§ Order for Second Reading read.9.41 pm
§ The Under-Secretary of State for Trade (Mr. Reginald Eyre)
I beg to move, That the Bill be now read a Second time.
The Insurance Companies Act 1974 was a consolidation measure covering the Acts dealing with insurance companies. It has provided the framework for the Secretary of State to authorise and supervise undertakings carrying on insurance business, and if necessary to intervene in their affairs. This Bill alters that framework in some respects, but not radically.
A phrase often used to describe the United Kingdom approach to regulation by the Government of its insurance industry is "freedom with publicity". The phrase serves to bring out some clear and continuing features of that regulation over the last century. In general, there has been no Government control of premiums or other conditions of contract between insurers and policyholders; there has not been Government direction of the investment of insurance companies; there has been a wish to see the insurance industry expand the range and volume of its business in the United Kingdom and in other countries; but there have been requirements for insurance companies to make substantial returns to the Department of Trade and its predecessors, for those returns to give details of companies business in a form allowing position and performance to be assessed, and for those returns to be available to policyholders and to the public at large.
Quite properly, the freedom that I have referred to has its limits; the Secretary of State has a clear duty to intervene if it appears that all is not well. The need for supervision of the insurance industry is one of record. There have been cases in the past where failures of insurance companies have done policyholders and interested third parties great harm, and, indeed done the industry no good. Although no system of supervision can avoid completely all risks of difficulty or failure of an insurance company, Government responsibility for a systematic approach is to be found not just in the United Kingdom, but throughout the countries of the developed world and in many others.
The main reason for the Bill, as hon. Members will have realised from the explanatory memorandum, is to give effect to two European Community directives harmonising certain features of the supervision of insurance undertakings within the Community. The Bill will not require any substantial change to the system of supervision in the United Kingdom as developed following the Companies Act of 1967 and the Insurance Companies Amendment Act of 1973. And I do not expect the changes that will be introduced by the Bill to lead to any requirement for additional staff to be drafted to the insurance division. At the end of 1980 the division had 100 staff, a figure to be compared with the peak level of 119 in 1976 and 1977. The fall reflects the fact that the level of staffing needed for the difficult time experienced earlier in the 1970s had become excessive. There is no question of the numbers being reduced so as to impair the Department's ability to supervise the industry, but it is 104 right that the level of staffing of the division as of other divisions should continue to be assessed carefully against needs.
Before I try to explain to the House the main provisions of the Bill, it would be right to balance what I have said about the need for supervision by a brief reference to the work and importance of our insurance industry. The importance of the security offered by insurers to domestic and business policyholders is a central and necessary feature of modern life, and the United Kingdom insurance industry meets the needs of this country and many of the needs of other countries. In 1979 there were 150 million personal life and general insurance policies in force in the United Kingdom; four out of five households had life insurance cover of some sort; nearly three-quarters had insurance against fire or theft of household possessions; over a half had motor vehicle insurance. The great variety of cover given by the industry to business and commercial bodies includes transport insurance, cover against fire and other damage, and a wide range of liability insurance. A substantial fraction of United Kingdom pension provision is made through insurance companies.
We have in the United Kingdom the world's leading and most diverse insurance industry. At the end of 1979 823 insurance companies were authorised to operate here, and there were 404 syndicates at Lloyd's. Employment in the industry was about a quarter of a million. Its wide range of investments includes substantial holdings of company securities. Between 1975 and 1979 its net increase in investment in such assets in the United Kingdom was over £3,000 million. And of course the net foreign exchange earnings of the insurance industry have been of vital importance to the economy for a great many years. In 1979 those earnings amounted to £957 million. I am glad to pay tribute to the importance that the insurance industry plays in our national life.
I should like to turn now to the Bill. On the pattern of the two directives to which I have referred, the non-life and life insurance establishment directives, different arrangements are made to apply to companies depending on whether their head office is in the United Kingdom, another member State, or outside the European Community. Within those three categories, it is one of the main objects of the Bill to apply as far as possible the same requirements to all companies whether or not the directives apply to them. No distinction was drawn in the 1974 Act between companies carrying on only reinsurance business and companies writing direct business. The directives do not apply to those writing reinsurance business only, but the Bill maintains that earlier uniform approach as far as is practicable. Complete uniformity is ruled out by the fact that some member States do not supervise specialist reinsurance companies in the same way as they supervise other insurance companies. Such reinsurers established elsewhere in the Community and operating in the United Kingdom through agencies or branches are therefore to be supervised in the United Kingdom in the same way as are United Kingdom pure reinsurers.
Part I of the Bill completely replaces part I of the 1974 Act and the classification and authorisation regulations made in 1977 and 1978 to implement the non-life directive. Like the provisions it replaces, it deals with classes of business, conditions for the authorisation of companies—in particular the fitness of those running them—and termination of authorisations. It also covers 105 three new matters to which I should draw attention. They are the extension of fitness screening to main agents, benefits in kind and partly paid up share capital.
Before discussing those new matters, I want to mention one feature of clause 6. In essence, this prevents new authorisations of companies to carry on both life and non-life insurance business. It does not, however, prevent companies already authorised to provide both sorts of insurance from continuning to do so. This is, of course extremely important, for a great deal of United Kingdom insurance business is carried on by composite companies. The question whether the life directive should allow or forbid composite companies was a difficult one during the discussions on adoption of the directive. The provision agreed—that existing composites could continue but new ones could not be created—met United Kingdom needs. The requirement in the directive for the segregation of long-term from general business funds already obtains in United Kingdom legislation. It provides important protection for the interests of long term policyholders. With it, we see no objection to composites continuing to operate as such as long as those concerned wish them to do so and we do not believe that the provision in the life directive for a report on those operations after 10 years is any threat to that freedom.
I now turn to the extension of fitness requirements to main agents. Directors, controllers and managers of insurance companies are required by section 7 of the 1974 Act to be fit and proper persons to hold those positions. In addition, the authorisation regulations require companies from outside the United Kingdom to appoint a general representative resident in the United Kingdom and to provide for that representative to be subject to fitness screening as though he were a director. All those existing fitness requirements are repeated in the Bill. The innovation concerns underwriting agents dealing in general business.
An underwriting agent is an agent of an insurance company with power to commit the company to contracts of insurance. Underwriting agents may be individuals, partnerships or corporate bodies. It is to be noted with regret that some cases have shown that underwriting agents can play a critical role in general business insurance companies in the United Kingdom, and not play it well. Persons wanting to make a living in this field have, by offering their services as underwriters, persuaded overseas principals to enter the London market. It has emerged too late that they have lacked the experience and judgment necessary to perform properly the duties that they have undertaken. It is therefore proposed to apply the fit and proper provisions to the more important underwriting agents—that is, to the "main agents". Following consultations with the industry, we have in mind that the regulations should make 10 per cent, of a company's gross premium income the threshold above which an underwriting agent is to be treated as a main agent.
I should emphasise that we are not taking powers to regulate the operation of main agents. The Secretary of State's powers of intervention will continue to be confined to insurance companies. The Secretary of State will, however, be able to intervene in the affairs of an insurance company which has appointed an unfit main agent as though it had appointed an unfit manager. The introduction of the proposed power should not be seen as an attack on underwriting agents in general. The cases that have caused concern have been few, and there is no reason 106 to expect that to change. But those that there have been have shown a need for control, perhaps most likely to be needed in the case of companies new to the London market. Lloyd's will continue to be responsible for approving those with binding authorities from Lloyd's underwriters.
§ Mr. Clinton Davis (Hackney, Central)
If the hon. Gentleman has finished that aspect of the Bill, would he care to comment on the provision of article 12 of the directive of 13 March 1979, which, among other things, provides:Each Member State shall make provision for a right to apply to the courts should there be any refusal.No such right is inserted in the Bill. Would he care to explain why that is so?
§ Mr. Clinton Davis
The Bill is said to follow the directive. That provision is emphatically spelt out in the directive. Surely the Minister can indicate why no right of appeal is provided for in the Bill. There is a right of judicial review, but that does not constitute a right of appeal.
§ Mr. Eyre
The hon. Gentleman is showing a lack of regard for the principles of a Second Reading debate and a Committee stage proceeding. His question appears to be founded on a misunderstanding, and I shall be delighted in due course to give him chapter and verse.
It may at this stage be helpful to say something about Lloyd's. Lloyd's has remained to a great extent a selfsupervising body. The directives that we are dealing with apply to Lloyd's, but recognise its special nature. Right hon. and hon. Members will know that in 1979 the committee of Lloyd's established a working party under the chairmanship of Sir Henry Fisher to inquire into self-regulation at Lloyd's. Following the report of that working party in May 1980, Lloyd's has presented a private Bill to strengthen its ability to regulate its internal affairs. The Secretary of State will at the appropriate stage report on that Bill to the Committee, but I should like to take the opportunity to reaffirm the Government's support for the principle of self-regulation for Lloyd's. The Bill does little more in respect of Lloyd's than repeat the provisions of the Lloyd's (General Business) Regulations 1979 and the Insurance (Transfer of General Business) Regulations 1980.
The second main innovation in part I concerns benefits in kind. Hon. Members will see from clause 2(5) and from clause 16 that we are proposing that the Secretary of State should have power to make regulations so that insurance companies offering insurance contracts that provide for benefits in kind rather than in money, and offering no other insurance contracts, may be exempted from the requirement to be authorised and from the supervisory 107 regime imposed by part II of the 1974 Act. I should like to explain briefly why we have decided to seek such a power and the manner in which we intend to exercise it.
It seems clear that it was never the intention of Government or Parliament when considering legislation covering insurance companies that companies offering benefits in kind should be supervised. Insurance companies' resources are financial. They meet the costs of making good a loss or pay a predetermined sum. Difficulties over insurance companies have generally arisen over inability to pay claims or to pay them in full. The obligation to supervise certain providers of benefits in kind was the result of a judicial decision in 1973 that some such contracts were contracts of insurance. In practice, that has meant supervising the roadside assistance and vehicle recovery operations of the AA, the RAC and a handful of specialist vehicle recovery companies. Not surprisingly, a system of supervision in great part concerned with financial resources is irrelevant to monitoring; for example, the ability of the AA to provide assistance to a member whose car has broken down. It is with that sector that we are mainly concerned in the exemptions. Not only is the system of supervision inappropriate to it, but if we take no power of exemption the bodies concerned will be forced to incorporate and to carry on no business other than insurance business. In some cases, that would impose an unnecessary financial and administrative burden.
§ It being Ten o'clock, Mr. SPEAKER interrupted the Business.
§ Mr. Eyre
I was saying that if we take no power of exemption, the bodies concerned will be forced to incorporate and to carry on no business other than insurance business. In some cases that would impose an unnecessary financial administrative burden. Circumstances may well vary; for example, some bodies may not wish to separate their benefits in kind insurance from their other insurance activities, and they will be under no obligation to do so.
It is our intention that the first order under the proposed power should be to exempt roadside assistance and vehicle recovery insurance when carried on by a body carrying no other insurance business. If it becomes clear later that the requirement to supervise other sectors of benefits in kind insurance is proving difficult or unnecessary we shall consider making a further order under this power.
The last innovation in part I concerns partly paid share capital. Although the directives permit one half of any share capital not paid up to reckon against the solvency margin once 25 per cent. of the total share capital has been paid up, we do not believe it is desirable that insurance companies should rely on partly paid share capital to meet their solvency requirements, for there is no guarantee that a call for additional capital will be met in circumstances when it is most needed. We do not think it would be right to take retrospective action on counting unpaid capital against the solvency margin; but clause 7(2) provides that companies that issue partly paid shares after the 108 commencement of the section may not be given new authorisations, and clause 1 1(2)(b) will allow intervention if an authorised company issues such capital.
I now come to part II, which amends part II of the 1974 Act. The first clause in part II, clause 15, restricts the business of insurance companies to insurance business. The reasons for this are obvious. If a company carries on other business, pressure to invest funds of the company needed to cover insurance liabilities in that other business may be very great even though the assets involved are unsuitable for insurance business. Taking that further, losses on the non-insurance side can result in insolvency, with partial or total loss of cover for policyholders. In fact, separation of insurance business from other business is already nearly complete in the United Kingdom, and complete compliance should be achieved with little difficulty.
Perhaps the most extensive changes in this part lie in clause 21, which deals with financial resources and solvency margins. For non-life business the changes will not be so great. Solvency margins have been required since 1946. The 1977 solvency regulations modified the 1974 Act requirements to meet the requirements of the non-life directive. However, for life companies, the requirement to possess a prescribed solvency margin will be new. We have up to now relied on the prudence of the actuarial profession in assessing a company's liabilities. If the company's assets exceeded its liabilities when valued by the actuary, that was in itself evidence of solvency. The life directive, however, requires a specific minimum margin to be demonstrated, and has rules about what that margin may include. We believe that the great majority of companies will have no difficulty in demonstrating the required solvency margin by 1984, the end of the basic transitional period. The method of calculation of solvency margins will be laid down in regulations.
Clause 21 proposes to add section 26D, which provides for regulations to be made to meet the requirements in the directives for assets to be in the same currencies as liabilities and to be localised in particular countries. I have received representations that the enabling powers in section 26D go wider than is needed to meet those matching and localisation requirements of the directives. I think that that criticism is justified. I intend, therefore, to propose an amendment in Committee to the proposed section so as to limit its scope to its intended objective.
I should now like to refer to clauses 17, 19 and 20. These clauses affect life companies, and modify sections 14, 24 and 25 of the 1974 Act. While the changes introduced do not for the most part flow from the directives, the sections they modify are important in establishing the required separation of life from non-life insurance business within a company that carries on both. The clauses are concerned with improving the control of movement of assets from the long-term business fund of a life company to the shareholders' funds and with protecting policyholders' rights and expectations. They are concerned with the assessment of solvency and the application of actuarially established excesses of assets over liabilities.
Clause 17 requires annual rather than triennial actuarial valuations. For the great majority of companies this is already the practice, though a number of companies at present publish only triennially. The computerisation of records means that the additional burden on companies for which this will be new should not be great. It goes on to 109 impose a new requirement on those companies which choose to define policyholders' rights to share in profits in terms of the surplus arising from a particular part of the business. Such companies are expressly required to establish a separate surplus for such parts of the business.
In addition, it is intended to amend the regulations dealing with the published returns companies must submit. The companies in question will have to include in the actuary's report a separate revenue account for each such part of the fund. The purpose is simply that where companies choose to define policyholders' rights in a particular way, the information necessary to monitor the satisfaction of those rights should be available to the policyholders concerned and open to scrutiny.
The other two clauses, 19 and 20, remedy technical deficiencies in sections 24 and 25 of the 1974 Act. They do not introduce wholly new concepts, and at this hour I shall not weary the House with them.
Clauses 22 and 23 amend the grounds for and powers of intervention to the limited extent necessary to conform with the directives. The existing power to "stop" a company, the power to prevent it entering into new contracts, has been recast on directive lines and placed in part I, in clause 11. The Bill does not introduce any new powers of intervention. The main changes affect the grounds on which we can at present require a company to put assets in trust. We shall no longer be able to impose the requirement solely because the company is newly authorised or there has been a change of controller. I can, however, confirm to the House that we shall still have the power to take appropriate action when we have reason to believe that policyholders' interests are at risk.
I propose to deal with part III and its schedules fairly briefly. Clauses 31 and 32 deal with Lloyd's and, as I have said, are not much of a change. The application of section 26D will, however, be, as it will be for companies, an innovation. The remaining provisions of part III are well described by its title as miscellaneous and general.
Schedules 1 and 2 deal with definitions of classes of insurance business. Schedule 2 will be no innovation; it has been covered hitherto by the Classes of General Business Regulations 1977. Schedule 1 will, however, be a more detailed classification of life insurance than we have had hitherto. Schedule 3 deals with consequential amendments, schedule 4 with repeals. Bearing in mind the importance of the contribution made by the insurance industry to the economy of the country and to the well-being of individual policyholders, the Bill is an important measure. I commend it to the House.
§ Mr. Clinton Davis (Hackney, Central)
The Bill seeks to amend the law on insurance companies. Although the Bill's main provisions deal essentially with the implementation of the relevant EEC directives, the Opposition intend to raise several other topics of importance to the insurance industry in this debate and, more particularly, in Committee and on Report.
The Minister has rightly paid tribute to the insurance industry. I join him in that tribute, although I have some qualifications to make about investment policy and one or two other aspects. Given the Bill's broad scope, the House was entitled to expect a wider review of the Government's policies on insurance than the Minister has deigned to provide. I hope that he will be more forthcoming in his oft-promised winding-up speech. With one qualification about 110 the appeals in article 12, the hon. Gentleman dealt with the Bill's provisions reasonably adequately. However, we are promised great revelations in the winding-up speech, when, no doubt, the hon. Gentleman will be very convincing.
The essence of the Bill in the implementation of the directives is to emphasise the need for, and to increase regulation and supervision of, insurance companies in order to enhance safeguards for the policyholder. Successive Labour and Conservative Governments have insisted on stricter supervision of solvency, of the conduct of insurance companies and of those in charge of them in order to prevent failures. The Minister was right to say—I also had some bitter experience of this in the early part of 1974 and for about 12 months thereafter—that no system could be completely foolproof.
As a result, we found it necessary to complement the system of supervision by providing a guarantee with some protection from failure, which was implemented through the Policyholders Protection Act. Notwithstanding the criticisms that came from various quarters when we introduced our proposals, it was a justifiable measure. However, that is history. I doubt whether many people would wish to see a reversion to the previous system. In the late 1960s and early 1970s in particular, our experience emphasised the need for a stepping up of supervision and control.
Too many people experienced the acid taste of insurance company failures. The stories of loss, hardship and anxiety affected thousands of ordinary people. It must be remembered that for many of them insurance was the only major investment of a lifetime. Those failures—there was also a number of near failures—occurred because too much money from profits went into property speculation and other fringe activities. It should have gone into productive industry.
The plain truth is that too many people wallowed delightedly in a system in which asset stripping was acceptable. I shall quote from "Commerce Finance in Europe", which is published not by the Labour Party but by the Institute of Chartered Accountants. It states that it was:more profitable to play games, buying and selling shares of companies through the stock market, than to invest new capital in industry.In other words, the joy of the speculator was in inverse proportion to the vital needs of the nation.
I believe that the nation has paid dearly for those profligate luxuries. This has a great deal to do with the Bill, because it is right to sketch in the background which led to a strengthening of supervision that apparently the Government accept. The measures of intervention, surveillance and control which ensued vividly illustrate the fact that unregulated private enterprise has no place, and is quite unacceptable, in the world of insurance. That experience, which is evidently accepted even by the present Government, contrasts markedly with the general economic doctrine which they so dogmatically espouse and so disastrously practise.
Clearly, we cannot afford to go through the experiences of the late 1960s and early 1970s again, not simply because of the roll of dishonour which affected the reputation of the insurance industry, not simply because of the anxiety and blighted hopes of the people who were directly affected by failures, but also because I believe that 111 a somewhat different role must be found for the financial institutions, including the insurance companies, in supporting our industrial investment.
I support the view of the minority of the Wilson committee, including its chairman, my right hon. Friend the Member for Huyton (Sir H. Wilson), that one-tenth of the funds of institutions should be earmarked for industrial investment, subject to a guaranteed return to the institutions. I shall not go into the details, as they are spelt out in the report. It is right to emphasise that the financial institutions, including the insurance companies, are the trustees of huge amounts of savings, a considerable proportion of which are the enforced savings of ordinary working people. The long-term interests of those people are dependent upon the strength of the economy, upon jobs and upon increasing investment in the United Kingdom. I, therefore, believe that those institutions have a bounden duty to have wider vistas than relatively short-term profits in the investment policies that they apply. That is not a novel proposition. The idea of a national investment facility has worked successfully in other countries—the Netherlands, France and Sweden, to name but three.
Mr. Nichol (Dorset, North)
While we may not agree on the suggestion of 10 per cent. compulsory investment in industry, does the hon. Gentleman agree that pension funds and insurance companies can do much more by playing an active part in helping, watching and supervising the management of the companies in which they invest and that that would be a contribution to industry?
§ Mr. Davis
I think that the hon. Gentleman has heard me argue that proposition in the context of another Bill. I accept what he says. But I do not think that the two propositions are in any way mutually exclusive. I did not expect the hon. Gentleman to agree with my first proposition, although perhaps he will be won over in due course.
In my view, the institutions must take greater account of their social and economic obligations in determining their investment decisions. This point was summarised in paragraph 1018 of the Wilson report as follows:The ability of the long-term institutions to meet the expectations of policyholders and future pensioners depends crucially on the real rate of economic growth. The institutions cannot stand apart from the process of generating that growth.I therefore submit that a somewhat new relationship must be created between the long-term institutions and productive industry.
I may add that I am more than a little concerned at the fact that, in a manner similar to the early 1970s, investment in property is running at about £1.5 billion annually in the United Kingdom, and a very considerable proportion of that is in central London. Again, there is greater investment in property outside the United Kingdom than in all the United Kingdom regions and the areas outside London. That is another fact at which we should look closely.
I turn to some other specific topics which I believe relate to the Bill, and I hope that the Minister will comment upon them in his reply. First, I refer to the EEC draft services directive. How does the Minister view the prospects of securing a satisfactory services directive in 1981 from the point of view of United Kingdom insurance 112 interests? To say the least, progress since 1973 has been disappointing, although I do not find that in the least surprising. While it is possible that some progress might be achieved as a result of pressure that is being urged by the Commission within the nest few months, can we reasonably expect that the real freedom envisaged in the directive will ever be realised?
If I am somewhat sceptical about this, it is because I believe that the French and Germans have constructed every possible technical and legal road block to impede progress, so as to deny this country the right to benefit by exploiting one of our strongest export industries within the EEC. That was a point made more than once by the Minister in his speech, and I refer to the insurance industry.
In 1979, our insurance premium income from the EEC amounted to only 12 per cent. of total premium income. I should be interested to hear what the figures are for 1980. The directive would sweep away many of these barriers. It would permit EEC insurers to establish outlets in other member States. It would permit substantial specialised companies to compete across frontiers. Perhaps it is because of our strength in these areas that the French and Germans have deliberately stalled the directive. I believe—I hope that hon. Members on both sides will expect the Minister to say this—that he should use every endeavour to defeat these nationalistic and protectionist designs which have damaged our insurance interests and will continue to do so unless they are stopped.
I turn to another matter—the conduct on insurance business—which is extremely important. I am disappointed—again, I express no great surprise about it—that the Bill has nothing to say about this topic, in particular about the selling of insurance by non-broker intermediaries. It had been my hope that the 1978 Act dealing with the registration of insurance brokers would be followed up legislatively by dealing with non-broker intermediaries. Perhaps the shortest and most effective way would be to make companies liable for the acts or defaults of their agents or other intermediaries.
However, the present Minister, almost from day one, has clearly preferred not to take that route, and he seems to be eminently satisfied with the BIA and Life Offices' Association codes for non-broker intermediaries. Indeed, he waxed euphorically about those codes and said:I am particularly pleased to see that the codes include provisions on complaints and the enforcement of standards set out in the codes.I shall not deal in detail with those matters, but my hon. Friend the Member for Norwood (Mr. Fraser) may do so.
I support any positive standards of enhancing methods of selling insurance, and, in so far as the codes manage to achieve that or enhance it, I welcome them. However, I have serious reservations about the complaints procedure that is envisaged. I can see little distinction between the provisions of the codes and the existing procedures. I notice that in their correspondence the BIA and the LOA have gone out of their way to stress that these procedures merely underline the best practices already followed. I do not believe that there was universal satisfaction with those practices in the past. Demands have been made by perfectly reasonable sources for an independent insurance ombudsman. Those demands would not have been made if the practices had been working perfectly satisfactorily.
Under the codes, a salesman is not required to say whether he is an intermediary or an introducer, yet surely 113 the policyholder is entitled to know with whom he is dealing as there is a world of difference between a mere introducer and a trained intermediary. Who is able to prefer complaints? Is it to be limited to policyholders? Why should not other qualified intermediaries be in the position of being able to make such complaints? Would they not have some valuable and qualified professional evidence to offer on whether a specific salesman had been giving misleading advice?
The enforcement provisions, too, leave much to be desired. If the code has been contravened by an intermediary, does it follow that the company will fully compensate the policyholder even if there is, perhaps, no legal obligation to do so? What action is to be taken against an offending intermediary? These are highly relevant issues, and I do not believe that the codes provide satisfactory answers.
The draft directive on insurance contract law will have a dramatic effect on insurance law and the law relating to insurance companies. This is relevant to the reform of the law on non-disclosure and breach of warranty, matters that have been recently considered by the Law Commission. These proposals, if implemented, would have an effect not only on the law but on the practice of insurance companies.
A most valuable part of the Law Commission's report was the draft Bill which was annexed to it. I hope that the Minister will indicate whether the conclusions reached in the report meet with his approval.
The fourth issue to which I turn concerns Lloyd's, which is mentioned briefly in the Bill but not in the context of the Fisher report, which is a matter to which, perhaps, the House will turn in the not-too-distant future. It will be helpful if the Minister indicates the views that he has formed on the Private Bill, which is based essentially on the Fisher report and of which he must have knowledge.
§ Following from that is the supervision of —
§ Mr. Deputy Speaker (Mr. Bernard Weatherill)
Order. I hope that the Minister will not be tempted ino taking up the invitation of the hon. Member for Hackney, Central (Mr. Davis) to state his views on the Fisher report. That is not really connected with the Bill.
§ Mr. Davis
I do not want to cross swords with you, Mr. Deputy Speaker; I never do that. However, there is a reference to Lloyd's, and perhaps I was erroneously tempted to ask that question. As I have asked so many others, I am happy to forgo that one.
I turn to the supervision of insurance companies. In the context of the Bill, the Government should give consideration to the desirability of reinforcing existing supervision requirements by requiring a life insurance company to submit an actuarial solvency cerificate before policies are offered, so as to prevent policies promising excessive benefits from being issued in the first instance, especially since the promising of excessive benefits can all too easily, as we saw during the days to which I have already referred, result in the failure of the company meeting such promises.
There are deficiencies in the current procedures in that a life assurance company must submit an actuarial solvency certificate each year when a switch of investments, perhaps immediately after the issue of the certificate, can, in effect, invalidate it. I believe that the proposition that I am advancing and to which I shall return 114 in Committee—1 should welcome the Minister's views on it, not necessarily tonight, but later—accords with the guide that was issued by the Faculty of Actuaries in May 1975. It would simply be a question of determining the best tactical approach to the matter, because I do not believe that there is any distinction in principle.
I come next to some of the detailed provisions of the Bill. For the first time in the history of life assurance operations in this country, specific solvency margins are being introduced for long-term business. In practice, I apprehend that, apart from some additional paperwork which might be regarded as somewhat bureaucratic in preparing official returns, long-established conventional life companies with a large proportion of with-profits business will be hardly affected. Will the Minister confirm that?
There is, however, some doubt about the position of linked-life companies whose solvency margins will by 1984 have to be at least £500,000. Many of these linked-life companies are small. They trade profitably on low capital amounts as a result of reinsurance of a major part of the death risk and a substantial part of the expenses risk. It is possible that small companies of this kind could face some problems in meeting this requirement unless they are able to obtain an injection of substantially increased capital sums. I realise that this does not take effect for another three years, but I believe that some actuaries are concerned about it. Perhaps the Minister will say something to allay those anxieties.
I turn to authorisation for different classes of long-term business. The Minister will know that this has given rise to some misgivings on the part of insurance interests. I do not propose to rehearse now some of those doubts and anxieties, because this is essentially a Committee point. However, it has been expressed to me that the imposition of special authorisation requirements in certain cases on existing companies will be unfortunate and unnecessary. This is a matter less of principle than of detail, and I hope that the Minister has an answer. Since I believe that the discussions by his officials with the insurance industry are not yet complete, I shall not pursue it. I simply put down a marker so that we can return to it if necessary. But perhaps the Minister can give a brief outline of the present state of play in those discussions and say whether he believes that there can be a rapprochement between his officials and the industry in this respect.
I come now to the right of appeal, as set out in article 12 of the directive of 5 March 1979. My intervention was not well received by the Minister, whom we all like and admire but who for a moment was less than his usual kindly self. I do not know why he became so furious with me about my question, and I am sure that he has a complete answer. I do not believe that a judicial review by the courts in respect of a failure by a Minister to fulfil properly his quasi-judicial role is the same as an appeal as envisaged in the directive. However, we shall listen with interest to what the Minister has to say.
Clause 7(3), as we heard, extends to main agents of insurance companies the fit and proper person procedure, which currently applies to directors, controllers, managers and general representatives of insurance companies. I wholeheartedly support that concept. The Minister gave some indication of the scope of the regulations in defining the amount referred to in clause 7(6) as 10 per cent. of the premiums. We shall look at the detail, but the definition 115 remains to be spelt out in regulations. The industry will, however, be pleased to have been given some definition by the Minister.
The whole doctrine of the fit and proper person procedure has been subjected to considerable criticism and now, indeed, scrutiny by the European Court. I am hopeful that the view which we took in Government, and which is now taken by the present Government, as to the reliability of fitness as a test is likely to be vindicated. Indeed, I can see no practical alternative. I hope that the Minister's implicit optimistic belief that the concept will be upheld by the European Court and by the Commission will be fulfilled. No doubt we shall not be kept waiting long for the matter to be determined.
I wish to raise one other matter in relation to clause 21, which amends section 26 of the 1974 Act. Section 26 D(l), as it would be redrafted, appears to be extremely wide. I hope that it is possible, as, I believe, the insurance industry has sought to impress on officials in the Department of Trade, that some more limited wording might apply. I hope, too, that the proposed section 26 D(2), can be rather more precise over the declaration of intent.
There are other areas where some amendment of the present drafting may be desirable, although we realise that that may be difficult when it comes to the European Community's insurance directive. The Department has to follow as closely as possible the wording of those directives. Nevertheless, there are matters, some of which I have gone into and others to which we shall refer in Committee, that we wish to raise.
We do not challenge the Bill. However, as I said, I am disappointed that the Minister did not seize the opportunity, as some of his predecessors have done when dealing with Bills of this character, to give an indication, of his policies in relation to a number of important issues. I am glad to say that he will have a second chance, and we look forward with some qualified optimism to what we might hear when he seizes that chance.
§ Mr. J. Enoch Powell (Down, South,)
After the exhaustive speech to which the House has just listened, I do not wish to detain hon. Members long. But for Northern Ireland and my hon. Friends and myself this is a Bill which we welcome for a special reason which I think deserves to be put upon the record.
Certainly for the past 60 years—and probably for longer—this is the first United Kingdom legislation, as opposed to Great Britain legislation, upon the subject with which it deals, and the House will note from the last clause of the Bill that it extends to Northern Ireland. I hope that that is a formula which in due course may no longer be necessary in United Kingdom Acts and that specific and explicit attention will be drawn only to those Bills which do not extend to Northern Ireland.
Some of the history and gestation of this gratifying result was debated at a rather later hour on 15 April last year, when the House had before it the Bill which became the Insurance Companies Act 1980. That Act made it possible for this Bill to be a United Kingdom Bill by consolidating the Northern Ireland law with that of Great Britain so as to produce complete uniformity. As a result 116 of that, future legislation on the subject of insurance companies will be able, like this Bill, to apply to the whole of the United Kingdom.
This will have a number of advantages of a limited character for Northern Ireland. It will mean that it will be precisely the same code under which companies are operating in all parts of the kingdom and that that code will be found in one place and not in two.
It will also mean that the rights of hon. Members of this House in respect of subordinate legislation will be identical. At a number of points both the Minister and the hon. Member for Hackney, Central (Mr. Davis), who followed him, referred to regulations which will be made under the principal Act as a consequence of the Bill. If this legislation were purely Northern Ireland legislation, then the power of the House and of hon. Members to challenge subordinate legislation would be severely limited. As it is, hon. Members representing Northern Ireland constituencies will have exactly the same rights as those from the rest of the United Kingdom in challenging or debating regulations made under the principal Act or under this Bill.
It is perhaps unfortunate—perhaps it is ironical—that this fortunate outcome is owed to directives of the European Economic Community, and perhaps one should put on record the fact that, no doubt accidentally and by a side wind, that monstrous organisation has been of some benefit to the Province of Northern Ireland. At any rate, it was because the Government felt that they could comply properly with EEC directives only by means of United Kingdom legislation that we had the Act of last year and that we now have the Bill before us in United Kingdom form.
But I hope—and there are many who hope with me—that the procedure which has been followed on this subject will become the norm over a great area of legislation, and that it will take the two stages which we have seen in this case. First, there is specific legislation, whether by Order in Council or Act of Parliament, applying to Northern Ireland and bringing the law in Northern Ireland into concord with that pertaining at the time in respect of Great Britain. Then upon that can be superimposed successive United Kingdom legislation like this Bill which will apply to the United Kingdom as a whole.
The Under-Secretary of State, who presented the Bill and who will be replying, was disposed, in the context of last year's legislation, to be somewhat sceptical and to cast a little cold water upon the hopes that I have expressed. Let me assure him that, though there are subjects on which, for a considerable time ahead, legislation for Northern Ireland will need to be separate from legislation for the rest of the United Kingdom, over the great majority of subjects there is no reason why the law making should not apply simultaneously to the whole country. Indeed, there are very strong reasons why it should.
Therefore, we welcome the Bill not only because of the specific benefits and reforms to which the Minister drew attention, but because we believe that it is a model of what ought to become the normal procedure in legislation for the future.
§ Mr. John Fraser (Norwood)
I have four short points to make and perhaps I can put them in an extremely curtailed form.
117 The first relates to benefits in kind. Can the Undersecretary confirm that organisations, such as St. Christopher's—a motorists' association which purports to provide benefits in kind; for example, a chauffeur for a motorist who loses his licence—which, since certain proceedings in the United Kingdom, has changed its base of business from London to the Isle of Man, will continue to be caught?
Secondly, can he confirm that he might think again about the automatic authorisations in clause 4 and whether they are logical or sensible? My hon. Friend the Member for Hackney, Central (Mr. Davis) dealt with those matters at some length.
Thirdly, perhaps the Under-Secretary can answer the question about matters of appeal. I am not sure that I agree with my hon. Friend about article 12 of the directive:Each Member State shall make provision for a right to apply to the courts should there be any refusal.It is unfortunate wording for a directive. I am not sure whether it involves a judicial review or an appeal. However, why is this matter not mentioned in the Bill? There seems to be a habit in legislation of ignoring certain provisions in directives and saying that they are part of our general law. That arose in the Competition Act. But I think we are entitled to an explanation as to how article 12 is incorporated in this legislation or why it has not been mentioned.
Lastly, is the Minister satisfied about reciprocity between the United Kingdom and other member States of the Community?
Apart from those points, there is nothing further that I want to pursue. However, I hope that will not provide any reason why the hon. Gentleman should not answer the long list of points raised by my hon. Friend the Member for Hackney, Central.
§ Mr. Eyre
It might be convenient if I deal, first, with the point made by the hon. Member for Hackney, Central (Mr. Davis) during my opening speech. I am able to confirm that the Bill does not provide for a right of appeal, because the right to apply for judicial review, to which the hon. Gentleman referred, provides what article 12 of the 1979 directive required. It is a right of appeal to the court, and this existing right meets the requirements of the directive.
§ Mr. Clinton Davis
I think that the Minister, as a lawyer, would agree that there is a distinction between a right of appeal on the merits and the question of a judicial review which, among other things, covers the failure of a Government Department properly to carry out its quasi-judicial functions. That matter would not entitle the appellant to proceed to deal with the merits. Therefore, on the face of it, there is an ambiguity here.
I shall not press the Minister to deal with this matter at this stage, but I hope that he will at least undertake, when we table a suitable amendment or discuss the matter on "clause stand part", to give us a full explanation—certainly fuller than the one that he has just indicated to the House.
§ Mr. Eyre
Perhaps I made a mistake in trying to reply to the hon. Gentleman's Committee point. I shall deal with it at an appropriate stage in Committee. I am sorry that he is not able to accept my explanation. He mentioned more substantial points. It might be convenient for the House if I work through them in the order that he raised them.
118 First, the hon. Gentleman dealt with the question of investment by the insurance industry in industry in general. That important matter is covered by the series of Business Monitor quarterly statistics dealing with investment by insurance companies and pension funds. They show the wide range of insurance companies' investments. The most important are British Government and Government-guaranteed securities, United Kingdom local authority securities, company securities—listed, unlisted and overseas—mortgages and loans. It is necessary to recognise the importance to insurance companies of investing widely.
In considering the range of those investments, it is important to consider the volume of funds that has to be invested and the substantial interests of policyholders. Those interests are bound to be concerned with profitability. Insurance companies are therefore bound to invest not only widely, but with prudence. It is erroneous to suggest that that precludes investment in British industry. The figures to which I referred show net investments in 1979 of more than £850 million in the ordinary shares of United Kingdom companies. The corresponding figures for the whole of 1980 are not yet available, but those for the first three-quarters of the year amount to £638 million. Detailed comparison with figures for earlier years is made difficult by inflation and the lack of differentiation between investment in United Kingdom and other companies, but the evidence seems to be of a maintained commitment by insurance companies to United Kingdom industry, and not to show that insurance companies are holding back from our industry funds that it wants.
I think that the hon. Gentleman had in mind the terms of the Wilson report. I shall summarise the general impression given by the report published in June 1980, which reviewed the functioning of financial institutions. It concludes that the economy is already reasonably well served by its financial institutions. The committee failed to agree on some important questions about finance for industry, especially industrial investments, but it found no evidence that a shortage of external finance had constrained the operations of companies. The report recommended against the extension of the public sector by way of nationalising existing institutions. I hope that the hon. Gentleman will agree that last recommendation is of importance.
The hon. Gentleman also raised questions about the European Community directives. I wish to say something about the stage the Community has reached in establishing a common market in insurance, which was the implication behind his questions. The two directives include most of the provisions needed to make effective the right of establishment for life and non-life insurers throughout the EEC, and the few outstanding matters are in hand. Progress on making effective the right of freedom of services in insurance, a right established by the EEC treaty, has been slower. Community directives making this freedom effective for reinsurance, insurance intermediaries and non-life co-insurance have been adopted by the Council of Ministers, but they leave a large area to be covered, notably underwriting across national frontiers industrial and commercial risks including transport. More than four years ago the Commission put to the Council of Ministers a proposal for a directive to cover non-life insurance services. The hon. Gentleman pressed me about that. It is the Government's view that consideration of the 119 proposal has proceeded too slowly, and that has been made clear to the other member States. The Prime Minister raised the matter at the European Council in December 1980. In recent bilateral talks with other member States, the Foreign Secretary has called for more rapid progress, following substantial discussion of the directive at meetings of COREPER during the Luxembourg presidency in the second half of last year. I am glad to say that the Dutch presidency, with our very strong support, has made arrangements for the major issues on the draft directives to be discussed at a Council meeting in March. It is to be hoped that good progress will follow from that meeting.
§ Mr. Clinton Davis
I welcome the Minister's comments, and the intervention of the Foreign Secretary in this matter. Has the Minister any indication that the German and French Governments are likely to vary the stance that they have adopted hitherto, which has effectively blocked all progress?
§ Mr. Eyre
I have tried to indicate the importance of the meeting in March, and I cannot add to what I have said. With the support that we are giving to the Dutch, it is hoped that we shall make progress in this important matter at that meeting.
The hon. Member for Hackney, Central referred to the question of intermediaries. He raised a number of questions and I should like to give him a long and detailed reply, but I do not think that that would be particularly popular at this hour. We shall have the opportunity to discuss the matter in great detail in Committee. The code of practice that the insurance companies have introduced represents an advance, and for that reason it should be welcomed. I understand the hon. Gentleman's concern about items of detail within that code. I should like to reply to them in detail, and I hope he will allow me to do so in Committee.
The hon. Gentleman also raised a technical question about insurance contract law. Here, I could have long and interesting discussions. We have welcomed the Law Commission's report and we are now consulting in great detail about that report. The hon. Gentleman mentioned one matter that was a question of whether the law of agency should be substantially changed in a particular insurance aspect. Again, I look forward to discussing the matter with him in detail. However, he will recognise that if that sort of change were made with regard to insurance law, it would be possible that such a change would begin 120 to have a profound effect on other aspects of law. That is a difficult matter, which should be considered in detail. There will be an opportunity for us to do so in Committee.
The right hon. Member for Down, South (Mr. Powell) raised questions of concern to Northern Ireland. As I explained during the debate on the Insurance Companies Bill 1980—the right hon. Gentleman referred to that debate—there is a European Community obligation for an authorisation to carry on insurance business to be valid throughout an entire national territory. The 1980 Act fulfilled that obligation and, as a result, a single body of insurance companies legislation now applies throughout the United Kingdom. This Bill also extends to Northern Ireland. I shall draw the comments of the right hon. Gentleman—which have wider law-making implications—to the attention of my right hon. Friend the Secretary of State for Northern Ireland.
I refer to matters of transitional authorisation and life solvency margins. These matters are ideally suitable for discussion in detail in Committee.
The hon. Member for Norwood (Mr. Fraser) raised matters with regard to St. Christopher's. It is difficult to relate St. Christopher's precisely to the question that the hon. Member raised about benefits in kind, because, as I understand it, St. Christopher's purports to insure against the effect of committing an offence, and it is not possible to make a valid insurance contract against that. There is no change now. I believe that it is not strictly a question of benefits in kind. But again, I hope that we shall have an opportunity in Committee of looking at this matter and its legal implications.
In these circumstances, I think that it is right to summarise a number of matters which have been raised by Opposition Members, but I believe that I have dealt with those which affect the principle of the Bill, which I hope the House will now proceed to approve.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).