the rag, tag and bobtail that could be shoved into the Financial Intermediaries, Managers and Brokers Association.
It is extraordinary to note that the mis-selling which occurred under FIMBRA—the most underfunded regulator with the least resources and the greatest potential problems—was a great deal less than that conducted by those who were regulated by LAUTRO and IMRO, yet they were supposed to be highly respectable people who did not need regulating. At least that is what they told us when some of us went to see them.
We need to put the matter in perspective. First, I wish to deal with the direct sellers—the very large companies that said that they did not need regulation because they were all so respectable. They were clearly the worst offenders. That is not surprising because, as the hon. Member for Stafford pointed out, they engaged in much high-commission activity. Indeed, many indulged in commission-only sales, so they did not have employees as such, but people who could not eat unless they sold yet another product. People employed in such a way are hungry to sell and do not necessarily act in the best interests of the person to whom they are selling. I have made many speeches to the industry and in the House on that subject and have been a consistent opponent of high-commission and commission-only sales, which inevitably tempt salesmen into abuses. That is exactly what happened.
Labour Members have asked who pays. Their answer was right, as in most cases the policyholder pays—the people who bought the product. I declare an interest as I have two personal pension policies and I will be paying. In the case of the mutuals, no one else but the policyholders will be paying. Fortunately, the mutuals— I am a great admirer and supporter of mutuality—were less active in mis-selling than the proprietary sellers. Nevertheless, the mutuals engaged in it and to that extent their members will suffer as a result.
In the case of the proprietaries, the hon. Member for Edgbaston was right to point out there is a problem with who pays, and whether some people should be paid from orphan funds. My view is that those funds should exist to even out variations in the market. Surely their purpose is to act as a reserve. The market can change rapidly—we have seen tremendous changes recently. In some cases, the policyholder may be looking for a lump sum on maturity to repay a mortgage, but because of a downturn in market conditions there may be insufficient funds to meet his or her expectations. Presumably he was sold the product on the basis that it would generate sufficient funds to repay the mortgage. Therefore, to the extent that the orphan funds exist, surely one of their primary purposes ought to be to contribute towards bonuses in lean times. They could be built up again when times are better. The idea that such funds should be paid out willy-nilly to shareholders has been promoted in some quarters—notably by the Prudential—but should be resisted at all costs.
The problem with orphan funds is not merely excess profits but policies that have not been cashed in and have accumulated. In the Prudential's case we are talking about £5 billion to £7 billion, which is a significant sum. The question is, should one generation benefit from what has been accumulated over several generations? Clearly, the funds are not being used to even things out at the moment. They are being used as a nest egg for when times are bad. When times are good they do not pay out.
I entirely agree. That was the point that I was trying to make. The funds should be used to smooth things out and to meet the reasonable expectations of policyholders. That is what the actuary is supposed to ensure, but there seems to be a risk that that is not what the Prudential intends to do.
Surely the point is that the so-called orphan funds exist in the large insurance companies. Those are the funds that will be used to pay the compensation and that is what is happening. Whether they should be deployed in that way or more fairly, the fact is that the companies have huge resources with which to pay. The central point as regards the current controversy is that the independent financial advisory sector has no such resource. It has professional indemnity insurance, the market for which is about to collapse.
My hon. Friend is, as ever, extremely well informed on these matters and I agree about the difference between the proprietary funds and IFAs. He is right to be concerned about the use of orphan funds for that purpose. If the directors of such companies condoned significant mis-selling for the benefit of their shareholders, those shareholders should suffer and may then exact their retribution from those who acted in that way. That is the proper and reasonable way to deal with the problem, rather than by raiding funds that have built up for generations.
I am concerned that the problem has been made worse by some of the Government's actions. The advance corporation tax changes were an enormous raid on the pension funds. Various estimates have been made of the cost of pensions mis-selling. The Association of British Insurers estimates that it is between £8 billion and £11 billion. Even if we take the upper range, that sum would be equalled in two years by the £5 billion a year raid that the Government have made on pension funds. Let us get the picture in perspective. The biggest raiders of pension funds are on the Labour Benches. It has been suggested that the Chancellor may tax lump sums, not to mention higher rate relief. If he did so, people who rely on products to pay their mortgages would be in even greater difficulties than some of them are already.
I am astonished at the crocodile tears shed by those on the Treasury Bench. The Government are abandoning the proposal of the former Minister of State at the Department of Social Security, the right hon. Member for Birkenhead (Mr. Field), for second-tier pensions and taking steps to attack the entire industry for short-term profit for the Chancellor, yet they express such great concern about pensions mis-selling. They are right to express concern, but let us put their actions in context.
The Economic Secretary made an astonishing attack on IFAs which was not justified. That is not to say that some IFAs have not misbehaved. Of course, some of them mis-sold pensions and I hope that those who did so deliberately and blatantly and who were wholly motivated by greed will not be able to practise as IFAs again. However, there are some greyer areas. Perhaps, those advisers may not have undertaken the full fact find, or they may have missed something that they ought to have noticed when giving best advice. If it was an innocent or careless mistake, the penalties should not be as great. Those who deliberately sold to people who had no means of knowing that the advice that they were being given was wrong and who encouraged people to leave occupational schemes knowing that that would be grotesquely to their disadvantage should never practise as independent financial advisers again.
We must consider the record of independent financial advisers. The initial report by KPMG clearly showed that IFAs engaged in less mis-selling than direct sellers—the product providers. I did not find that altogether surprising, as they were professionals and were bound to make comparisons between one product and another, however inadequate those comparisons might have been.
If we look at the results of phase 1, we find that 86 per cent. of the mis-selling was by the direct sellers—the product providers—and only 14 per cent. of the mis-selling is attributable to IFAs, despite the fact that IFAs sold 42 per cent. of the products concerned. The incidence of mis-selling by IFAs is a tiny fraction of the incidence of mis-selling by product providers. For the hon. Lady to portray IFAs as the villains of the piece was to distort the truth a little too much.
Does the hon. Gentleman accept, and will he make it clear for the record, that my remarks referred primarily to the campaign being run by the IFA Association, and were not, as I made clear to the House, directed at every IFA?
I am grateful to the Economic Secretary for that clarification, although it does not take us much further. In my experience—she will know that I have been involved in the industry for some years—the IFA Association has probably done more to raise standards among IFAs than almost any other body that one can imagine. Of course the IFAA is a trade association and will seek to defend its members. It would not be doing its duty by its members unless it did so.
Let us examine some of the hon. Lady's accusations. First, as my hon. Friend the Member for Ryedale (Mr. Greenway) said, IFAs do not have the cash that is instantly available to the direct sellers. Secondly, the hon. Lady said that the IFAs went to court against the regulators, as though that was some appalling act. They went to court to establish whether it should be possible for the regulator to require them to go back to people who had not complained and ask to investigate the possibility that they had mis-sold a product.
That would be in direct contravention of the terms under which the IFAs were insured for professional indemnity. The hon. Lady knows that it was the professional indemnity insurers who were telling the IFAs that they would be in breach of contract if they behaved in that way. The only way for the IFAs to resolve that through the IFA Association was to seek a court ruling, otherwise they would be caught between a rock and a hard place.
The IFAs did not go to court to avoid co-operating in the review or to delay the process. They went to court to clarify their legal position because they had been put in an impossible situation by the demands of the regulator. That does not seem an unreasonable way to behave. They need to clarify the matter, as the underwriters of their professional indemnity cover are saying, "We are in an impossible position. We will be asked to pay out on terms that are clearly in breach of the contract between you, the IFA, and us, the underwriters."
The underwriters are either refusing to give cover, which means that some IFAs cannot legally operate because they cannot get PI cover, or the underwriters are quoting such huge premiums that it is impossible for the IFA to operate. That is continuing problem which must be addressed by the hon. Lady and the regulator, in consultation with the IFAs, if IFAs are to continue to operate in the market. Clearly, as the IFAs were the least guilty of mis-selling, it is in the overwhelming interest of the public that independent advice should be available. I appeal to the hon. Lady to deal with this issue, which is vital for the industry.
The second problem, which I shall not labour as previous speakers have outlined it, is the basis of compensation. It has always been maintained in our courts that if someone has suffered damage, the measure of damages is his actual loss, as far as it can be quantified, and it is the loss at the time that the loss occurred, not the notional loss some years later.
Indeed, I was a lawyer before I came to this place, so may I tell the hon. Gentleman that the assessment of loss in a civil case is carried out at the time of the hearing, not at the time that the wrong was committed, which might have been many years earlier? That makes sense; otherwise courts would be in the absurd position of awarding sums of money that were completely wrong—far too large or far too small.
The hon. Gentleman is partly right. The assessment of loss takes place at the time of the hearing, but the object is to put the plaintiff back in the position that he would have been in if the wrong had not been done. That is not what is being proposed. The present proposal is that there should be the benefit of hindsight and that the loss should be assessed regardless of the fact that the economic circumstances have changed—in particular, the yield on annuities has changed dramatically.
The calculation of loss is a moving target, which changes enormously depending on the date chosen to assess the loss. As I mentioned earlier, in one case the policyholder would have been £2,500 better off in 1995, but because of the changes in the annuity market since then, he is now facing a £38,000 notional loss. If he gets that money, he will be substantially better off than he would have been if he had never bought the policy. Indeed, he was better off buying the policy in the first place.
I am not sure that we should enrich people by giving them the benefit of the hindsight that we would all like to have. We would all like to own something that we could have bought, had we had the necessary information five years ago. That is surely not what the Government intend as the basis for compensation.
Several leading actuaries have examined the issue and concluded that if we proceed as the Government and the regulator propose, a large number of people will be significantly better off than they could have been if they had not taken out a particular pensions policy. As the funds of the other policyholders will generally cover the cost of compensation, we would be rewarding one group of policyholders at the expense of another, with no real justification for doing so.
The Economic Secretary referred to the PASS initiative, which was welcome. It has assisted many IFAs to deal with the problem, but I understand that that is confined to phase 1. Phase 2 is a more difficult problem because the numbers involved are much greater. That means that the cost of carrying out all the investigations in phase 2 will be much greater, although the likelihood of mis-selling is proportionately much smaller, because the people to whom the products were sold were a great deal younger. The maximum cost will be passed on to IFAs for a much lower benefit to those who may have been mis-sold a pensions policy.
I intend to press the Economic Secretary on the issue of mis-selling. A significant group of IFAs have got through phase 1 and it has been shown that they were not involved in any cases of mis-selling in phase 1.
As my hon. Friend the Member for Ryedale says from a sedentary position, other IFAs were involved in a few cases of mis-selling. I am particularly concerned about those companies against whom there are no complaints of mis-selling. They will be required to sift through their entire portfolio of sales for the past 10 years at enormous cost—£600,000, on average. That is a colossal sum for some small firms. One IFA told me that it would take his whole staff three years to complete the process. He said that they would not be able to do any other work and that the company would go bust but for the fact that he was prepared to support it financially through the process. This exercise will drive an enormous number of IFAs out of business when there is little likelihood of mis-selling having been proven.
It would surely be correct in phase 2 to say that, if there are no complaints about potential mis-selling and if there has clearly been no mis-selling in phase 1, the test should be different. Will the Minister agree to the proposition that the Government should reimburse IFAs for the cost of the process if no evidence of mis-selling is found? That is another possibility: the Government could compensate IFAs for having impugned their professional integrity. I doubt that that proposition will be attractive to the hon. Lady, but it is one that I postulate.
I am very worried about the Government's attitude to this issue. They have demonstrated an extremely aggressive attitude towards IFAs, who have been the least guilty parties in this process by a considerable margin— 86 per cent. compared with 14 per cent. That aggressive attitude leads one to believe—and my suspicions are reinforced by personal conversations that I have had with Treasury officials—that the Government do not care about the IFA market. They think that IFAs are a bit of a nuisance and would sooner that the public dealt with direct sellers—we know that some of them are cronies of the Prime Minister—particularly if they happened to be selling kite, CAT or some other product.
I am concerned that the Government are exhibiting a cavalier attitude towards IFAs. I am equally concerned about the principle of kitemarking, which could lead to more mis-selling. I am particularly worried also about the possible abandonment of polarisation. I have long held the view—I argued to this effect in 1986 when we were considering whether there should be hybrids in terms of sales—that the public must know the status of the person selling the pensions. People must know if they are talking to a tied salesperson who can put his hand on his heart and say, "I am telling you what I am telling you, but I am the paid sales representative of company X". In those circumstances, people would know exactly where they were and how much weight to put upon his or her advice.
When people deal with IFAs, they know that IFAs should—if they are doing their job properly—look at the whole range of the market, identify the product that is best for the individual and make an informed expert choice on the customer's behalf. If we have a hybrid situation, whereby people sell the products of five or six companies, sellers are neither IFAs nor single tied agents. Let us look at the situation where hybrids exist. In Australia, for example, the results have been disastrous. A small group of hybrid sales organisations now dominate that market. They are very large, they have forced everyone else out and there is no expert information available to consumers. That toleration of hybrid sales is one of the reasons why there has been more mis-selling of pension products in Australia than anywhere else.
There has been remarkable consensus and great expertise displayed in the debate so far. I plan to continue the former, but I doubt that I can add to the latter. There is not a great deal left to say about this subject, and I sympathise with the hon. Member for Twickenham (Dr. Cable) who commented much earlier in the debate that all the issues had been covered.
However, in talking about the problems that have arisen as a result of the changes introduced by the Conservative Government, it is important to dwell briefly on the impetus for that change. I was one of those who pushed very hard to open the whole pensions issue. Pension transfer values were diabolical: if one's career was not entirely in one company, one was ripped off completely when it came to pensions transfers. We needed to open up the market so that people could provide for themselves. In fact, more and more people were becoming financially astute and wished to provide for themselves.
I think that the impetus for change in the pensions area has benefited this country—as is recognised by the £600 billion under management, which, as has been pointed out, is the largest sum by a long chalk in the whole European Union. It will cushion us against potential problems that could arise as a result of the greying of the population—which was another impetus for changing the whole pensions regime.
As so much money has gone into the pensions industry in the form of savings, I must take issue with the hon. Member for Stafford (Mr. Kidney), who described the past 10 years as a "decade of disaster". Eleven billion pounds is a huge sum, but I think that we should put the matter in perspective and compare it with the £600 billion that is under management.
Angela Knight, the Economic Secretary to the Treasury under the previous Government, was a very valuable member of the House and she did much to encourage financial companies to focus on and address the pensions mis-selling issue. I am concerned that, when Labour came to government, it raised the temperature by criticising the very companies that it is looking to to provide second pensions and ISA products. That sort of aggressive relationship with the private financial sector does not help when the Government are clearly relying on it to supply new products.
As many hon. Members have said, it is recognised that there are problems in the pensions area. I shall not repeat them all, other than to say that that problem is recognised in the biggest and the smallest companies. An insurance broker in Beckenham, who briefed me about the problem as it relates to his company, acknowledged in a letter to me that files
must be reviewed and where losses have occurred as a result of advice given not to join occupational pension schemes then redress should be available. Likewise where members have been opted out of their employer scheme and losses occurred as a result redress should be given.
There is agreement throughout the industry that the matter must be dealt with, and I am pleased that phase 1 will be completed, in essence, by the end of the year.
As many hon. Members have said, the bone of contention lies with phase 2. I am struck by the role that hindsight has played in this debate. It is clear, with hindsight, that there should have been a much tighter regulatory regime and that we should have examined the financing arrangements much more closely. Hindsight is a wonderful thing, but the problem is that we are dealing with the real world, real people and the real circumstances that prevailed when they bought their pensions.
The Economic Secretary, if I understood her correctly, said that the regulatory regime under the Financial Services Act 1986 was not what it should have been, which is precisely the point that many of us are making. We cannot expect people such as independent financial advisers, who, while funded to carry on their business, do not have access to the huge reserves that the large companies have, to be able to guess what hindsight would tell them about the regulatory regime that they needed to act under when they were selling their policies. I was interested in a simple statement that the Independent Financial Advisers Association made before the Treasury Select Committee when it gave evidence on 25 June. It said:
The review is fast becoming a process to ensure no one loses money, in any circumstances, rather than a review of mis-selling.
When the Economic Secretary called in aid the Association of British Insurers rather than the IFA Association, it was interesting to note that the ABI, in much more restrained language, made exactly the same point in its briefing to Members for this debate. The association states that phase 2 will be completed when
various factors such as the complexity of loss assessment, its interaction with the availability of actuarial resources and the degree of accuracy required
are understood. If the ABI is making that point, the IFA Association, which is making the same point in a much more clear and direct way, deserves some sympathy.
Beckenham is not known as a hive of commercial or industrial activity. However, I have quoted one insurance broker and I have been impressed by the number of IFAs who have come to me with great feeling about the issue that we are debating. I shall outline one company's problem. Its senior partner is its greatest earnings getter. The company specialises in employee and executive benefits. The partner has a client list of blue chip companies, many of which are in the new industries whose age profile is of necessity young. He has done no business getting for the past two years because he has been engaged entirely on the review. In addition, the company has had to hire outside consultants to a current cost of £80,000.
When phase 2 comes through and if the current annuity rates apply to the pensions that the senior partner's company has sold to younger people, the cost could be £1 million, and that equals bankruptcy. It is an IFA with no complaints against it.
It cannot make economic sense for a senior partner not to be getting any business. That is why I add my plea to those made by all those who have asked the Economic Secretary and the Treasury to look again at the regime for phase 2. No one is asking for it to be withdrawn. We accept that there is mis-selling, and if there is mis-selling, compensation is due. However, we need to ensure that those IFAs which have done a good job and which complied in their understanding of what the regulations were at the time should be able to continue in business.
In the spirit of slight mischievousness I throw in the thought that if current annuity rates can be used for reviews calculated now, and given that there will be delays, will the rates return to the level at which they stood at the time when pensions were sold, bearing in mind the announcements made today by the Chancellor of the Exchequer of increased public spending? Therefore, is it not in the interests of everybody to examine whether the regime for phase 2 is the best and most effective way in which to deal with pensions mis-selling?
I again remind the House of my many interests in these matters. I shall painstakingly go through them because there is a point to be made on each one. I have worked in the insurance industry since 1970. I am still an elected member of the Insurance Brokers Registration Council. The council has had to give up its status as an authorised body under the Financial Services Act 1986. For reasons which the Minister knows, the council's future is in dispute. One of the factors in having to give up its status was the complexity of the work involved in carrying out the phase 2 review and the resources required if it was to be done properly. That is a telling point for the House to consider. If one of the authorised bodies feels that the cost of carrying out the review is so great that it has to hand the job over to the Financial Services Authority, no wonder small independent financial advisers feel constrained by the potential cost.
I am a director of a major insurance broker and independent financial adviser, which purchased the company which I started in 1973. It did so three or four years ago. Sadly, I owned very little of it by then. Its headquarters are in Harrogate, the constituency of the hon. Member for Harrogate and Knaresborough (Mr. Willis).
I think that it would be helpful to share with the House what has happened to us. We were fined£4,000 along with most other IFAs because of the delay on phase 1. We gave all our phase 1 cases—all 39—to an out-sourcing actuarial service, which proceeded to do nothing with them because all its efforts involved sorting out the insurers. We brought them back in-house and we have put them all right. We expect to be in order by the end of this year. We think that there are possibly eight or nine cases to compensate.
We think that we have about 150 transfer cases in phase 2, the majority of which are compliant. Until we examine them all in detail, we cannot be sure. We have 7,000 IFA clients, 2,700 personal pension policy holders and only two cases where there was an opt-out to buy a personal pension. I cannot say how typical we are but I suspect that we are typical of most of the really professional IFA firms. The sadness is that in some elements of the IFA sector—as in the employed sector, to which the hon. Member for Hemsworth (Mr. Trickett) referred—a great deal was left to be desired on standards of training, competence and the quality of advice.
The industry has put much of that behind it. To be authorised now, one must be professionally qualified, and the industry can be proud of that. Those who are left, particularly in the IFA sector, to clear up what needs to be done have put themselves through the professional mill. They have achieved their financial planning certificate. A great many have gone further and achieved the advanced FPC and are members of the Society of Financial Advisers. We are dealing now with an independent financial advisory industry that is considerably more professional and committed than the whole industry was when much of the mis-selling that we are discussing took place.
In an earlier intervention, I declared my interest as a chairman of the Federation of Insurance and Investment Intermediary Associations, of which the IFAA is a member. That is an unpaid post, but I am a paid adviser to the Institute of Insurance Brokers, for which mis-selling is not a huge problem. As the Economic Secretary knows, we have much greater concerns about dealing with the future of the Insurance Brokers Registration Council, and I hope to talk to her soon about that.
I want to correct two points that the Economic Secretary made earlier. If there has been misapprehension on her part or misunderstanding of what the IFAA has been trying to do, this is the opportunity to put that right. We are not saying that there is not a problem to resolve in phase 2—clearly there is a problem. We are asking the hon. Lady to recognise that the problem in phase 2 is fundamentally different from that in phase 1.
Phase 1 will be completed by Christmas with, perhaps, a few exceptions in the IFA networks. I ask the hon. Lady to be kind and understanding to them. I do not belong to an IFA network and I have no brief for them, but I know that they have spent a great deal of money on phase 1.
The problem is that the on-going cost of regulation and remaining in business means that many smaller IFAs have joined networks to stay in business. The chief executive of the Personal Investment Authority, Colette Bowe, encouraged many to do so. Much of the mis-selling that the networks are now dealing with occurred before the firms were part of the networks, which is why there has been a delay. I hope that there will not be more unnecessary fines because they simply deplete already hard-pressed resources.
I want to suggest to the Economic Secretary a way in which the problem of phase 2 can be resolved. Time does not allow me to go into detail. Many speakers have put their finger on the problem, but they have not suggested a solution. The solution lies in the way in which the financial viability test can be conducted.
The test allows the IFA to examine files to find out whether the advice given at the time was correct and reasonable. That involves examining the quotation—the basis of the projections on which it was made is a key factor—to find out whether it was based on reasonable assumptions of growth. Most quotes were based on assumptions of growth within the range of 8 to 12 per cent. At the time, the market was achieving 25 per cent. growth as a norm. Of course, that has changed. If the assumptions were reasonable compared with the information from the scheme where there had been a proposed transfer, that should be adequate for the purposes of the phase 2 review.
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.
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.
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.
I plead with the Economic Secretary to sit down and discuss this. She may not realise what her diary secretary has done today, but it has been agreed that the Independent Financial Advisers Association will see her on 19 November. We must find a solution which the ABI, IFAs, PI insurers, her Department and the regulator can live with. I believe passionately, and agree wholeheartedly with those who feel strongly about this, that we must resolve the matter as quickly as we reasonably can, but that means that the arrangements must be practical, sensible and workable. They could be, but, at the moment, they are not.
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?
Not only is it difficult to assess whether the rules have been broken, and whether a policy holder has suffered a financial loss; it is difficult to assess who should pay compensation for any mis-selling that may have occurred. We have heard various views on who should pay, but all the larger companies will do is pass on any compensation payments that they make, or any fines that they pay, to the with-profits policy holders. Companies' ability to do that is unfair on the small independent advisers whom the industry itself advises people to consult in preference to single companies. Independent advisers have no one to whom they can pass on costs; in such circumstances, they will simply go out of business.
I ask the Government to look at the way in which the second phase of the review, in particular, is being conducted. All that I have said so far relates to the past, but I would add that the financial services industry is extremely important to the country. If people lose faith in it, that will be to their great detriment. I urge the Government to ensure that such a thing does not happen again, by stating that a recognised professional qualification must be obtained before anyone is allowed to become involved in the industry. Let me stress the need to protect the innocent companies that have worked so hard for so many years, so that they do not have to go out of business owing to a heavy-handed approach to regulation.
One of the joys of speaking last in a debate through which one has had to sit is benefiting from the experience of other speakers. Tonight's debate has demonstrated one of the great joys of being in the House of Commons. It was a delight to hear the speeches of the hon. Member for Birmingham, Edgbaston (Ms Stuart), the right hon. Member for South Norfolk (Mr. MacGregor), the hon. Member for Bournemouth, West (Mr. Butterfill) and, indeed, my neighbour the hon. Member for Ryedale (Mr. Greenway). I must add that I have no interest to declare, apart from the interests of a constituency which, according to my hon. Friend the Member for Twickenham (Dr. Cable), boasts more independent financial advisers than any other constituency in Britain. I was glad to learn that it also contains the former company of the hon. Member for Ryedale.
I listened to the debate with interest. Given the exercise in misinformation and sophistry that we have witnessed, the Government and their regulators should be congratulated on the spectacular success of their handling of the so-called pensions mis-selling review. For too long the pensions mis-selling scandal has been a convenient vehicle for the nurturing of populist tendencies and the furthering of political and regulatory ambitions, and has provided an easy target for the filling of sensational news space. The prevailing attitude has been, "Never mind the justice, just feel the self-righteousness"; there has certainly been a sense of that this evening.
The purpose of regulation is simple: to protect the investor from the excesses of those who might seek to misguide him for personal gain. Yet, under the phase 2 procedures, the regulator has designed a process that will ensure that clients will always have a case for compensation, and the financial adviser will always be in the wrong. That approach is closer to tyranny than to regulation.
Many of my constituents are employed as independent financial advisers or work for them, either running their own firms or as part of larger organisations, and that must apply to nearly every Member of Parliament. Along with many others, I suspect, I have received few complaints about the services that those advisers provide: in fact, I have not received one complaint since my election. Yet they provide as many as 15,000 jobs throughout the country and most of them, or many of them, are at risk if phase 2 is allowed to progress in its present form.
It does the Economic Secretary to the Treasury no credit that her letter to Members of Parliament was so dismissive of what was a serious attempt by the IFAA to bring this subject into wider debate. If an association is not allowed to lobby Members of Parliament in the way it did, it is a sad state of affairs, although I admit that today's debate is welcome and my constituents pass on their thanks to the Economic Secretary for holding it.
Let me assure the House that I and the people whom I represent are committed to the view that clients of independent financial advisers who have been negligently or poorly advised should receive proper compensation; that is not in doubt. There can be no argument about it. Independent financial advisers should and must be held to account, just like large companies.
However, the process and methodology by which phase 2 is to be carried out goes far beyond what is required to provide an equitable solution to the problems. There is a danger that, in the natural desire to compensate those who were mis-sold pensions, enthusiasm is being carried to the point of trying to ensure that no one can ever lose any money. It is much like going to the races and the bookies being obliged to give people a return even if their horse falls at the first fence.
Yes, there was mis-selling and scandal in many of those cases that fell within phase 1 of the review: those who were close to retirement, have now retired or have even died. Rightly, those people and their families must receive proper recompense; but with phase 2, another scandal is upon us: the decimation of the independent financial adviser sector, more through the inequity and artificiality of the phase 2 review process that has been set down by the regulator and supported by the Government than by any malpractice by independent financial advisers.
The majority of phase 2 cases are in respect of people who are under 35 and therefore have many years to go before retirement. To view those cases in the same light as those under phase 1 simply cannot be justified.
The regulator affirms that individual cases will be judged in terms of the rules in force at the time the advice was given. If those rules were broken, the case must be reviewed to find out whether the client has suffered financial loss as a result of acting on the independent financial adviser's advice. That is reasonable, but pension transfers were transacted from July 1988 and no specific guidance as to the regulator's requirements for the handling of that type of business was issued until early 1994, after the Securities and Investments Board identified possible cases of misadvice following the KPMG investigation.
I heard what the Economic Secretary said earlier: she dismissed those allegations. I would like her to put a paper in the Library demonstrating when the regulations were brought in, so that we can have a clear, definitive statement on that.
The regulator's response to KPMG's investigation was to impose stringent standards, drafted with the exact knowledge of hindsight and with retrospective effect, in the pretence that those standards had existed from the outset. They had not. It is important to realise that the Financial Services Act 1986 came into effect only in 1988. As we know, it was an unfortunate coincidence that the Act was in its infancy at the very time when the pension transfer business first started to be transacted.
There was an acceptance that all parties would require time for a "learning curve" to adopt procedures, to develop systems and to familiarise those who gave financial advice to clients with the practices required to comply with the new legislation. That, too, was right; it happens in any industry.
That explains why, from 1988 to 1994, regulators did not find significant rule-breaking in the sectors that are now being pursued with such crusading zeal. That regulatory zeal, fortified with the certainty of hindsight, will render nearly all the cases that fall within phase 2 in breach of the rules of the time, as now defined by the regulator.
The injustice does not end there. Having failed the now virtually impossible rule breach test, a case must be reviewed to identify whether there has been mis-selling and to quantify the amount of compensation due to the client. For the purpose of assessing whether the individual has suffered any financial loss, the regulator states that the advice can be measured by comparing the estimated benefits of retirement that the occupational pension scheme would provide with the estimated benefits from the alternative personal pension. Both calculations should be made using projections of future growth and expectations of annuity rates such as could be reasonably deduced from the investment conditions when the advice was given. As the hon. Member for Ryedale said, that is the so-called financial viability test.
Again, that is an extremely reasonable approach—except that the regulator then imposes on the process the requirement that the client complete a questionnaire that requires the exact recall of specific events in the advice process that happened as long ago as 10 years. Most people cannot remember where they went on holiday 10 years or even five years ago, let alone recall the specific detail of the hotel bedroom or the lunchtime menu. How realistic is it to expect them to have a precise recall of every detail of the complicated process involved in reaching a decision as to whether to transfer a pension from an employer's scheme to a private pension?
In the regulator's view, failure by the individual to give a positive response to each of the questions on the questionnaire is just about conclusive proof that the individual has been misadvised. Surely that is nonsense. If the only thing that comes out of the debate today is that the Economic Secretary drops the questionnaire from phase 2, we will have had a very successful debate.
I am sure that most people are perfectly honest and would answer truthfully to the best of their ability—particularly Liberal Democrats. However, because of all the publicity surrounding this issue, an expectation of compensation has been built up which even the most honest of citizens might find hard to resist.
The regulator then requires a different calculation method to be used to assess whether the individual is due compensation. That method ignores the reasonable assumptions made when the advice was given, based on the investment conditions of the time, in favour of assumptions based on current market conditions. That is a grossly inequitable approach and can have no result other than to ensure that the majority of cases that come within phase 2 are artificially deemed to be due compensation. That offends against natural justice.
It is a fact that investment market conditions are ever changing and that future growth of the funds and annuity rates will reflect market movements, up as well as down. Recently, we have seen a significant downturn in investment markets and a steep decline in bond yields which has reduced current annuity rates to the lowest in living memory.
On the "Today" programme on 2 November, the Chancellor boasted that one of the successes of the Government's financial policy was that annuity rates were at their lowest for 35 years. When the Minister replies, perhaps she will say whether that is deliberate Government policy. If it is, it impacts significantly on phase 2 and undermines its credibility. At some time in the future, I can see that annuities may be removed as a compulsory way of securing people's pensions if that is Government policy. It is hardly surprising that, based on current conditions, the estimated returns under personal pension plans are showing a significant shortfall compared with the figures quoted as long ago as 10 years.
In 1988, when the first transfer cases took place, the annuity rate for a man aged 65 was 11 per cent. In 1992, the equivalent rate was 10.5 per cent., by 1994 it was 9.5 per cent. and today the rate is 8 per cent. It is mathematically simple to deduce that those who took advice in 1988 now require 37 per cent. more retirement funds to produce the same pension. The figure is 31 per cent. for those who acted in 1992 and 19 per cent. for those who transferred in 1994. That is caused not by poor advice or mis-selling, but purely by movements in the investment markets which are outside the adviser's control.
Are we really to believe that, over the next 20 to 30 years, which are the retirement years for most phase 2 cases, investment markets will show no recovery? The approach is so fundamentally flawed and so biased against the adviser that, were the cases to be brought to a court of law, they would be unlikely to succeed. Why then should the financial services industry be expected to make compensation payments on the basis of a calculation that is arbitrary and demonstrably inequitable, and which will result in windfall payments to many who have absolutely no justifiable claim?
If phase 2 of the pensions review is allowed to proceed in its current form, the role of financial adviser will be changed dramatically. Not only will it be expected that sound, professional financial advice should be given, but the adviser will be required, year by year, to have the ability to predict precisely movements in investment markets and to guarantee returns at any given point. In the past 18 months, the Government have failed to make such predictions. How is it reasonable to expect independent financial advisers to do so over a long period?
Today's debate has dealt with many of the flaws in phase 2 and demonstrated the House's unanimity on the need to resolve the pensions mis-selling issue. We look now to the Government to show some sense and reason in trying to conclude the exercise swiftly and without punishing independent financial advisers who were not at fault.
Forgive me; we have heard from three trustees—[HON. MEMBERS: "Four."] We have heard from four trustees. It is encouraging to know that the pensions of right hon. and hon. Members are in such safe hands.
We have heard from several hon. Members on both sides of the House—including my hon. Friend the Member for Stafford (Mr. Kidney) and the hon. Member for Ryedale (Mr. Greenway)—who have extensive knowledge of the industry and the law. We have heard also from hon. Members—notably my hon. Friend the Member for Hemsworth (Mr. Trickett)—with deep constituency experience of the impact that personal pensions mis-selling has had on the lives of individuals.
Tomorrow, I shall, of course, read the full debate with interest, to ensure that I have not inadvertently overlooked any point. I shall also draw the debate to the attention of the regulators, just in case they do not look at it for themselves.
As several hon. Members have said, much common ground has been demonstrated in the debate, and I warmly welcome it. There is clear agreement on both sides of the House that there was mis-selling of personal pensions. There is agreement also on the scale of the mis-selling, and that the mis-selling was a scandal. Moreover, there is agreement that the situation must be put right: as a matter of justice to the individuals who have lost savings and future retirement income; to ensure confidence in the industry—including independent financial advisers, who, I assure the House, will have an extremely important role to play; and to provide thereby a sound basis for people's future pensions and savings.
I regret to say that I cannot agree with all the points that have been made in the debate. I was astonished to hear the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale) suggest that the progress that has been made on the review is attributable to the previous Government's actions. Although I am in no way criticising my predecessor, Angela Knight—whom I look forward to meeting in her new role—I should draw the House's attention to the facts.
In March 1997, three months after the first deadline for priority cases had passed, only 15 per cent. of those cases had been resolved. The figure has now reached about 90 per cent. due to the tough action and the tough stance that my predecessor took and that I shall maintain. Hon. Members who welcome the progress that has been made with phase 1 must in all honesty give credit where it is due to the tough stance of the present Government, particularly my predecessor.
I regret the suggestion by the hon. Member for Harrogate and Knaresborough (Mr. Willis) that the Government's tough action had been motivated by political advancement or self-righteousness. I hope that I misunderstood him, but he certainly seemed to make that suggestion. The facts as I have given them make it very clear that the Government and my predecessor were motivated entirely by a determination to get the mis-selling scandal put right in the interests of consumers, who are our constituents. That is what we have done and will continue to do.
A succession of points have been made about independent financial advisers. Several hon. Members have complained about the burden that is being placed on IFAs. Let me make it clear that there is an issue for IFAs to face up to: according to the information provided to us that we have published, three of the firms that we have been monitoring—all IFAs—have missed their targets for completing all priority cases. If we look back at the original deadline of 31 December 1997, we see that more than 600 small IFAs failed to meet their first priority target.
Of the phase 1 cases, the FSA has estimated that, on average, an IFA will deal with 1.8 cases of personal pensions mis-selling and in phase 2 the average will be 2.1 cases. That is not a heavy burden. An IFA—an individual or a firm—who has given good advice and not mis-sold personal pensions has nothing to fear from the phase 2 review. Of course the burden is greater for those who did not keep proper records of their business at the time or who failed to preserve such records—an action for which there is no excuse whatever. It was made clear when the extent of personal pensions mis-selling first came to light that records should be kept, and in many cases preserved indefinitely.
Many hon. Members have suggested that the review is retrospective. Let me deal with that again in some detail. As the hon. Member for Harrogate and Knaresborough admitted, the regulators' review guidance specifically states:
It goes without saying that the question of whether a firm was at fault in compliance terms must be judged without the wisdom of hindsight.
So let us look at the rules that were in force at the time. They obliged a regulated firm to inform itself about the client's circumstances and objectives and to give suitable advice, to give its client adequate information so as to understand the nature and effect of the recommended transactions, to ensure that the client understood the risks, and to give clear and not misleading information.
The FIMBRA conduct of business rules that were in force at the time state, for example, that a transaction should not take place unless the adviser can satisfy himself that
"the client understands the extent to which he will be exposed to risk".
The rules also state quite unambiguously that the investment should suit the circumstances of the client and that the adviser should recommend the best product available for the client. The rules were and are perfectly clear in their meaning, and certainly would not extend to selling an unsuitable product to an unknowing investor.
The hon. Members for Ryedale and for Bournemouth, West (Mr. Butterfill) mentioned professional indemnity insurance, on which there are serious issues. The regulators and the majority of the insurers reached an accord in January 1996 on the terms under which the review could proceed without negating IFAs' insurance. The FSA is confident that the design of phase 2 is consistent with that accord. The regulators see no case for a different approach for PI insured firms. That accord allowed firms to send revised letters and questionnaires to investors.
The hon. Member for Maldon and East Chelmsford asked whether I was willing to meet the IFA association. Of course I am. I look forward to doing so later this month and discussing the issues with the advisers face to face. However, the point that I made in opening the debate stands—the IFAs who are dragging their feet on phase 1 must take action to complete phase 1. The sooner they get on with phase 2, the better.
The right hon. Member for South Norfolk, the hon. Member for Bournemouth, West and others asked how the loss will be calculated, and suggested that it was wrong to calculate it on the basis of the situation in force at the time that the review is made. I underline the point that I made in opening the debate: whether a personal pension was mis-sold is judged by reference to the rules and standards in force at the time, but the extent of the loss, if any, must be assessed at the time that the review of the case is made.
Conservative Members shake their heads, but they should listen. The guidance on how that should be done is based on the independent advice of senior members of the actuarial profession. The Government Actuary has confirmed that the methodology was appropriate, and that the actuarial assumptions fell within a range that actuaries would regard as acceptable for these purposes.
In all respects, the review process reflects the practice of the courts. If it did not, phase 2 investors who believed that they had suffered loss would have a redress in the courts that was not available to them under the regulatory action that we are ensuring. That would place a far greater burden of uncertainty on the IFAs and the firms responsible for mis-selling.
Although losses for phase 2 cases are generally lower than for the first priority cases, they are none the less widespread and material. Extensive research conducted by the FSA in deciding how phase 2 should be conducted estimates that there are nearly 1 million transfer cases, and where there is a loss it averages £4,000; 154,000 cases of opt-outs, with an average loss ranging from £3,500 to £7,250; and up to 700,000 cases of non-joiners, with an average loss in the range £2,250 to £12,000.
Those are significant sums. The idea put forward by one hon. Member, that £11 billion is a mere drop in the bucket compared with the total funds under management, will be of no comfort to younger investors who were ill advised and suffered loss as a result.
Several hon. Members have suggested that there should be no immediate review for the younger investors, and that no loss should be calculated until they reach retirement age. If it is difficult to conduct a review now, eight or 10 years after the mis-selling may have taken place, it will be virtually impossible to do so when the young investors retire, by which time the IFA or firm that sold the personal pension may have merged, gone out of business, retired, died or destroyed the records.
The suggestion is absurd, and would have the additionally damaging effect on the industry of leaving it in total uncertainty for 20, 30 or even 40 years as to the extent of the losses for which compensation might in future have to be paid. As every hon. Member will know, it is precisely the pension contributions that people make when they are young that are of the most value to them in securing a decent standard of living when they retire.
No. I gave way extensively during my opening remarks, and I still have a great deal of material to get through, and many points to which I wish to respond.
However, perhaps I should have dealt earlier with the point that the hon. Gentleman raised, which was about the PASS initiative by the Association of British Insurers. As he said, that was only for phase 1. Many IFAs are still struggling to complete phase 1, but if they need help with phase 2—no doubt many will—I certainly hope that those running the PASS initiative will consider their requests sympathetically. The issue had not been brought to my attention before.
The hon. Gentleman also raised an important point when he made a persuasive case about the value of the present polarisation rule. That matter is being reviewed by the Financial Services Authority now. Strong arguments are made on both sides, and I want to defer judgment until the FSA has completed its work.
It has also been suggested—by the right hon. Member for South Norfolk, I think—that rebate-only cases should be completely excluded from phase 2. I have no doubt that that idea will be considered by the FSA if, as the review unfolds, there is good reason for dealing differently with a particular category of case. It is far too early to make a judgment now.
The FSA has been keen throughout to learn from the experience of the industry in implementing phase 1. Phase 2 is identical in most respects to the phase 1 procedure, with which even the Independent Financial Advisers Association says that it is now content. The exception, of course, is the way in which firms will be actively required to seek out investors and bring appropriate cases within the review.
That is being done because the regulators know, as do the Government, that awareness of a possible pensions mis-selling will be considerably lower among younger investors than it was among those who were close to, or had already reached, retirement age when the personal pensions mis-selling scandal first came to public attention.
It is unreasonable to suggest, as many hon. Members have, that the onus should be on those clients, those investors, to come forward, with no initiative being taken by those upon whom the responsibility must fall.
No. I have already said that I have a great deal to get through in my closing remarks, and I do not intend to give way.
I wish to refer to the question—raised by my hon. Friend the Member for Edgbaston and by the hon. Members for Twickenham (Dr. Cable) and for Bournemouth, West—of where the costs of pensions mis-selling fall. The insurance directorate issued guidance to insurers in October 1994 on where the costs of compensation for pensions mis-selling should fall. That guidance applies to phase 2 just as it did to phase 1 of the review. The insurance directorate of the Treasury is monitoring compliance with that guidance.
The basic principle, which is very simple, is that the costs should be shared fairly among those parties which stood to gain from the sale of the pension. That will include both the shareholders and the policyholders in a proprietary company. In the case of mutual insurers, there is no alternative but for policyholders to be used. In the case of shareholder-owned companies, we consider it reasonable for the with-profits policyholders to bear a proportion of the costs, following the principle that they share in the good times as well as the bad, to the extent that they stood to share any profits made from the sale of pensions contracts involved—and, of course, provided that that does not lead to a failure to meet policyholders' reasonable benefit expectations.
My hon. Friend the Member for Edgbaston, who is extremely knowledgeable on the subject, mentioned orphan assets and inherited estates, which is a distinct— but none the less linked—issue. Our objective remains to protect policyholders in line with the normal position that with-profits policyholders should share in the whole surplus of a with-profits fund—usually in the proportion of at least 90 per cent. Any exceptions to that norm need to be carefully justified. However, the precise circumstances of each case differ, and it is not always easy to judge where the legal ownership of these often substantial surpluses lies.
In many cases, use of the inherited estate to meet personal pensions mis-selling costs is a sensible way to protect policyholders from immediate and severe cuts in their bonuses. However, as I have said, we will continue to monitor the way in which the costs of compensating the victims of pensions mis-selling are being met, and we will take any necessary action to protect policyholders' reasonable expectations.
The hon. Member for Grantham and Stamford (Mr. Davies) asked whether the costs should not instead fall upon the individuals who themselves sold the pensions, or who were managing the firms responsible for that mis-selling. It is important to stress that the sales managers and the sales force were often carrying out company policy. As my hon. Friend the Member for Hemsworth pointed out, in some cases those who were sent out to sell were placed in a quite impossible position, and it would be utterly wrong to expect the cost of compensation to fall on those individuals.
The responsibility for compliance goes right to the top of the company. The Financial Services Authority has the power to fine individuals within firms if any of them are found responsible for systematic malpractice, although that evidence is not always easily available.
I wish to refer to our pensions policy, which the hon. Member for Maldon and East Chelmsford made much of. The story in the Daily Mail to which he referred—as my right hon. Friend the Chancellor has made clear—has no foundation whatever. The pensions review and the stakeholder pensions proposals that we are developing are on track, and will be disclosed in the forthcoming Green Paper.
The abolition of the payment of tax credits to pension funds is part of a reform of the structure of company taxation which is in line with our determination to secure long-term growth in the economy and to remove the perverse incentive that payable tax credits gave to companies to distribute dividends rather than retain profits for investment.
I must end by stressing that phase 2 of the pensions review will go ahead. The Treasury and the regulators will continue to work with the industry to ensure good progress. I urge the industry to co-operate with us and the regulators, and to build on the progress that we have at long last made in the past 18 months.