§ '.—(1) Where a person has sold since 6th April 1986, more than ten investment bond related home income plans to individuals, the provisions of this section shall apply to them.
§ (2) A person falling within the provisions of this section shall be entitled to a reduction in their tax liability for 1993–94 of the amount specified in subsection (3) below if the condition of subsection (4) below is met.
§ (3) The reduction in tax liability referred to in subsection (2) above shall be £1.
§ (4) The condition referred to in subsection (2) above is that no more than 10 per cent. of the investment bond related home income plans they have sold since 6th April 1986 have subsequently been terminated.
§ (5) The Board is empowered by this subsection to issue regulations defining the term "investment bond related home income plans".'.—[Mr. Darling.]
§ Brought up, and read the First time.
§ Mr. Darling
I beg to move, That the clause be read a Second time.
This is a different matter which, as the House will recall, was debated almost exactly a year ago. Indeed, the terms of new clause 3 are almost identical to those of the new clause that was tabled by my hon. Friend the Member for Brent, South (Mr. Boateng) on 8 July 1992. We make no apology for raising the matter again. The position has not changed substantially since the House last debated it.
We want to draw attention to the plight of between 10,000 and 15.000 people, some of whom lost substantial sums of money by purchasing home income plans in the 1980s. The plight of those people is yet another nail in the coffin of the faltering system of self-regulation that was set up by the Government in the 1980s. Those people, most of them elderly, did not want to be such a nail, but their plight highlights the failure of the self-regulatory system and its inability to prevent the sale of manifestly unsuitable products and to provide an effective and efficient compensation scheme.
This matter concerns Members on both sides of the House. Sales of home income plans were eventually stopped in 1991. The question that must be asked is, why not before? I believe that a proper system of regulation would have done so long before then.
Let us examine first the poor advice that was offered to these people. No regulatory system can ever make it impossible to sell unsuitable products; what it can do is to make it less likely to happen. Of course, the buyer must beware. He or she should take advice. If, however, the Government set up a regulatory system, members of the 708 public are entitled to rely on it and to assume that it works. The problem is that the present self-regulatory system does not work. In the case of home income plans, most people took advice but were given deliberately false advice by some very unscrupulous salesmen.
It is likely that in future more and more people will have reason to buy financial products, as a means either of saving or of providing a pension for themselves. If we intend to ask people to make such provision for themselves, it is essential that Parliament puts in place a regulatory system that is worthy of respect by the public and the industry. An efficient and effective regulatory system is good for the industry and for the public, but that is not what happens at present.
The problem is that the self-regulatory system is falling into disrepute, not just in the eyes of the public but in the eyes of the industry and the City. Hon. Members will no doubt have seen the remarks of the chief executive of the Prudential Assurance company, Mr. Mick Newmarch, and others. More and more people are calling for an end to the fiction of self-regulation and for the setting up of an effective, statute-based regulatory system in an area that is playing an increasingly important part in people's lives. That is why we have called repeatedly for a complete overhaul of the regulatory system.
I believe that we could draw on the experience of the Securities and Exchange Commission in the United States. I do not advocate its importation, but we need a single, powerful, regulatory body—perhaps building on the Securities and Investments Board that we have at the moment—that commands respect and strikes an acceptable degree of apprehension in the minds of all those whom it regulates. It should be free to set up regulatory bodies, as it sees fit. It should ensure, among other things, that there is a compensation scheme that works quickly and effectively. We do not have such a scheme at present. A review of the City's regulatory system, together with the enforcement of the criminal law for market-related offences, is long overdue. The Government should accept that, rather than sit back and wait for something to happen.
Investment-linked home income schemes were sold in the late 1980s to mostly elderly investors. Many of them have lost everything that they had. The idea was to unlock the capital in their homes, in the hope of earning a large enough return to make the repayments, as well as to provide extra income. Some of the people who bought those plans have told me that they were encouraged to do so by the remarks of Lady Thatcher when she was Prime Minister. She urged people to unlock their savings in that way. They feel especially bitter and let down because the Government's self-regulatory system has left them high and dry, following the failure of those plans.
Many investors were never told of the difficulties attendant on such schemes. Furthermore, it was not brought to their attention that those schemes were fundamentally flawed because, before any money was invested, the salesmen's fees and commissions were deducted. To illustrate the point, in one case a couple were to invest about £20,000, but subsequently found that over £2,000 had been deducted for the salesman's commission and fees, leaving insufficient capital to generate the required income.
Some of the schemes were sold by sharks—that is the proper word for them—who should never have been allowed to conduct business under the Financial Services 709 Act 1986. To its credit, the Financial Intermediaries, Managers and Brokers Regulatory Organisation has made valiant efforts to remove those people who should not have been allowed to trade, but it is a long haul. When the system was set up, more or less anybody who was trading previously was allowed to carry on business, although those people should never have been allowed to do so.
At stake is not just the character of individuals but the suitability of these people. The role of the regulator in ensuring that mainfestly unsuitable products are not sold must also be considered. A function of proper regulation is, I believe, to ensure, first, that the sales force is properly equipped and regulated and, secondly, that where manifestly unsuitable products are put on the market they are not allowed to be sold or, if they are sold, the circumstances in which they are sold are strictly regulated.
In this case, following the sale of home income plans in the late 1980s, the SIB received more than 1,500 complaints. I understand that more than £23 million has been paid to just under 2,000 investors. Others, however, are still waiting for compensation.
It is important to deal briefly with compensation. That is where some of the problems inherent in the present system are now becoming apparent. It should be remembered that, even where compensation has been paid, many people have lost heavily. One pensioner told me that it cost him £7,000 to get out of the scheme.
One of the difficulties is that the plight of these people depends to a large extent on who sold them their plan. If they were able to go to the insurance ombudsman, until fairly recently they received an extremely efficient service. The ombudsman took a broad view. If we look at his most recent report, we see that he took the view that
the elements of such Plans can only sensibly be regarded as parts of the same transaction. I therefore ask insurers to deal with the loss on the mortgage as well as that on the bond.The ombudsman was preparedto compensate policy holders in respect of any sums withheld from the mortgage funds, or withdrawn from the bond.The ombudsman was also willing to make payments in respect of distress. He also, quite rightly, took the view that those who had sought advice were entitled to seek advice and that the cost of their advice ought to be recoverable from the insurer.
Unfortunately, because of a recent ruling, the scope of the insurance ombudsman's remit has been curtailed. I am not sure that he wanted it to be curtailed, but in a recent finding it was said that, due to technical reasons which I do not want to go into, it is not possible now for the insurance ombudsman to take as wide a view as he previously took about the scope of his powers. The fact remains, however, that we might want to examine the role of the insurance ombudsman. The victims of these schemes who until now were able to go to the insurance ombudsman found that most of, if not all, their claim was met.
That is not the case with other bodies. If individuals who lost out were able to go to the Life Assurance and Unit Trust Regulatory Organisation, the chances are that they would have received full compensation because there is no ceiling. Indeed, I have received few complaints from such people. If, however, people attempted to attach a building society, many would have encountered substantial difficulties.
710 Some building societies eventually proved to be co-operative–1 emphasise the word "eventually" because even some household names have proved reluctant to become involved. They were happy to take the profits that would have accrued had the policy worked out, but they seemed reluctant to become involved in compensation. Others refused to co-operate—for example, the Alliance and Leicester, the Bristol and West, the Chelsea, the Leeds, the National Counties, the Newcastle, Northern Rock, the Staffordshire and the West Bromwich building societies. They trade on their reputation, but the public should be aware that, where those building societies have been found wanting or where people have lost out, they have been reluctant to become involved, or have refused to become involved, in the ombudsman's scheme.
Unfortunately, the building society scheme is such that it needs the building societies to volunteer to co-operate. When the Government eventually embark on a review of the regulatory system, they should look long and hard at the compensation scheme which depends on the voluntary effort of building societies to co-operate. That seems absolutely intolerable.
§ The Economic Secretary to the Treasury (Mr. Anthony Nelson)
I shall deal with this issue later, but I must point out to the hon. Gentleman that the Leeds proceeds on a case-by-case basis. I know that it was listed as one of the societies that had refused to become involved, but it has, in fact, been helpful. I am sure that the hon. Gentleman would welcome the opportunity to set the record straight for that particular society.
§ Mr. Darling
I am all in favour of forestalling correspondence that may ensue. The information that I received, which was given in good faith, was that the Leeds had not agreed to co-operate. The Minister tells me that it has agreed, and I am very pleased; perhaps the other building societies will take a leaf out of its book.
In any event, building societies should not be reluctant in the first place. Everyone agrees that the people whom we are discussing, who are mainly the elderly, have lost substantial sums of money though no fault of their own. I fully accept that a building society might take the view that it is not the prime mover—the real villain of the piece may be the independent financial adviser. However, the building societies became involved. I should have thought that, as a matter of good will, if nothing else, some would be willing to be a little more co-operative than they apparently have been prepared to be until now.
I repeat that it should not be a question of volunteering to co-operate. A proper compensation scheme should ensure that when people are in difficulties, having relied on advice and been completely innocent victims, they should not have to spend weeks, if not months or years, worrying and becoming involved in considerable expense to get reluctant volunteers to come to their rescue. The Minister will find that that is not the view of the Labour party alone.
If an investor found that he had to go to the Financial Intermediaries, Managers and Brokers Regulatory Association, which regulates independent financial advisers, and then on to the investor compensation scheme, I am afraid that the chances are that he would have experienced substantial difficulty because the maximum payout under the investor compensation scheme is £48,000. It will not pay compensation for any sums withdrawn, unlike the insurance ombudsman. It does 711 not compensate for stress or illness, and those who operate it do not believe that the people involved should have taken legal advice; if they had not done so, the chances are that many would not have received a penny. Of course, the scheme will not pay compensation for those who bought plans before 28 August 1988; nor will it pay if the independent financial adviser did not receive full authorisation. The difficulty in some cases is that the independent financial advisers held themselves up as being full FIMBRA members when they were not. A decent compensation scheme worthy of the name would not have left the victims high and dry.
I know that the ICS has had its difficulties. It is mindful of the fact that its payouts are an increasing drain on the industry as a whole. Indeed, it is the cost of compensation, among other things, that is holding up the formation of the new personal investment authority because, understandably, those who are to be members are worried about compensation. It is in the interests of the industry to ensure that we have an effective and efficient compensation scheme which does not cause further trouble to people who are in difficulties through no fault of their own but which accepts that, where mistakes have been made, investors should be compensated without making them jump through hoops to satisfy criteria that, in many cases, are unjustifiably stringent.
I should welcome an effective one-stop shop. Efforts to set it up have been fraught with difficulties. Initially, the Securities and Investments Board, albeit under slightly different management, was reluctant to set up a system. It did when pressurised to do so, but the SIB should reflect on the interests of the industry, let alone those of the public, and ensure that any scheme works and that it does not put investors to undue trouble in the exercise of remedies to which they are entitled.
Under Andrew Large, the new chairman, the SIB is attempting to clear up the matter, but the House should not be under any illusion: we are by no means anywhere near the end of the road. The fact is that people bought products that should not have been sold to them. Institutions such as some building societies want nothing to do with people who have lost out. Unlike Lloyd's names, who have also been the victims of difficulties, elderly people do not have a Lady Archer to stand behind them. They understandably feel very bitter at the fact that the Government are apparently indifferent to their suffering. That is a further illustration, if one were required, of the need for the Government to establish an effective regulatory system.
The House will know that there is a plan to set up a personal investment authority, if it ever gets off the ground. There have, however, been two years of horse trading between the vested interests. If trade unions had been left to put their affairs in order, the Government would have passed dozens of pieces of legislation in the intervening period; but, because of vested interests, one suspects, the Government have done absolutely nothing to ensure that an effective regulatory body is put in place to deal with this end of the market.
I suspect that we shall be told by the Minister that the SIB and others are making valiant attempts to deal with a difficult situation; that the Government intend to do nothing to amend the present law but hope that the industry will set its house in order; and that the industry has another last chance. The Government are very keen on giving people last chances when it suits them. Members of 712 the public, and especially the victims of the home income plan disaster, want action from the Government; they do not want platitudes or to be told that it may not happen in the future. They want a firm sign of government.
The Government have abdicated their role. They are paralysed and transfixed in the glare of growing criticism of the system and of calls for action. We have been calling for change, and the chairman of the London stock exchange has called for a new body to examine the criminal law and the prosecution of market-related offences. As I said, the chief executive of Prudential Assurance has called for an end to self-regulation, and others are doing the same. In today's Financial Times, the Lex column calls for an end to the present system. The 10,000 to 15,000 people who suffered because of the failure also demand action. In the face of those calls, surely we deserve better than another tepid, uncertain response from the Government.
In an interview with the Financial Times last November, the Financial Secretary threw in the towel and said that there was to be no new legislation. He told the SIB that the Government would not legislate, and I suspect that Lloyd's has been told the same thing. The Government have a role to play in putting the present system to rights. We need a proper system of regulation to deal with such a crucial part of the economy and to protect members of the public. I hope that tonight the Government will at least say that, for a change, they are prepared to change from their present tack of doing absolutely nothing.
§ Mr. William Powell (Corby)
I warmly welcome many of the remarks made by the hon. Member for Edinburgh, Central (Mr. Darling), but when he went into rhetorical flights of fancy about the Government I parted company from him. Nevertheless, his general analysis of the problems faced by those who purchased home income plans was accurate. He is right to say that the unfortunate scandal—and it has been a scandal—has revealed gaps in our regulatory system. I congratulate him on giving valuable time to raising the matter this year, as he did last year.
I also pay tribute to many of my colleagues on both sides of the House who have devoted a great deal of time over the past year to fighting on behalf of their constituents who have suffered grievously as a result of this scandal. I pay tribute to my hon. Friend the Member for Romsey and Waterside (Mr. Colvin), who has raised the matter in Adjournment debates on more than one occasion. I also pay tribute to my hon. Friend the Member for Ryedale (Mr. Greenway), who has acted as chairman of the all-party committee on home income plans which set up so many important meetings with the various bodies concerned.
I pay tribute to all my colleagues on both sides of the House who, in relation to the West Bromwich building society, have contacted me as a result of the way in which their constituents have been afflicted and affected by the extraordinary way in which that building society has behaved in connection with this matter.
I shall devote my short remarks to the way in which the West Bromwich building society has tried to wiggle and wriggle to avoid its responsibilities in a very serious matter. Many of my comments will come as a shock to those in the west midlands who have trusted in the good name of the West Bromwich building society. I will refer to individuals and to conduct which is criminal in its nature.
713 About 800 people took out home income plans which were ultimately backed by cash from the West Bromwich building society. There was always an intermediary and that intermediary was usually an organisation known as Frew Fisher Smith. In effect, it introduced clients to the West Bromwich building society which advanced money. Those of us in this House who have tried to seek some small measure of justice for our constituents have met a brick wall. It would appear that everything was down to the intermediary and had nothing to do with the building society.
The way in which the West Bromwich building society has behaved and has tried to avoid its responsibilities has been utterly scandalous, deeply shocking and would certainly merit much closer investigation, particularly by the police. I choose my words carefully. I believe that a great deal of criminal activity has been taking place involving forgery and fraud.
In respect of forgery, I have seen and am quite aware of documents, which have been signed by constituents of mine and of other hon. Members, which have undoubtedly been changed after they were signed by the person who was seeking to borrow money. Incomes have been falsified. There have been greatly enlarged falsifications to justify the pushing out of much larger sums of money than our constituents wished to borrow in the first place. Documents were altered after the event without the knowledge of our constituents. That forgery led to fraud and no doubt very high commissions for those involved in that activity. The result has been misery across the country.
So far as I am aware, every one of my constituents who took out a home income plan took one out which was backed ultimately by the West Bromwich building society. As I have said, about 800 people are affected across the country. Literally hundreds of hon. Members have drawn to my attention the fact that constituents of theirs have been involved through the West Bromwich building society. Everyone who has lost money and has faced considerable difficulty owes a debt to hon. Members who have pursued the matter, often in circumstances of great difficulty and in the face of the utmost indifference on the part of that particular building society.
I want to take this opportunity to pay tribute to those who took out home income plans and have grouped together to campaign on behalf of those who have been losers. A dedicated group of people across the country has devoted many hours to fight for those losers.
The matter has been so serious that, in one case, an elderly constituent of mine committed suicide. There is absolutely no question but that the behaviour of the West Bromwich building society triggered that. As one would expect, that has led to enormous problems for the family.
As this matter has been going on for so long, we find that elderly people are becoming more and more worried. They see their debts growing and they are extremely worried about how they can meet those debts. They are terrified that the building society will move against their estates and that the modest inheritance, which they hoped to pass on to their children and members of the family, is likely to go to the building society and all those involved.
Whenever I tried to approach the West Bromwich building society, I met with indifference and a total refusal, 714 on the building society's part, to face up to the gravity of the situation. That refusal was exhibited by the chairman, Mr. Baker, and by the chief executive, Mr. Elliott. From my experience of those two gentlemen, I believe that they should not be holding the kind of posts that they hold. Neither of them has shown the slightest interest in coming to grips with what has happened. It is a serious scandal that people who hold positions of trust, as they do, should seek to brush aside what has happened and pretend that it has absolutely nothing to do with them.
I concentrate my remarks on the West Bromwich building society. I have had almost no dealings with any other body. I am aware that, where people have borrowed from other societies, some have had satisfactory outcomes and conclusions, and others less so. However, I know about the West Bromwich building society.
When my constituents and the constituents of other right hon. and hon. Members asked for a holiday on the interest payments while the matter was sorted out, the West Bromwich building society absolutely refused even to contemplate the idea of freezing the interest at the point of the problem and trying to resolve the matter thereafter. As a result, compound interest is being added to the debt and that debt is growing larger and larger. As nearly all the people—if not all—who borrowed through the home income plans had modest levels of savings, they increasingly find that their debts are at least as big as, if not in excess of, the asset that they currently hold. That is obviously desperately worrying for those people.
That is not the only point which is so scandalous and which makes it necessary for changes in the regulations and the regulatory framework to ensure that that kind of thing can never happen in future. We must also consider the fact that our constituents were told that if they simply signed the document put before them everything would be taken care of. No adequate explanation was ever given about what those people were signing up to in the first place.
It is worth bearing in mind that many of the people who signed up were exactly the kind of people who needed an explanation of what was contained therein. Responsible lenders, responsible banks and responsible solicitors would have ensured that a copy of the documents which our constituents signed would have been available to them and that the contents were carefully explained, clause by clause, so that the borrowers were aware of what they were signing up to.
In the case of nearly every one of the West Bromwich building society borrowers, through the intermediary, that did not happen. That is a very serious state of affairs. By lending money on the basis of home income plans and not ensuring that that happened, that is a flagrant breach of the duty of trust which the West Bromwich building society owed to its own depositors. It lent depositors' money in risky circumstances without taking the most elementary steps to ensure that the borrower was aware of the obligation being entered into. I indict the West Bromwich building society for that as well.
One has to say that there is precious little evidence that the financial status of those people who were buying home income plans was carefully and properly investigated. Indeed, I have already asserted, and believe it to be true and am aware of documents where this has happened, that the financial status was subsequently altered, by forgery, 715 after the income had been declared in order to justify the kind of advance which the intermediary wished to obtain with, of course, the commission that went with the much larger loan than might otherwise have been the case.
It is an absolutely scandalous state of affairs. If anything required police action, it is that each and every one of the mortgage applications to the West Bromwich building society now needs to be examined by the police. There are cases in which there was subsequent forgery of the financial declaration. Those matters need to be investigated and persons need to be brought to trial. If they are found in the intermediary or found in the building society, there should be no hiding place for those who have done this.
§ Mr. Darling
I am listening carefully to the hon. Gentleman. He has pursued these matters vociferously and vigorously on behalf of his constituents. Has he reported any of them to any authority, whether the police, a supervisory body or the Government? The hon. Gentleman's allegations are extremely serious and should normally be reported.
§ Mr. Powell
The hon. Gentleman is absolutely right. All those matters are available; they have been reported, and they need to be further reported. I have not reported them to my hon. Friend the Economic Secretary to the Treasury, but I have made others aware. They are matters for the police. There are West Bromwich borrowers—if I may refer to them as that, although the West Bromwich would always hide behind the intermediary, as the hon. Gentleman identified in his own speech—who have been in touch with the police about these matters.
I hope that, as a result of what is said tonight, there will be a much more determined investigation than has currently been the case. That is precisely why I am taking advantage of the opportunity to ensure that matters which have been clear just below the surface for some time are now brought out in the open. Those who have responsibility for them have to face their responsibilities.
Although the new clause may not be exactly the right way of proceeding—I am open to argument about that—it paves the way for an important discussion about this matter which has concerned many of our constituent s. We have always been faced with the fact that the West Bromwich building society relies upon the existing methods of regulation. Those methods have been shown to be wrong. It would be absolutely unacceptable to hon. Members if we discovered that people are selling home income plans. I am not aware of it, although there is the suggestion that some intermediaries might be trying to market such plans now, but, in view of experience from the mid to late 1980s, if any financial agent was seeking to market such plans, it would be a matter of the greatest scandal.
We cannot shut the stable door after the horse has bolted in relation to those who have already purchased, but for new purchases to be taking place, with people not being advised of all the difficulties that there are in law and so on, would be truly scandalous.
§ Dr. Lynne Jones (Birmingham, Selly Oak)
Will the hon. Gentleman join me and other hon. Members in calling for the Securities and Investments Board to deregister the West Bromwich building society from being 716 able to practise investment business, as that organisation has clearly proved itself to be incapable of looking after the interests of people who lend to it or borrow from it?
§ Mr. Powell
The hon. Lady raises a very important point. She has been most assiduous on behalf of her constituents who have been affected by the West Bromwich building society. Therefore, she makes her request to me from a position of personal and close knowledge of the way in which that building society has been operating. I very much agree with the sentiments behind what the hon. Lady has said.
I hope that the building societies' authorities will look extremely closely at this matter. If I had any deposits in the West Bromwich building society, I would be extremely anxious and concerned about the competence of the people who are presently entrusted with looking after those deposits. I hope that the authorities that have overall responsibility for building societies will take close note of what the hon. Member for Birmingham, Selly Oak (Dr. Jones) has said.
I do not want to go on very much longer; I think that I have said enough to show how deeply unhappy I am at the way in which my constituents have been treated. I know that constituents of my right hon. and hon. Friends and others have been affected. Unfortunately, that disgraceful pattern of events has already taken place. It is obvious that the existing pattern of regulatory law has proved to be too insubstantial to deal with it.
My experiences of the West Bromwich building society have been so serious that I have felt it necessary to take advantage of this opportunity to try to bring out into the open what I regard as some of the most disgraceful behaviour by people who are entrusted with looking after other people's money that it has been my misfortune to learn about.
§ Mr. Alan Milburn (Darlington)
It is a pleasure to follow the hon. Member for Corby (Mr. Powell), who has amply demonstrated the fiasco behind home income plans. He has made several serious allegations, and I am pleased that he has brought them to the attention of the House. I hope that the Economic Secretary to the Treasury not only listened to what the hon. Gentleman said but will say what action he intends to take as a result of those allegations.
My hon. Friend the Member for Edinburgh, Central (Mr. Darling) dealt comprehensively with the failures of the self-regulatory system and the need to change that system and learn the lessons of the disaster of home income plans. As he said, up to 15,000 people were caught as a result of the sale of those plans in the mid to late 1980s. The trap that they are now in is certainly not of their making. Some of them have lost their homes, many of them have lost their life's savings, and many of them presumed that the home income plans that they purchased would not only pay off their mortgages but guarantee them a substantial slice of additional income for many years to come. When they were sold those plans, they were told that they were as safe as houses. Home income plans have not only turned out to be unsafe in respect of their mortgages but have cost them a pretty penny.
As the hon. Member for Corby said, when they were sold, none of the home income plans was issued with a health warning. Many people who bought home income plans are among the most vulnerable members of society. Many were elderly people, looking to pay off their 717 outstanding mortgages and for some additional income. The Financial Services Act 1986 has obviously failed to stop the sale of those plans, and it did not ensure that they carried a health warning.
The chief executive of the Financial Intermediaries, Managers and Brokers Regulatory Association, Godfrey Jillings, has called home income plans inherently flawed. He made that statement after the event, because it was not until 1990 that FIMBRA and its counterpart, the Life Assurance and Unit Trust Regulatory Organisation, wrote to their members reminding them of their duty to recommend only policies geared to an individual's specific needs. The lack of public health warnings meant that many unauthorised firms, as my hon. Friend the Member for Edinburgh, Central said, were able to continue selling to unwitting victims even when it started to become clear that a home income plan scandal was brewing. It was not until a year later that the regulatory organisations effectively banned home income plans.
The mess was the making of the regulatory organisations and their failure to make clear to the public the inherent dangers of investing in those plans. Clearing up the mess has been as inadequate as the system that created it in the first place. My hon. Friend alluded to the rather different treatment available to the victims of home income plans, depending on whether they bought through an independent financial adviser or from elsewhere. He went into that in some detail.
The miserly conduct of the investors compensation scheme was thrown into sharp relief recently in a court case when it became clear that the ICS was refusing to pay any compensation on behalf of a victim who had died before the rogue firm was declared in default. That meant that a widow or widower might get only half the compensation that she or he had hoped for, which would not be enough to keep them in their home. According to the solicitor who was dealing with many of the victims, in the two and a half months since the ICS took that decision, it had halved the compensation paid to a surviving spouse in at least 12 cases. He warned that many more people would be affected unless that practice was reversed.
There are a number of lessons to be learnt from the mess. The hon. Member for Corby has called for police investigations. My hon. Friend the Member for Edinburgh, Central alluded to the need to change the regulatory system and to introduce reform as quickly as possible. As a result of the home income plan debacle it has become clear that lax regulation costs people their homes; it costs people their lifetime's savings; it leads to a great deal of stress and worry. It even led eventually to one person's suicide.
Too many independent financial advisers are simply incapable of doing the job and of looking after their customers responsibly. Unless change is made, many of us will be left with the impression that the industry is run by cowboys. I am sure that the Minister does not wish that impression to be conveyed, and that he will have something positive to say.
We need tighter regulation because many of the people who are sold home income plans are not in a position properly to assess them unless public information is made available. The regulatory organisations are running a 718 telephone helpline and making information available through citizens advice bureaux, but it is too little, too late. Information should have been available to people contemplating investing in home income plans before they got into trouble.
Lax regulation does not work. I hope that some lessons have been learnt from the debacle and that when the Minister replies he will tell us the Government's thinking on compensating the victims and ensuring that they get a decent deal, and on ensuring that this kind of fiasco does not happen again.
§ Mr. Nelson
It is not surprising that the debate has evoked strong emotions on both sides of the House. I welcome the opportunity to make a few remarks in response to the new clause because I acknowledge that the issue has caused great personal distress to those who have been affected. It has come to the attention of many Members of Parliament who have taken up cases on behalf of their constituents, and it is right that the House should have an opportunity to be brought up to date with how those cases are being dealt with, as well as to examine some of the more fundamental issues of supervision, regulation and compensation.
The hon. Member for Edinburgh, Central (Mr. Darling) used the debate—as he has some others—as an opportunity to call for a fundamental overhaul of our supervisory system, and he reiterated his call for a full-blown statutory system. I have expressed my views on the issue and shall not repeat them, save to say that whatever system one has—statutory, self-regulatory or semi-self-regulatory—it does not, of itself, ensure that no losses will arise, that no fraudulent activities will take place and that no bad advice will be offered. One must not confuse the structures with the need to provide adequate supervision and regulation under whatever structure there is.
§ Mr. Darling
Will the Minister tell the House whether he and the Government are still wedded to the existing system of self-regulation, and whether there is any hope for any change originating from the Government?
§ Mr. Nelson
The Government have made it clear on a number of occasions that we believe that the structure provided by the Financial Services Act 1986 has been a considerable improvement, and that further measures can be taken to improve the system of supervision provided under that legislation. That was the purpose of Andrew Large's review, and it is the purpose of some of the changes being prepared by self-regulatory authorities.
I anticipate problems and great damage if any Government were to visit upon the financial services industry the blight of major reorganisation without a consensus as to what should replace the current system, and without confidence that such a reorganisation would result in a better system of supervision. When there is scope under the existing legislation significantly to improve the effectiveness of investor protection, it seems to me that the responsible first recourse of government is to take that approach. That is precisely what we are doing.
I do not rule out, for the long term, changes in response to events and I am always prepared to have a running review of those issues. However, when I am trying to support moves, for example, for the personal investment authority to get off the ground, it would not be responsible or helpful to suggest that we intend to throw the deck of 719 cards into the air and start dealing again, as far as our system of supervision and regulation is concerned. I prefer to address the issues of inadequacies in supervision and regulation where they occur, and not just the structure. It is the human decisions, as much as the institutional structures, which result in good or bad investor protection.
Many hon. Members have spoken about home income plans. Some home income plans are fairly benign; others have caused very serious problems. Home reversion schemes, whereby the owner of a property sells all or part to the scheme provider for an immediate cash sum and carries on living there until he dies, are sometimes a source of distress to next of kin and inheritors, but they are popular and there is nothing necessarily wrong with them, provided that people are well informed and know what they are entering into.
Purchase life annuity schemes can be a sensible source of additional marginal income for people. As the House will know, under such schemes the home owner takes out a mortgage loan on the property and uses the cash to buy an annuity, which services the loan interest and leaves an income. As tax relief up to £30,000 is available on the loan used to buy the annuity, the scheme can provide a positive—if modest—income after meeting the interest due on the loan.
The schemes that have caused most concern are those in which the owner takes out a mortgage on part of the value of his home and invests the proceeds in an investment bond. I understand and fully sympathise with hon. Members' concerns about the plight of home owners—usually elderly—who have been sold unsuitable home income plans. As the House may be aware, action is continuing to deal with the problem and I shall describe a little of the progress that has been made.
The financial services regulators, the Financial Intermediaries, Managers and Brokers Regulatory Organisation and the Life Assurance and Unit Trust Regulatory Organisation., have amended their rules to prevent further marketing of inappropriate schemes and have taken disciplinary action against the firms concerned. To answer the point mentioned by my hon. Friend the Member for Corby (Mr. Powell), therefore, such schemes should not be sold in the future.
In addition, action is being taken to help those who find themselves in difficulty. Many life offices have made good the damage that investors have suffered. Some investors may alternatively be eligible for compensation, either from the investment company or from the investors compensation scheme set up under the Financial Services Act 1986. Last week I went to see for myself, at first hand, how carefully the ICS staff investigate those cases, and I should like to take this opportunity to pay a tribute to them. I watched and spoke to the staff, and in my judgment they are extremely thorough and as expeditious as they can be in dealing with the many claims that have been brought to their attention.
Firms regulated by LAUTRO have now paid out £8 million.
§ Mr. Darling
I am glad that the Minister mentioned the ICS. No one is criticising the staff; the system is at fault. Is it not an anomaly that an investor who goes to the insurance ombudsman will get more or less full compensation, including compensation for legal costs, stress and any payments made, while for those who go to the ICS the upper compensation limit is £48,000 and no 720 other payments are made? In other words, for the latter there is only partial compensation. Does the Minister agree that it is anomalous for the end result to depend entirely on a stroke of luck or bad luck as to which regulator or authority the investor approaches?
§ Mr. Nelson
I acknowledge that there are differences in the overall amount of compensation that might be available—although in the vast majority of cases the amount will be less than the £48,000 for which the scheme provides. I acknowledge also differences in approach. That aspect was subject to judicial review, which ruled in favour of the fair basis of compensation provided by the ICS. It is an inherent problem of mixed-product schemes—and one which legitimately gives rise to concern—that where a number of institutions or intermediaries are involved in packaging a product sold to an investor one may find different acknowledgments of the liability which may be met. LAUTRO has generally been rather fast and, some would say, more generous. Compensation has certainly been paid more quickly than in cases that are the subject of resolution by ombudsmen or the one-stop procedure.
Each case is different, and many cases are complicated. That explains why a number remain outstanding. Considerable progress had been made in clearing up and resolving cases since the issue was last raised by the hon. Member for Brent, South (Mr. Boateng) in a similar amendment last year.
Firms regulated by LAUTRO have paid £8 million in compensation to more than 920 investors, and investors have been restored to the final positioin in which they were before they became involved in the scheme. Between 400 and 500 cases are still being considered by the insurance ombudsman. Many cases are complex and may involve the responsibility of a number of different parties—for example, the financial adviser, the solicitor and the lender.
The liaison group established by the Securities and Investments Board announced in March 1992 a one-stop procedure for handling complaints under which investors in such a scheme on the recommendation of a FIM BRA member who are in difficulty as a result and who have received no satisfaction can pursue all their complaints through FIMBRA—even if their complaints involve others besides the FIMBRA member. The majority of complaints against FIMBRA members received so far are being handled by the ICS, which deals with cases in which firms are in default. The making of an award under the FIM BRA arbitration scheme can drive a firm into default.
So far, 15 of the independent investment intermediaries that were members of FIMBRA—that is, most of them—involved in marketing the schemes have been declared in default under the investors compensation scheme. Payment or offers of payment amounting to more than £16 million have been made to more than 1,000 investors with those firms, and a further 600 claims are being considered.
In many of those latter cases, investors have been told that they are eligible to receive compensation but that their claims cannot be finalised until financial details are received from the various third parties or because the investors have not yet encashed their investments. That might include the insurance company whose insurance bond was used or the solicitor who dealt with the mortgage documents. Some building societies have agreed to co-operate with the building societies ombudsman in using the one-stop procedure. Discussions continue with others with a view to encouraging them to do likewise. No doubt 721 those societies and other organisations will note the strictures and comments of hon. Members who contributed to this debate. The Government hope that they will feel able to co-operate in that way.
More than 120 cases have been processed through the one-stop procedure, 29 cases remain in the FIMBRA arbitration process and 19 are being investigated. The remainder have been settled, rejected or referred to the ICS. Meanwhile, the building societies concerned have made it clear that they want elderly borrowers to remain in their homes, resolve their worries and avoid hardship.
The regulators are concerned to ensure that no one who took out such a plan is overlooked. On 7 June, the SIB published a fact sheet, "Home Income Plans: Grounds for Complaint", which sets out the characteristics of investment bond based schemes and encourages anyone who has taken out such a scheme and thought that they were given bad advice, or were not adequately informed of the risks, to contact the SIB. It has also established a helpline for two months to advise those who have not complained before on the action that they should take. Since it was established, a further 24 cases have been identified and referred to the appropriate complaints handling body under the one-stop procedure.
I was amazed that when that fact sheet was sent out and investors were invited to say whether they thought that they had grounds for complaint, and a number completed a questionnaire—when 24 cases were identified as being serious enough to merit investigation—13 respondents wrote to express their interest in home income plans and asked how they could take one out. If anything, that emphasises the point made by my hon. Friend the Member for Corby that the public need good advice—whether it is independent, professional or simply sound common sense. Even now, the public are not necessarily aware of the dangers involved.
I have said previously that, although those involved in selling or wrongly selling such schemes must bear the principal responsibility, and although a statutory compensation scheme is available for those who cannot be assisted in other ways, ultimately the public must exercise a degree of buyer beware. They should observe five rules. They must beware, spread their investments or risks, seek good advice, read the small print and not confuse authorisation with compensation. We cannot provide a fail-safe system of statutory regulation or even self-regulation in this or other areas. We can do our best, and we can take action against those who are in default. That is being done, substantial progress has been made, and the remaining cases should be dealt with over a period of time. I hope that all parties concerned, and particularly the institutions, will play their full part in co-operating to bring this sad episode to an end and to ensure the rightful restitution of funds to those who have undoubtedly suffered greatly.
§ Mr. Darling
At the start of this debate, I indicated that I had borrowed heavily from last year's amendment in the name of my hon. Friend the Member for Brent, South (Mr. Boateng) and, with respect, I believe that the Minister 722 has borrowed very heavily from his speech last year. As he spoke, I recognised several passages that appeared in the columns of Hansard in July 1992.
I emphasise that no one is suggesting that we should throw the existing regulatory system into the air like a deck of cards and wait to see what lands. There is a growing consensus about what needs to be done. I suggest that we build on the present system but remove the self-regulatory element to end the present situation whereby people can pick and choose between regulators. People can decide to do nothing because there is no pressure on them to do anything. Above all, we must get away from the state of affairs that the Minister signalled again today, in which the Government will do nothing because that is to give the green light to those outside who wish to do nothing to put their house in order.
I remind the Minister that the financial services industry is of crucial importance to the economy, the people whom it employs, and those who buy the industry's products. We are calling for an overhaul of the present system and the establishment of statute-based regulation to protect not only the public but the industry itself.
I am sorry that the Government will not accept that proposal. I am sure that the 10,000 to 15,000 people who bought fundamentally flawed schemes will be bitterly disappointed. Our proposals are made not in any partisan sense. There is support for change outside the House as well as in it.
I am astonished that the Minister made no reference to the comments of the hon. Member for Corby (Mr. Powell) about the West Bromwich building society. I thought that the Minister would say something—even if he only expressed concern. I hope that the Minister realises that concern is felt by hon. Members on both sides of the House. Earlier this year, I tabled two early-day motions which attracted more than 100 signatures. I was astonished at that level of interest. Conservative Members tabled early-day motions that were slightly different, but they also attracted supporters.
The Minister must accept that there is concern and that it is not a question of criticising the industry, but a recognition that the industry is of crucial importance. People will want to buy more and more products and it is therefore important that we have a system of regulation and compensation that works. We do not have that at the present time.
In his tour round the compensation scheme, the Minister might have commented a little more on the anomalies between the various schemes. He said that the ICS scheme was fair and that he was glad that the judicial reviews found in its favour. The judicial reviews are to do not altogether with fairness and objective assessment of the pros and cons of such schemes, but with a narrow interpretation of administrative law, which is not quite the same thing. I hope that the Minister will realise that many people will find it curious that one scheme gives help for legal costs while another does not. There must be something wrong with that system when they are dealing with the same product.
The hon. Member for Corby and my hon. Friend the Member for Birmingham, Selly Oak (Dr. Jones) have said that one of the problems is that we have mixed-product schemes which allow the various organisations concerned to duck behind one another, saying that it is nothing to do with them. The hon. Member for Corby also made the point, which the Minister must accept, that even if the 723 Minister does nothing else and even if everything in the regulatory system needs no alteration, there is something wrong in this area. I am sorry that he did not do anything more.
By tabling the new clause, I hoped at least to provoke the Minister to say something different. Since the interview in the Financial Times last year, he has a new boss, a new Chancellor—a man of the people, who comes from the industrial midlands, no less. I had thought that with that new broom we might have seen some changes in financial regulation, but we have not.
My new clause is highly technical and was engineered to produce this debate. I am sorry that the outcome has not been more positive. I can only hope that those who are trying to resolve the situation will redouble their efforts. I am sure that many people long for the day when we have a Government who are prepared to govern in this area. They are keen on interfering in all sorts of trivia, yet when it comes down to such an important, fundamental point, the Government have absolutely nothing to say. I wonder why that can be.
§ Question put and negatived.