This Bill is designed to give extra insurance to millions of private people who are holders of United Kingdom insurance policies. As the House will know, the Bill has already been debated, scrutinised and amended in the other place, from which it emerged on 26th June with an unopposed Third Reading.
I mention this because there is, I believe, a substantial degree of acceptance for this measure in all political parties and, indeed, in the insurance industry itself—an acceptance that has grown as the purposes of the Bill, in the course of serious discussion, have come to be better understood.
The Bill has one central purpose and justification—to see to it that policy holders do not suffer major loss and hardship when an insurance company fails. Let me say straight away that I consider that my main objective, in supervising the industry, is to see that insurance companies do not fail—and I shall say more about that later. But the fact is that insurance companies have failed over many years, and in the past two years, in particular, a number of companies have got into difficulties as a result of the deterioration in the general economic situation and particularly the fall in stock market values and the decline in the property market.
I shall do my utmost to prevent failures in the future, but, if and when they occur, my major concern, and I believe that of this House, must be for the victims of such failures. Life insurance is the major form of saving in this country. For many people a life insurance policy represents their only substantial investment. The average citizen relies very heavily indeed on his insurance policies.
It is not only life insurance that we must be concerned with. The protection of insurance in the non-life field is also of major importance. A man may have had to write off a car after an accident, for which he may be entirely free of fault, or a family home may be partly or wholly destroyed by fire. These are distressing circumstances in themselves, but they can cause great loss and hardship if an insurance company then fails. Further, much anxiety is caused by the delay and uncertainty that policy holders inevitably experience before they know what they may expect in the liquidation of an insurance company.
I do not take the view that insurance is just one of many kinds of investment and that we can or should do nothing but shrug our shoulders and say "bad luck" when disaster strikes. The very purpose of insurance is to give the average citizen security against contingencies and misfortunes of all kinds. This is why there should be a special severity in our regulation of the insurance industry, and this is also why there is a need for the new protective measure that this Bill provides.
These two approaches, supervision and a safety net, are indeed complementary. As the House knows, the 1973 Act greatly increased the powers of supervision, and these powers are being enlarged in a series of new and, I regret to say, complex regulations. For example, we now have regulations that require companies to value their assets on a more competitive and realistic basis. Last month we made two more sets of regulations, one dealing with linked assets and indices, the other with changes of controller, director or manager. The latter is particularly important, since it means that my approval will be required before, not after, changes in the control of insurance companies can be made.
Another important set of regulations I have to make soon are those requiring quarterly returns of assets and liabilities and quarterly actuarial certificates from all companies. These will enable us to identify any undesirable developments much more rapidly we will thus be able to act more quickly to prevent companies from getting into difficulties. Much has been made, by those who suffered from the recent failures of life assurance companies, of the excessive and misleading nature of their advertising. Rightly so. This, too, will be curbed by regulations. I intend further that intermediaries who are in fact agents of particular companies and not independent brokers should be required to make this clear to their clients.
In addition, I already have powers—which I have used—to impose specific requirements or restrictions on insurance companies if circumstances make this desirable. I can limit a company's premium income to a particular figure. I can restrict the taking on by a company of all new business. I can require a company to mount special actuarial investigations. I can order a company to place assets in trust and to dispose of certain assets. These are all powers which I already have for the protection of policy holders, and all these powers I have already used on many occasions and will continue to use when the interests of policy holders require it.
My right hon. Friend speaks of the powers that he has. Will he say whether any of these powers would have prevented the activity indulged in by Nation Life and London Indemnity? Was there any power by which he could have prevented that tragedy happening? My understanding is that there was not.
This is a matter of the detail of the regulations. These are complicated matters, but I am advised that the regulations dealing with the composition of assets would have been especially helpful in the case of Nation Life, where far too large a part of the total assets was invested in a single block of property. In other words, there is indeed a relationship between the regulations which are being issued and the problems which companies have already experienced.
I said that I had these powers. But, despite the progress that we are making, I do not believe that any conceivable system of supervision can provide total guarantee that there will be no failures. There is no way of giving companies complete immunity from the fluctuations of the insurance market or the economy in general, or from those risks that are inevitable in insurance business. Life policies last for many years. It is difficult enough to foresee situations a year hence, let alone in 20 years' time. That is why I am convinced that even the toughest regulatory approach—and I wish it to be tough—must be complemented by a safety net to protect policy holders if a company does get into difficulties.
My first hope was that the insurance industry would be able to devise and operate a protection scheme of its own; its representatives were certainly willing to consider the idea in principle when I spoke to them last summer, but they could not then agree sufficiently amongst themselves. After the Government's intention to legislate was announced, the industry did come forward with agreed proposals, but for a number of reasons they were unsatisfactory. However, we have continued to consult the industry, and, as I had always hoped, our thinking has now substantially converged.
From the beginning, the Bill took account of the insurance industry's views in important respects; for example, we have all along accepted that protection should be at a level of 90 per cent. rather than 100 per cent., except where insurance is compulsory, and that overgenerous benefits under life policies should be scaled down to a reasonable level before the 90 per cent. was applied; we have also accepted from the beginning that there should not be a standing fund accumulating year by year against contingencies—a point with which many of my hon. Friends were concerned—but that the levy should be imposed only when needed and only to the extent needed. Furthermore, as the House will know, the Bill was extensively amended in another place, in an effort to meet the many different and informed views expressed there. The Bill left the other place with widespread support, and I believe that the industry also is broadly content with it as it now stands. Yet this wide measure of agreement has, I am very glad to say, been achieved without undermining the basis of the protection which the Bill affords. It still, I believe, represents an important advance in consumer protection.
I should now like to describe the major features of the Bill and, after that, to deal with the main arguments which have been made and no doubt will continue to be made against the proposals.
Clause 1 establishes the Policyholders Protection Board, which will administer the protection scheme. Of the board's five members, whom I shall appoint, at least three will be directors, chief executives or managers of authorised insurance companies, and at least one will have a special duty to represent the interests of policy holders.
I am considering this matter, and I shall have something to say about it, not just in the context of this board but, a little later on, in the context of the advisory body which I am seeking to establish.
I have not ruled that out. The board itself has the limited and executive job of arranging for cash transactions. Therefore, inevitably I am leaning rather heavily on people who have the highly technical financial skills which are required. But I have not totally closed my mind, and I am anxious to have the benefit of the advice and knowledge—which is very considerable—of the trade unions concerned.
I shall be coming to that later. I hope to be able to satisfy the hon. Gentleman then.
The kernel of the Bill is the board's duty to protect policy holders of a company in liquidation. Only policy holders of authorised insurance companies who hold United Kingdom policies will be protected. Marine, aviation and transport insurance and reinsurance are excluded. Claims under compulsory insurance policies will be met in full. In the case of non-life or general business, other than compulsory insurance, private policy holders only will be protected, to the extent of 90 per cent. of the benefits. In the case of life business all policy holders will be protected and the protect- tion will also be 90 per cent., except where benefits are excessive. I shall now describe in a little more detail the protection offered in relation to each type of business.
Clause 6 sets out the various existing types of compulsory insurance. It is clearly right that where the law requires people to take out insurance policies it should also give them full protection if they find that their company through no fault of the policy holder, is unable to meet its liabilities.
Clause 8 deals with non-life policies other than compulsory insurance. Again the board will guarantee that claims outstanding at the beginning of the liquidation are met, but only to the extent of 90 per cent., and only private policy holders will be protected. The 90 per cent. figure is designed to provide real protection, but at the same time to leave an incentive for prospective policy holders to choose a prudent company—in so far as they have the information to do so.
Clauses 10 to 12 deal with long-term or life policies. The principle is the same as with general business—90 per cent. protection. There is one important qualification to the board's duties in relation to long-term policies. If it considers that the benefits provided for under a policy are excessive, it must refer it to an independent actuary; on his recommendation it will treat the benefits as reduced in exercising its duties. In such a case, the policy holder would be guaranteed less than 90 per cent. of the face value. This provision will ensure that calls are not made upon the levy in order to secure the payment of benefits under long-term policies issued on irresponsible terms. The board will finance its activities out of levies on insurance companies, one for non-life and one for life business.
The board will not be able to raise a levy before 1st April 1976, and the levy on life business will be based only on income from contracts entered into after 1st January this year. Therefore, there is no question of the levy affecting actual premiums under policies taken out before the scheme was announced. On current figures, the maximum possible levy in the first year would be about £15 million on non-life business and about £12 million on life business. If the levy proved insufficient in any year the board would have to postpone making payments until adequate funds were available, unless, of course, it could borrow the extra money needed. There is, I believe, little likelihood that the levy will be insufficient. On the contrary, in view of the tighter supervision which I have described, I certainly hope that calls on the industry by way of the levy will be rare.
In the case of long-term life business there will be one possible source of income open to the board before it needs to have recourse to the levy. Clause 17 entitles it to recover from intermediaries sums received by way of commission from a failed company. The House will know that this clause was inserted in the Bill in another place. We have some doubts how the clause, as drafted, will work in practice. We have been discussing these practical details with the industry and the brokers themselves, and it may be necessary to move certain amendments to the clause in Committee. However, we are certainly willing to accept the principle of the provision, and it may contribute something to our general aim of improving standards of responsibility in some areas of insurance broking.
One possibility we are considering in this area is the creation of a new institute for brokers which would determine standards of education, training and practice, control admission, and maintain discipline. As the House will know, I have asked the four brokers' associations to undertake a joint study with a view to putting forward proposals. They have held an initial meeting and they have set up a working party to consider this matter.
I am sure that the right hon. Gentleman will agree that Clause 17 raises some very wide issues. It was introduced late in the day. Does the right hon. Gentleman expect to receive the views of the working party to which he has referred before the House parts with the Bill? It is important that we should not prejudge the issue, particularly now that the working party is considering this and wider issues about broking.
I doubt whether I can help the hon. Gentleman on that matter. I understand that the scope of the working party's study will be extremely wide. I do not think that we can expect to have the working party's view on the possible impact of this clause as quickly as may be desirable. We shall have to draw upon our own experience and contacts with the industry when debating this matter in Committee.
Clause 16, which empowers the board to attempt to arrange for the continuance of an insurance company's business, has attracted a good deal of attention and controversy. The Government regard this as an important feature of the Bill, as it may sometimes be in the interests of both policy holders and the industry as a whole to rescue a company rather than allow it to go into liquidation. I understand, indeed, that the insurance industry, particularly the life side, has come round to this view, as it agrees that it is important for life policy holders, where possible, to be provided with continued cover at a reduced level. It may well be easier to achieve this by keeping a company in being rather than by allowing it to go into liquidation and then seeking to arrange a transfer of business or the issue of substitute policies.
At the same time, the rescue powers remain a secondary feature of the Bill. The powers are discretionary. Whereas in a liquidation the board will have duties to fulfil, the circumstances in which the board may use its powers are strictly limited. The clause comes into operation only if a company is in provisional liquidation or in certain similar cases specified in the Bill. The board may not arrange for the rescue of a company where it appears to it that it would cost less—that is, that the call on the levies would be smaller—to allow the company to go into liquidation—
No, I do not think I did. The board may not arrange for the rescue of a company where it appears to it that it would cost less—that is, that the call on the levies would be smaller—to allow the company to go into liquidation and to protect policy holders as required by its duties. I do not expect it to arrange the 100 per cent. rescue of a company when it appears to the board, before liquidation, that it would be imprudent. I shall see whether this
point can be introduced explicitly into the Bill. In addition, the board will be debarred from using its powers under the clause in any case where it seems to it that shareholders of the company in difficulties or
persons who had any responsibility or who may have profited from the circumstances giving rise to the company's financial difficulties
would benefit materially from the board's intervention. I am sure that the House will agree that, in view of the stringent and explicit safeguards, there can now be nothing objectionable about the clause. I am convinced that it is necessary if long-term policy holders are to be protected effectively in all circumstances.
I have had a number of useful discussions about all aspects of the Bill with the trade unions concerned, with the insurance industry and with the companies. Some trade unionists have expressed the fear that the Bill will have an adverse effect on workers in the industry by causing costs and premium rates to increase. I understand their worries, but I believe that the impact on companies of a levy limited to a maximum of 1 per cent. of net premium income in one year can be only very slight.
The scheme will not and cannot lead to an increase in the premiums payable under existing policies, and its effect on the level of premiums under new contracts will be slight. In fact, I am confident that the existence of the protection scheme will be a source of strength to the industry and thus of benefit to its employees, while our strengthened supervision of companies will increase the industry's stability and reduce still further the possibility of failures.
Moreover, I am convinced that the trade unions, in common with other sections of the industry, can give me valuable help and advice in my supervision of companies. That was the point about which I was asked. It is for this reason that I intend to appoint advisers drawn from the insurance industry, including the unions. We have included Clause 24 so as to ensure that they can properly be given the information necessary to enable them to advise me effectively.
I turn to the reasoned amendment which has been put down by some of my hon. Friends. It turns on four points, and I should like now to take them in the reverse order.
First, I turn to the prevention of reckless practices. I hope I have made it clear that the Bill deals only with the safety net, and that it is my primary aim, under the 1974 Act—if I came to the conclusion that was inadequate, I would ask the House for more powers—to prevent the safety net ever having to be used. It is worth emphasising that the prevention of reckless practices turns as much on the rigour with which the legislation is applied as on the laying of regulations. It has been suggested, for example, that companies might be formed to take advantage of the protection offered by the Bill by a deliberate policy of reckless premium rating. I assure the House that I am now applying the provisions relating to the authorisation of insurance companies sufficiently strictly to ensure that a business plan of this sort would not be permitted.
Secondly, there is the proposal that proprietors of failed insurance companies should be made to contribute to the levy. The Government have accepted an amendment introduced in another place which extends the levy to certain intermediaries. Like the companies themselves, however, intermediaries are part of the industry, whereas shareholders, even if defined, say, as having at least 10 per cent. of the shares, are not. I can see other great practical difficulties, as well as those which would arise from what would be a fundamental variation in the principle of limited liability. If, of course, there has been any unlawful act involving, for example, payments to other purposes from the assets required to meet the liabilities on life policies, such moneys may in any case be recoverable. Although I have some sympathy with the underlying purposes for seeking recoveries, I must be frank with the House and say that I can see little prospect of the Government's being able to accept an amendment on these lines.
Thirdly, I agree that the criticism, in the reasoned amendment, of the cumbersome and costly liquidation processes is all too well founded in relation to insurance companies, particularly life assurance companies. For this reason, my Department has started discussions with representatives of the insurance industry aimed at producing a comprehensive plan for altering the system for winding up insurance companies. I can assure the House that I shall press on with this as rapidly as possible, and I hope that my hon. Friends will accept that assurance. The Bill which we are considering will set up a Policyholders Protection Board. Its operations will mitigate the effects of the current liquidation procedure on policy holders, but I am advised that it would be wrong to insert one or two unco-ordinated changes in the liquidation procedure.
Last but not lease, the reasoned amendment objects to the Bill on the ground that it discriminates against the policy holders of reputable life assurance companies, and particularly against small savers. I believe that this is the main argument that has been advanced against the Bill and I know that it is strongly felt by some of my hon. Friends and by others in the trade union and Co-operative movements outside, and also, perhaps, by hon. Members opposite. In response to what I accept is a serious criticism, I have these points to make.
First, let there be no doubt that excessive benefits will be reduced. If someone has been issued with a policy on unreasonable terms, he will not be granted 90 per cent. of the benefits like other policy holders. Instead, the benefits will be scaled down to match the premiums that they have paid, and the other terms of the policy. The protective scheme will guarantee only 90 per cent. of benefits at that level.
Secondly, and more important, I believe that the argument wrongly assumes that the only policy holders who could benefit from the scheme are both imprudent and affluent—the rash and the rich. This assumption conflicts with the evidence concerning the policy holders of companies that have recently failed, and represents an over-sanguine assessment of the lasting soundness of companies which are at present prudently managed.
The House should be aware that many of the people who had invested in the recently failed companies were small or modest savers—perhaps people who had invested a retirement gratuity or a redundancy payment and whose policy was their only form of saving.
I recently looked through the first few cases in a day's intake of letters about Nation Life. They included a pensioner who had invested his total life savings of £1,000, previously in a building society in guaranteed income bonds; a worker whose insurance policy had matured after 30 years and who had then invested the £2,000 that it had provided; a young married couple with two children who had invested £10 a month over two years, and someone who had invested his redundancy payment.
My right hon. Friend, with great respect, is now getting up an Aunt Sally to which no one who has been party to the reasoned amendment has ever subscribed No one is arguing that when companies like Nation Life go bust, ordinary, simple, humble people are affected by it. What we are saying is that the procedure which the Government will adopt will not meet that situation, because it will not deal with the canker at the root of the plant.
I know that my hon. and learned Friend will develop his case strongly when he makes his own speech, but, with respect, it matters a great deal that we should have a clear idea of the kind of people who are being affected by failures in or of life assurance companies. Unless one were to take the view that the method of regulation was foolproof and that therefore such companies would never fail again and lose all their policy money—I do not believe that one can take that view—what we should be doing if we failed to provide a safety net, as I propose, would be to turn our backs upon their predicament and their pro lems.
That raises the difficult question of retrospection, which the House always understands. I have taken the view—I announced this on 29th October, in my original statement—that the measure that we were proposing would, if the House accepted it, be operative from the date of that announcement The hon. Member knows as well as any one that the problem of retrospection, however our sympathies may be moved, creates such enormous difficulties and precedents, that it would be very dangerous—[An HON. MEMBER: "What about Court Line?"] That argument has been dealt with, although I am always willing to take up the cudgels again on that account.
This evidence, and the evidence that I could quote from a number of other companies, indicates at least that it is wrong to assume that, because a company proves to be unsound or because some of its policies—guaranteed bonds, for instance —can be seen in retrospect as overgenerous, its policy holders must be imprudent speculators rather than ordinary savers. Indeed, a noticeable feature in these cases is the considerable number of old people affected—motivated not by greed but by the impact of inflation which began in 1972 and 1973 to reach the level of double figures. That is a point which should at least work upon our judgment, our consideration and our sympathies for those who have been or could be affected by the failure of companies.
My third point is that the information to enable people to make an informed choice between companies is simply not available. Such a choice requires expert advice, which is often out of the reach of most ordinary people and which, even when available, is by no means always reliable. So we cannot blame people for the misjudgments that they make.
Fourthly, on the soundness of companies, it cannot be assumed that because a company is absolutely sound now it will necessarily remain so for all time. The management policy of a company—and the economic environment in which it operates may change. As a result, its commercial soundness may change significantly within the duration of a life policy. There is, in fact, no clear and immutable distinction between so-called prudent and imprudent policy holders and prudent and imprudent companies. Nor it is the case that the small saver is always attracted to the prudent companies, any more than it is the case that the large saver invariably invests in imprudent companies.
The truth is that substantial savers are just as likely to invest in so-called pru- dent companies as small savers are to invest in imprudent ones—if not more so. So the levy system is not the transfer from the poor to the rich, as has so readily been assumed, but rather an act of solidarity among policyholders—a genuine insurance of insurance—from which all can benefit.
Although my main point is that insurance companies present a great spectrum from the very sound to the not-so-sound and that policy holders range equally widely from the cautious to the rash and from the poor to the rich, and that there is little correlation between them, it has been put to me that there is one limited class of life business which clearly is attractive only to the small saver and whose investment policies are exceptionally careful and cautious. I refer to industrial life assurance. This matter has been discussed on a number of occasions between myself and the Federation of Insurance Trade Unions and is the particular focus of its concern at present—at least it was when I met the federation's representatives yesterday afternoon.
There is considerable substance in the claim about industrial life insurance. If, therefore, it was thought to be both practical and desirable to provide separately for industrial life business I would certainly be prepared to consider proposals on their merits in Committee.
I cannot follow my hon. Friend's argument at all, because in nine cases out of 10 the industrial assurance policy holder becomes the ordinary life policy holder in five or 10 years' time. When trying to separate these two branches of insurance it should be remembered that the industrial life policy holder of today is the ordinary branch policy holder of tomorrow. Do not let us separate the industrial life industry into separate compartments.
My hon. Friend, with his great knowledge of the industry, at once rose to make the point about the difficulty of establishing any line of division or subdivision between different categories of policies. I am aware of the difficulties, but it is for the Committee—not for me, at present—to consider this matter in the light of what I have said and the feelings of many people outside and to examine whether it is possible to meet the obvious difficulties to which my hon. Friend has referred.
This is not a matter for the Committee. It is, rather, a matter of principle, whether it is the Government's intention to introduce amendments to the Bill to exclude, for levy purposes and, presumably for benefit purposes, holders of industrial life policies. Will the Minister elaborate on this point?
If it is possible to establish a separate category, I certainly would not want to deny these policy holders the possibilities of safeguard. I want to arrange matters so that this group of policy holders, which, generally speaking, consists of the poorer people in the community, can be helped in some way.
The Life Offices' Association advises me that it is its view that the system in the Bill, that is to say, the system already before us, is preferable, whereby life and non-life are treated separately but there are no subdivisions within the life business. However, as I have already assured the House, I am prepared to look at this again.
Does my right hon. Friend agree that there may also be a further subdivision in relation to pension fund business, because there is a great deal of misgiving that contributions to pension funds administered by life officers may be subject to levy?
I do not want to comment on that question at present, although I shall consider what my hon. Friend has said. He will obviously have an opportunity to develop his thoughts further during the debate.
In conclusion, I believe that the Bill starts from the premise that the consumer needs and deserves protection. In view of the bewildering variety and complexity of modern insurance business it is wrong to expect ordinary people today to have the expertise needed to make sound judgments for themselves between different insurance policies and companies. We must therefore endeavour to protect them from the consequences of decisions that turn out, perhaps many years later, to have been mistaken.
I therefore ask the House to give a Second Reading to a measure which, in conjunction with the tighter supervision of insurance companies, will be of considerable benefit. It will, at a very small cost indeed, give necessary and extra security to millions of insurance policy holders.
I do not believe there is any difference between the two sides of the House on the question of the importance of the insurance industry in this country. I pointed out on a previous occasion that the industry is important not only to us domestically —I can only agree with the view that the Secretary of State has expressed in relation to the relevance to savings—but also to our invisible earnings, for about 15 per cent. of the premium income of life policies comes from abroad. For general insurance the figure is about 70 per cent. or more. This income, which has been growing rapidly, is clearly a matter of great importance to the country's economy.
Therefore, it is unfortunate that in the Bill in the debate in another place, on one or two occasions, and, indeed, to some extent in the Secretary of State's remarks this morning, doubts have been cast about the position of this country's insurance industry. I believe that the industry is second to none in the world —given adequate regulations, and so on.
That being so, we should perhaps examine for a moment the history of the Bill. As the House will know, we debated the matter on a Private Member's motion tabled by the hon. Member for Battersea, South (Mr. Perry) on 7th March. It is true to say that the proposals which the Government were envisaging but which had not then been published did not receive support from any quarter of the House whatever, apart from the Government Minister speaking in the debate.
The consequence of this was rather unusual. The Government did not change their policy, but they introduced the Bill in the House of Lords instead of the House of Commons. That was, perhaps, unusual, but at all events it has produced a interesting result, because their Lordships have, in their wisdom—indeed, in their expertise—made radical changes to the Bill which I believe are, on balance, a great improvement on the measure as it was originally published. It would have been better if, after the debate on 7th March, the Under-Secretary had thought about the matter in rather more detail and produced a measure which—I appreciate that redrafting is a difficult business —was originally in a more suitable form and in line with the views the House expressed on 7th March. This is yet another example of the mass of legislation which is inundating the House at present.
It is extraordinary to be presented in the middle of July with the Second Reading of a Bill, which is in no sense an emergency measure but which is clearly a substantial measure. It is a curious situation. It is even more curious that the Secretary of State should apparently still be considering the position for employees in the industry and even more extraordinary that he should have made the remarks that he did towards the end of his speech about the industrial life offices. If he had proposed some changes in these matters one would have thought that he would consider them carefully and give the House his considered view on the subject. It is not as if this is a matter that has suddenly arisen. The remarks which he has made show a remarkable ignorance of the structure of the industry. This was brought out by the hon. Member for Battersea, South and, indeed, by my hon. Friend the Member for Faversham (Mr. Moate). Obviously, we shall look very carefully at any proposals which he now puts forward, but, again, it shows how ill-digested, ill-considered and ill-prepared this measure has been. Therefore, it is very important that we should, in the course of its remaining stages, look with very great care at the Bill as it now stands.
As I have said, it is never easy to redraft Bills. Certainty some of the clauses are now in a state which might give cause for concern about their wording, intention and operation—for example, the controversial Clause 16. The Government would be well advised not to press ahead too fast before the Summer Recess, so that those who are expert in these matters—and parliamentary draftsmen in this Session must be close to exhaustion—have an opportunity to examine the clauses and make sure they fulfil the objectives which the House of Commons, in Committee or on Report, actually wishes to achieve.
I think that the Secretary of State was being unduly defeatist in the view he took concerning the regulations. He seemed to express the view that however many regulations he made, however effective they might be, and however well enforced, one still had to have a safety net. I am not convinced that that is so. I think it is very important that we should bear that in mind. If the Bill eventually receives the Royal Assent, I hope that in practice the safety net will wither away through being otiose because the regulations themselves have conducted the job which they ought to be doing.
A number of people, both in this House and in the other place, and outside Parliament, have expressed the view that this is not really a Policyholders Protection Bill but a Bill to protect Ministers and officials. That view has been widely expressed. There is some element of truth in that point. It is certainly in many ways redistributive—if that is the right expression—between some groups of policy holders and others. Some policy holders will not be protected by the Bill. On the contrary, they will find that part of the money which might otherwise have gone to them will go to someone else.
That brings me to the core of the matter, upon which the Secretary of State touched in his closing remarks. I have already said that I do not like the way that the Government are constantly eroding—in many ways dangerously so—the principle of caveat emptor. We have had the Air Travel Reserve Fund Bill, and now this Bill. After this morning perhaps there will be a levy to protect Solicitors-General who come to the House without notice and try to push certain measures through the House. This is a dangerous trend, which the House ought to examine whenever evidence of it arises. I recognise, however, that it is not easy, as the Secretary of State mentioned, for individual people contemplating taking out insurance policies to weigh the exact merits of the policy or the firm concerned.
The Under-Secretary of State for Trade (Mr. Clinton-Davis):
The hon. Gentleman frequently raises the caveat emptor point, but he is aware, is he not, that the qualifications that have been introduced in the Bill are exactly, or at least in many substantial respects, reflected in the insurance companies' own scheme? Where does he stand now on the argument about the qualifications?
The hon. Gentleman is absolutely right. He anticipates what I was about to say in the next paragraph but one of my speech. Perhaps I may turn to that matter now. I recognise the hon. Gentleman's point, but I also recognise the complaint made by the Secretary of State, namely, that particular individuals may find what we have found in the Nation Life correspondence. I was slightly surprised to hear him say that he read "some" of the letters he received, because I read all those that I received. Some of those, he will know, said, "I took the advice of my bank manager, my solicitor and my insurance broker and invested in Nation Life." That was particularly unfortunate.
We recognise that this is a genuine difficulty. The House would be foolish not to recognise that. When we had the previous debate, we advocated that we should, in effect—because the regulations are not yet effective—support the proposal which the industry itself had put forward. I believe that the approach we should now adopt is effectively to implement that. In many ways that is what the changes which have taken place in the House of Lords sought to do.
However, the central issue still remains, as the Under-Secretary rightly pointed out in his intervention, that there is involved in this scheme, in the industry's proposals —if the Bill is amended in order to comprehend the industry's proposals effectively —an element of redistribution. That is certainly something we must recognise. It raises the problem to which I have just referred. None the less, we must face the fact that not all of the regulations are yet made or yet effectively enforced, and that it will be some time before they are fully effective and can be taken into account. That is why, while I think this could be done effectively by implementing the industry's proposals, but with a back-up clause, we must recognise the reality of the present situation. I do not dispute that. I admit it gladly to the Under-Secretary. It is a realistic way of approaching this question.
Having said that, I should like to comment first on the degree of Government involvement. In effect, what the Bill is gradually moving towards is something like a simple enabling Bill which will implement the industry's scheme. There have been considerable changes in the House of Lords. I should like an assurance from the Under-Secretary that the Government do not propose to reverse those major changes in the power of the Secretary of State, for example, with regard to extension to other areas, by order—and, for example, with regard to the composition of the board. I hope that the hon. Gentleman can give that assurance. He would be very unwise not to do so, because I strongly suspect that he has not got the votes to do otherwise anyway.
We shall also need to consider very carefully whether the powers of the Minister are not still too great with regard, for example, to Government directions to the board. They are subject to affirmative resolution in both Houses of Parliament, but none the less we all know that this can come late at night, with one and a half hours of debate, and it may not be a very effective control. We shall need to consider in Committee whether that is indeed a necessary power.
I was not very reassured by the Secretary of State's speech—indeed, he will have gathered by now that I am much less reassured than I expected to be by what he said—when he particularly related this question to the question of rescues, to which I shall turn shortly.
We recognise the point made by the Under-Secretary in his intervention, but the extent to which there is a levy on one group of policy holders which will go to the benefit, possibly of another group will depend to a considerable extent on the question whether there are rescues, and how they are carried out. Certainly Clause 16 as it now stands is a lot less objectionable than it was when the Bill was published. That is a tribute to the work done in another place. At the same time, the drafting is complex and tortuous. We would be well advised to examine it very carefully. We and the parliamentary draftsmen should have due time to consider it.
The changes made in the House of Lords, as I understand it, are effectively that a transfer of a business or help to a company in financial difficulties will be made only if a provisional liquidator has been appointed. Secondly, there is a change inasmuch as the board may not attempt a rescue if it is cheaper, to other policy holders, to proceed on the lines set out in Clauses 11 and 12. I am still not entirely clear that the Secretary of State explained that in precise form. We shall need to read carefully the report in Hansard when it appears.
The third change is that the Secretary of State cannot take the initiative in ordering the board to undertake a rescue. That is very important, because clearly, otherwise, the political pressures both on the Secretary of State and by the Secretary of State are likely to be considerable.
I seek clarification from the Under-Secretary on one point. My understanding is that, as Clause 16 as amended now stands, if there is a rescue policy holders will get 100 per cent. instead of 90 per cent., at some cost, of course, to policy holders in other companies. As I understand it, that was not the general intention of the legislation. Unless I have misunderstood the clause—even after 10 years on Finance Bills that is possible—100 per cent. and not 90 per cent. would be paid out to policy holders in the event of a rescue.
Arising on the amendment which I understand has been selected for debate, I want to refer to the question of delays in liquidation. Great concern has been caused to Nation Life policy holders by the delays in liquidation. The case for examining the law on this is very strong I welcome the study announced by the Secretary of State.
Perhaps the Under-Secretary will make clear what form he envisages legislation taking. It is tied up closely with the whole question of liquidation generally, though I suppose that in many ways the liquidations of insurance companies are amongst the most difficult of liquidations which have to be undertaken.
Does the Under-Secretary envisage that provisions for this will appear in the Bill on company law which the Prime Minister has suggested will be introduced, or does he envisage it as a separate measure? We should like to know this, because it is not irrelevant to our general consideration of the whole picture.
In this connection, hon. Members will welcome the statement, reported in yesterday's Financial Times, that progress is being made in the Nation Life matter. It brings out in this case the very real need to speed up the procedures.
I understand that there is some question in the Department's mind that occupational pension schemes will be regarded as compulsory insurance for the purposes of this legislation. This is obviously a matter we shall need to go into in Committee, unless the Under-Secretary will tell us the Government's view on it now. On the face of it, there would seem to be a considerable difference between compulsory insurance, on the one hand, and a compulsory pension scheme which happens to be implemented by insurance, on the other.
The hon. Gentleman has great knowledge of these matters. Perhaps he would tell the House how this would affect the obligations of trustees of pension funds if they were subject to this kind of levy and legislation.
I strongly suspect that my knowledge on that point is rather less than that of the hon. Gentleman. He will agree, perhaps, that we should pursue this point in Committee. He has brought out an important point.
I do not think that it would be very difficult to guess what their attitude would be. This is a point which we need to go into in considerable detail. It is a complex matter.
I turn to the position of brokers, or intermediaries, as they are now called in the jargon which seems to have developed in the regulations and in the legislation we have before us. There was broad agreement in the other place and by the Secretary of State today—I think that it reflects the experience in the Nation Life case—that there is a case for involving—if that is the right word—brokers in the scheme the Government envisage in the Bill. However, that having been said, I think that there are considerable differences between a return on commission, on the one hand, and a levy on premiums, on the other; they are two very different animals. Very difficult questions arise, because it may well be that the broker concerned has paid out the money he has received in commission, either in taxation or to his employees or in some other way. This is another point we shall need to go into carefully.
There is also considerable difficulty in respect of small companies which, if the board sought to get the commission back from them, might well cease to exist.
There is a danger that brokers would be less inclined to give business to insurance companies which were small or new, even though they might be perfectly viable concerns and might in time grow to be important components of the industry.
There is also the question where the limit should be set for clawback. Obviously, large numbers would be involved, and this would create administrative difficulties. On the other hand, if the limit is set at certain levels a number of small companies may engage in certain activities which, as I understand it, it is the intention of the clause as it stands now to discourage.
There are a number of points that we shall wish to pursue. There has recently been an important statement by Mr. John Methven on the insurance industry, related to the question of insurance brokers. We shall no doubt need to take that into account.
I am not as defeatist as the right hon. Gentleman was this morning about regulations. He rightly pointed out that recently we have had a number of extra regulations—on linked assets, on changes of controllers, on quarterly returns, and on actuarial reports.
As the Government seem to envisage this measure not as something which will wither away, as I hope, but as a measure which will be with us for all time and will apparently come into operation from time to time, it is incumbent upon them to say where they think the loopholes in the regulations now are, or are likely to be, when they have all been issued. If the regulations are effective, why do the Government envisage a situation in which certain companies may crash?
For the reasons that I have given, I do not recommend my hon. Friends to oppose the Second Reading of the Bill. It is right that this steady process of improvement—it is in fact a dramatic pro- cess—which has gone on since the Bill was first published by the Government should continue, but there are a number of matters to which I have referred about which we are still very unhappy and which we shall wish to press very carefully both in Committee and on Report.
I beg to move, to leave out from "House" to the end of the Question and to add instead thereof,
declines to give a Second Reading to a Bill which discriminates against the policyholders of reputable life assurance companies and societies and consequently against small savers, does not deal with a major source of distress in an insurance company failure, namely the cumbersome and costly liquidation processes, takes no action to recover any of the large payments made to the proprietors of failed insurance companies shortly before their failure, does nothing to prevent the reckless practices by speculative insurance companies, and, in consequence, signally neglects to give genuine protection to policy holders.
Nobody here is disagreed about the apparently pious intention of the Secretary of State, as expressed at the outset of his speech, to deal with the urgent need to protect those who suffer from the failure of insurance companies. Beyond that point, however, I fear that many hon. Members part company with my right hon. Friend. The hon. Members who have put their names to the amendment represent many different interests, and come from both sides of the House. It would have been easy for many more Members to have put their names to the amendment. The reason why many others who wished to do so have not is that we actively discouraged them from doing so.
Let the Minister and the Government, however, be in no doubt that on the Government side of the House there is strong and continuing hostility to the Bill. The Minister had a run-through on 7th March on which date not one hon. Member, other than those speaking officially for the Government, gave their blessing to what the Government were proposing. Since the Bill was produced —it is important that this matter should be clearly stated—there can be no question that almost everybody concerned in the insurance industry is opposed, has expressed opposition to, and continues to oppose the Bill. The trade unions most closely concerned—USDAW, the Transport and General Workers' Union, the ASTMS and the National Union of Insurance Workers—have all expressed opposition to the Government's proposals, and continue to do so.
Among the hon. Members who have put their names to the amendment are members of those unions. The Secretary of State saw trade union representatives last night. At the conclusion of that meeting I am given to understand—and if I am wrong I shall be corrected by others than the Minister—the trade unions took the view that they had no alternative after hearing what the Minister said but to continue to oppose the Bill by all means open to them.
The Minister has spoken of the British Insurance Association having withdrawn a great deal of its opposition but the fact remains—and I have authority to say so—that the Life Offices' Association, which is primarily concerned in a way which other members of the BIA who are large general insurance companies are not, wishes that there should be no doubt that it has not in any way withdrawn its objection to the Bill, and that the amendments made in the Lords have made no difference to its point of view. Indeed, the attitude of the Life Offices' Association has been that so far as it has cooperated in this matter it was in an endeavour to protect the interests of those it represents, its clients, should the Bill succeed in getting a Third Reading. Let my right hon. Friend be in no doubt about that. These are matters which, on behalf of those for whom I speak, I have the authority to quote. He would be wise to have regard to the matters about which I am speaking.
I always listen with great care to my hon. and learned Friend's unfailingly courteous and careful expression of his deeply-held views on this matter. I have no quarrel on that score. However, when he claims to speak with such confidence about the actual views and feelings of large bodies of people, including the insurance industry as a whole—
—and the track unions about their position on the Bill, I ask him to consider rather more fully their point of view. The point of view as it has emerged—I would not seek in any sense to disguise it—is that a lot of people began with a complete and general opposition to their idea of the Bill but that they also have a deep desire to help policy holders. When the two things were brought more clearly before their minds they sought to find accommodations and compromises in the Bill, which we have gone a long way to reach, and to win that broad degree of consent to which I referred earlier.
The matters of which I have spoken are those which have been brought to my attention formally after many of the interviews and discussions my right hon. Friend has had with those individuals and bodies of which I have spoken. No doubt there will be others who will speak about this matter. It will be for them to elaborate. I think the point is properly made, and I hope that the Minister will have regard to it.
I do not know whether it is a unanimous view. What I say is precisely what I have the authority to say, and I do not wish to exceed my authority. It is emphatically stated that the Life Offices' Association and the Associated Scottish Life Offices, while they naturally seek to mitigate the effect of the Bill in the event that it becomes law, have not in any way withdrawn their objections to it; nor have the amendments made in the other place made any difference. That is a clear enough statement, and I do not know what advantage the Minister seeks to gain by asking me whether or not that is a unanimous decision. It is the decision which was conveyed to me and which, in the precise terms in which it was given to me, I give to the Minister.
Does my hon. and learned Friend agree that the original objection in principle by the Life Offices' Association and the Associated Scottish Life Offices has been reaffirmed at each of their monthly meetings since the time the objection was taken?
My hon. Friend obviously knows more about the details than I do, but I am sure that the Minister will have regard to that point.
Because I expressed myself strongly on this question, and indeed feel strongly about it, I hope that my right hon. Friend the Secretary of State for Trade will not take my remarks in any way personally. I feel no personal offence towards him. He said that I am always unfailingly courteous, and I hope that he will have regard to the fact that in expressing strong opinions I am not being rude to him.
Having made clear the hostility and opposition to the Bill, and having also underlined my concern for the protection of policy holders I should like to go on to deal with the matters which I believe make this legislation a totally inadequate means by which to achieve the objectives which the Minister obviously hopes to achieve.
The Minister underlined the importance of protecting millions of policy holders. Let us try to put the matter in context. In recent years there has been no insurance failure in this category. I emphasise that the insurance failures which have taken place have not occurred in any of the traditional insurance companies. They have in each case occurred among the fringe insurance companies which transact their business on normal traditional lines, and they have occurred as a result of reckless management.
The Minister seeks to put on the traditional companies—firms which transact business on a totally different basis from the fringe companies—the burden of rescuing companies which the Department has a duty to prevent carrying out practices which may lead to tragic consequences. If the Minister wants to protect policy holders, let him protect them from being fleeced by companies which indulge in these fringe activities.
By regulation and by legislation. That is the point to which the Minister should be directing his mind, rather than attempting to close the doors after the horse has bolted.
The Minister implied that there were dangers to be found not merely in the fringe companies but in a broad spectrum of insurance companies. That is not only specious, but untrue. Even in a time of exceptional inflation, and by reason of the manner in which the traditional companies carry on their business, it is virtuaally impossible for the traditional life assurance firms which carry a large volume of with-profit business to be in a situation in which they need rescuing—except perhaps in a period of total economic collapse.
The Minister spoke of saving the widow and the orphan. I used to regard that as a traditional fall-back argument employed by some Opposition Members. It is better that the Minister should concern himself with the companies in which widows and orphans are investing their life savings. The reality is that unless there is a major economic collapse those savings are safe. That will be the case as long as they leave those savings with the traditional companies, and they will be unsafe only if they invest in companies which are on the fringe of insurance activities. However, if there is an economic collapse the suggestion of a 1 per cent. levy will be similar to a cork bobbing about in a cauldron. It will do nothing to save the great mass of the people who invest in these companies.
We have tabled the motion in the hope that the Minister and the Department will have second thoughts. Although we have had many meetings with the Minister, and although I have never regarded myself as wholly inarticulate, I am afraid that we have reached the point in all these discussions when we have failed to make, the Minister understand what it is we are trying to say. However, I hone that he will have regard to the points I have made because they are matters to which the Government should give attention if they seek to give genuine protection to policy holders.
There are other ways in which this can be done. The Minister said that he intended to deal with the liquidation processes. However, he said that those processes are difficult, complicated and long. No doubt that is true, but there are three easy ways at least in which the Minister—without incurring long, cumbersome and complicated processes—can make a quick contribution to protect people who may be caught by insurance companies forced into liquidation.
The first thing is that an outstanding claim by a policy holder should be given priority in liquidation proceedings. As we have seen from Nation Life, the tragedy has been that people who have suddenly been overtaken by disaster have found that disaster increased because the liquidation proceedings have left them in terrible trouble without the possibility of their claim being paid reasonably quickly.
It is of no use to a person whose home has been burned down or whose physical well-being has been affected to be told that in 10 years' time he can get 90 per cent. or even 100 per cent. of his claim. Nor is it any use to be setting up a system such as the Minister has set up in which a levy is made upon the people who will never benefit from it to assist companies of whom the Minister is not prepared to make the kind of demand we have been urging for some months. The provision does not extend to corporate bodies, although it leaves the small shopkeeper trading as a limited company without the benefit of the Bill. It is of little value to create a situation in which many large companies will be able to claim exemptions and to say that it is not possible to exempt pension funds from the costs of the scheme.
The second area in which the Minister can do something quickly which will be of real benefit is to give to the Policyholders' Protection Board power to grant a full indemnity to the liquidator in respect of a failed company so that the liquidator would be able to pay emerging insurance claims as they fell due. If that is done it will mean that large and needless expense now falling on policy holders in other insurance companies would be able to be met from the remaining assets of a failed company.
Another way in which the matter might be more easily dealt with would be, when an insurance company is known, by the procedures available to the Board of Trade, to be running into difficulties for an approach to be made to the company to scale down the benefits it is to pay to its policy holders so that, immediately, those who are responsible make the first contribution.
The Secretary of State has said that our proposal requiring payments from proprietors of the failed companies is impractical and difficult of application because of the large number of shareholders involved in companies generally. Again, this is to ignore the reality of the situation which is that the failed companies—and few will fail except in a period of grave economic crisis—are proprietary companies in which the large shareholdings have in every case been limited to a small number of proprietors who in every case, before the companies have finally broken down, have received large dividends. Although they have been involved in the management and therefore must bear some responsibility for the failure of the companies they have escaped and after the passage of this measure will continue to escape any liability.
Perhaps my hon. and learned Friend will be kind enough to indicate how he draws a distinction between the situation of maybe a relatively small number of people behaving in this way in respect of insurance companies and other incorporated bodies?
I do not have to do so for the purposes of my argument. I am taking the specific examples of insurance companies that have failed and the nature of the business conducted by those companies to rebut what seems to have been the wholly false premise produced by my right hon. Friend for bringing forward this Bill. I say that as this must affect companies within a limited area, all of which fall within a limited category, that is something which can be properly attended to by the Minister rather than saying what the Under-Secretary seems now to be saying, that where there are specific cases we will not even try to deal with them because it might create problems elsewhere.
There are others who will develop the argument which I have sought plausibly but reasonably and rationally I hope, to put before the Minister. Those of us who have tabled this motion have done so in the belief that it is possible by alterations to the liquidation proceedings of the kind we have mentioned, by preventing insurance companies who have behaved in a way which has led to failure from having certain powers to deal with this situation. Nothing that is in the Bill would solve the problem which arose with London Indemnity or Nation Life. We seek to ensure that the benefits to be given should come from those from whom the levy is obtained. These are ways in which the Government could help. In introducing this Bill they have created a situation analogous to that in which, if British Leyland failed, Fords are called upon to meet the deficiency and increase the price of their cars in consequence.
We urge the Minister to reconsider this matter. It may be that a proper way of dealing with it from the beginning would have been to take more care in inquiring into the real difficulties with which the insurance industry is faced. Perhaps that could have been done by a Select Committee instead of by a botched-up Bill of this kind. Unless my hon. Friend the Under-Secretary of State is able to give us more comfort and assurance than has been given us by his right hon. Friend, we shall press the amendment. Even if we fail in our objection at this stage, we warn the Government that we shall continue our opposition throughout the Bill's remaining stages.
I begin by declaring my interest in pensions and insurance. I shall be extremely brief, in view of the many hon. Members who wish to speak.
I am glad to follow the hon. and learned Member for Warrington (Mr. Williams) as I have great sympathy with many of the points he made. I share some of his misgivings. I know that he is able to speak with a knowledge of the Co-operative movement and for many neutral companies which have a long and honourable involvement in insurance and pensions.
I regret the introduction of the Bill primarily because I believe that in the area that it is trying to cover, voluntary self-regulation is better than statutory regulation from outside. The worldwide reputation of British insurance is based on responsibility, reliability and prudence. The more that there is regulation from Government, the greater the danger that those qualities may be undermined and that we may get the curse of the age—namely, buck passing—coming into this type of transaction.
My hon. Friend the Member for Worthing (Mr. Higgins) referred to another reason for its being necessary to move with caution—namely, international confidence. We must bear in mind the enormous importance of the invisible earnings of this industry in terms of our balance of payment position. I am sure that everyone in the House would wish to see the maximum protection for policy holders. We want to avoid the heartaches which some policy holders have suffered and which some are still suffering as a result of some recent unfortunate incidents. The best protection for policy holders is responsible management and self-discipline from within rather than more regulations from outside. That is particularly true in the light of the legislation which is already on the statute book.
The Secretary of State, in introducing the Bill, referred to regulations made under the 1973 Act, regulations which have only recently been promulgated, and others still to come. It might seem rather unnecessary to introduce yet more legislation when there are already extensive powers not yet fully used. For those reasons I regret the Bill. On the other hand, we must be realistic. As my hon. Friend the Member for Worthing said, I hope that it will be a Bill which can wither away.
The fact is that we have not been able to get a voluntary scheme acceptable to the Government. It is also the fact that the Bill has been substantially improved. As a result, there is a greater measure of agreement. The Bill has been substantially improved in its passage in another place. I give credit to the Government for listening to the views which were then expressed and for doing their best to meet them. It is for those reasons that I am prepared to accept the Bill. I consider it to be the lesser of two evils.
I shall make four quick points, all of which I am sure will be pursued more fully at a later stage. My first point I did not intend to make at all until it was referred to by the Secretary of State—namely, industrial life assurance. I am bound to say, with respect, that I think the right hon. Gentleman raised more questions than he answered. We shall need to go very much more fully into the implications of his remarks. We shall wish to study in Hansard what was said.
My second point has already been raised and I shall mention it only briefly. I refer to the position of occupational pension schemes and the trustees of those schemes. I am not clear how they will be affected by the Bill. We shall need a good deal more information before we are satisfied on that ground.
My third point relates to the status of the Policyholders Protection Board. Again, this is a matter that was referred to by my hon. Friend the Member for Worthing. In this context I noticed that there was an interesting letter in the Financial Times on 16th July from Mr. Kenneth Burton, which also referred to the status of the board. Will the board be an independent body with statutory hacking or will it be, as I suspect, the poodle of Whitehall?
I look with some suspicion at Clause 2, entitled
Guidance to the Board by the Secretary of State".
If guidance means guidance, why is legislation necessary? If guidance means something else, that may be the explanation for the Bill. We shall need much more explanation of what form of guidance the Secretary of State intends, and much more assurance that when this responsible body is set up it will be able to do its job with reasonable independence.
It is not entirely an exact analogy but I think that there are some parallels with another comparatively recently established body—namely, the Occupational Pensions Board. In a comparatively short history that board has established itself effectively because it has a substantial degree of independence. It has powers laid down within the appropriate statute, but it has substantial flexibility as regards the way in which it uses its powers. Legislation has emphasised the independence of that body, and it is for that reason above all others that it is establishing the confidence of the industry. If the Policyholders Protection Board is to be satisfactory and acceptable, it must also have a substantial degree of independence to do its job within the statutory framework.
My final point relates to intermediaries as contained in Clause 17. This is a matter that was introduced fairly late in the day against the advice of the Government. I am not against the involvement of intermediaries in a Bill of this kind, but I think that the clause as it stands has substantial disadvantages and raises some very wide issues. One of those issues is to what extent can intermediaries be held responsible for activities over which they have little or no control. Questions of equity and fairness are raised which will need careful consideration.
Another matter is the amount to be recovered. The Bill does not seem to recognise effectively the expenditure which will be incurred by the intermediary in providing a service. Then there is the whole question of the registration of brokers. I understand that the working party is looking into that issue.
It would be wrong in a Bill of this kind to prejudge the recomendations of the working party.
I intervened in the Secretary of State's speech to ask him when he expected to receive the views of the working party. He thought it unlikely that its advise would be available while the Bill was still before Parliament. If that is so, it is very unsatisfactory. I put two propositions to the Government. Either they should ask the working party whether it is possible for it to consider this matter first and give the benefit of its advice, or they should not rush the later stages of the Bill through the House but leave them until after the Summer Recess so that there would be more time to consider this matter. Genuine fears have been expressed on both sides of the House on this and other aspects. The Summer Recess could be used to give full consideration to them. I believe that If that were done, the later stages of the Bill would be more fruitful and constructive.
I regret the Bill, but in the circumstances I accept the need for it. But I beg the Government to realise that although they have met some of the fears expressed, for which I give them credit, other fears are still being expressed which they will have to meet if they are to get a measure which will be acceptable and will command the confidence both of policyholders and the industry.
I declare an interest as a former director of the Co-operative Insurance Society and as a Member sponsored by the Cooperative movement, which has considerable interest in insurance. Because of that interest, I was initially concerned about the Bill on the ground that it was designed to provide a measure of consumer protection. The Co-operative movement has always stood for consumer protection. It may therefore seem odd at first sight that hon. Members who have associations with the Co-operative movement should resist a Bill designed to provide additional consumer protection.
Initially, when people objected to me about the Bill, I considered that these were the views of the insurance establishment resisting change practically for the sake of doing so. But as I have studied and discussed the Bill I have become increasingly persuaded that there are substantial objections in principle to it as a means of achieving the objectives which the Secretary of State and I share.
We are both anxious to achieve a workable method of consumer protection. We differ merely about the efficacy of the Bill. I greatly appreciate the courtesy of the Secretary of State, who has been prepared, often at short notice, to meet those of us who have had concern about the Bill, and although I am afraid he has not managed to persuade us of everything, and we have not managed to persuade him of everything, it is true that there have been changes following those consultations. But I do not agree that there have been substantial changes, except in one instance.
I want to consider the changes made in the House of Lords. These are important, in view of the confusion which exists about the attitude of the insurance industry towards the Bill. There was one substantial concession in the House of Lords which I believe altered the attitude of the British Insurance Association towards the Bill. This was the acceptance by the Government, after discussion with the Opposition, of the provision concerning the power of the Secretary of State to extend the scope of the guarantee scheme or to mount rescues. There is a certain discrepancy of voice in the attitude of the insurance industry on this matter.
The general, as opposed to the life, interests are in practice dominated by the commercial interests of a small group of very large general insurance companies, such as the Commercial Union, the Royal, the General Accident, the Phoenix, and a few more—all excellent companies but with a particular interest and largely biased towards the general rather than the life side. The BIS has claimed to speak on behalf of the insurance industry as a whole, and this has tended to confuse some of us.
There is within the industry—one can argue whether it is in terms of a majority or a large number—a substantial number of mutual life offices which are particularly concerned about the Bill and continue to object to its provisions. The changes in the House of Lords have done nothing, as far as I can see, to allay the misgivings of, for example, the Life Offices' Association or of the Association of Scottish Life Offices, both of which have an objection in principle to the idea of a guarantee scheme, although they have welcomed the changes because they consider that they at least improve the scheme from the form in which it was originally proposed.
I do not wish to make any greater claim on behalf of the attitudes of bodies of this kind than can properly be made, but it is relevant to point out that the insurance industry as a whole produced a scheme which embodied precisely the principle of a levy and of a rescue fall-back of up to 90 per cent. of the policy holder's claim. I ask my hon. Friend to take account of that fact in his assessment of the attitudes of the various branches of the life assurance industry.
I appreciate that point, but the difficulty which my right hon. Friend raises is a fundamental one, underlying the problem of attempting to deal with the insurance industry, which is not homogeneous but extremely heterogeneous. Positions and attitudes appropriate for some parts of it differ considerably from those appropriate for other parts. My right hon. Friend has himself accepted the idea that there may be a lack of homogeneity in the industry as a whole. I think, therefore, that it is virtually impossible even for the BIS to speak for the entire insurance industry, in view of the great range of interests within that industry.
Perhaps I may now take up the point made this morning about industrial assurance. I am sure that my right hon. Friend, in introducing that passage into his speech—which I am sure all hon. Members found of considerable interest—thought that he was making a considerable concession, and that perhaps my hon. Friends and I would be gratified by this particular move. But this shows the difficulty to which I have just referred, for in so far as the whole of the insurance industry is not homogeneous, so, also, the whole of the industrial life assurance industry is not homogeneous. Some large companies operate virtually 100 per cent. on a with-profits basis. There are also a number of small companies in industrial life assurance which do virtually none of their business on a with-profits basis, and what might be appropriate for certain life assurance companies would certainly not be appropriate for those other small companies which have different characteristics.
I believe that the distinction which needs to be made is not one between industrial life assurance and other life assurance but rather between those parts of the traditional life assurance business which operate on the basis of distributing at least 90 per cent. or 95 per cent. of their profits to their policy holders, and those which operate largely in the interests of their shareholders rather than of their policy holders.
If my right hon. Friend had wanted to make a distinction he would have done better to make it on those lines, rather than between industrial life assurance and other forms of assurance.
With regard to the problem of strengthening the protective legislation, my right hon. Friend has referred to what has been done under the 1974 Act and the regulations which he has already produced. As stated by my hon. and learned Friend the Member for Warrington (Mr. Williams), it is by no means clear that either the powers already taken under the 1974 Act, or regulations which could be taken under that Act, would have been sufficient to deal with the sort of malpractice which occurred in the case of London Indemnity or Nation Life.
London Indemnity failed because it issued such an enormous number of single premium guarantee bonds carrying excessive guarantee surrender values. This led to a situation in which, when interest rates rose, large numbers of people surrendered their bonds in order to reinvest the proceeds of surrender to better advantage. I am not clear—perhaps my hon. Friend is about to intervene to instruct me—that the bankruptcy of that company resulting from that cause would have been prevented by the regulations which exist.
While it is very difficult indeed to speculate whether a catastrophe of that kind might have been avoided if the full rigours of the regulations which we have brought about, and are continuing to bring about, had been in being, is it not of help to my hon. Friend and those he represents that the non-statutory advisers will be able to help the Department and the industry as a whole in the effective job of surveillance, so that if regulations are seen to be not adequate for the task of effective surveillance in the industry, they will be able to bring their expertise to bear on this problem? This is a point that my right hon. Friend was very anxious to stress.
I am sure that in the long term the more advisory committees there are the better, but we are concerned with the present, and with the obviously reckless management practices which occurred in the two companies I have mentioned, which brought so much misery to so many people. Nation Life failed because it invested an excessive proportion of its life assurance fund in a highly speculative property investment in Bournemouth.
Although the regulations will generate an enormous amount of paper—I am not sure how this will be stored within the buildings at present used by my right hon. Friend's Department—I am not convinced that the creation of returns, and so on, will automatically stop the reckless management practices which have occurred in the past. Certainly these two categories of practice are prohibited in virtually every other country, and I believe that, if this had really been an effective Policyholders Protection Bill, it should have had clauses in it prohibiting financial speculation of the sort which occurred in those two companies.
In case there is any misunderstanding on the part of my right hon. Friend, I am not suggesting that we need to control on a day-to-day basis insurance companies' investments or the terms on which they issue their policies. All that is necessary is to prevent insurance companies acting recklessly outside safe limits. As was said in another place by my noble Friend Lord Peddie, on the Committee stage of the Bill, is it not a ridiculous suggestion to have a statutory requirement that a life assurance company must submit an actuarial solvency certificate each year, when that certificate can be invalidated, even immediately after it has been given, by a switch in investments made by the proprietors, possibly without the knowledge of the actuary? Is not this a totally unsatisfactory situation at the moment?
Reference was made by my hon. and learned Friend the Member for Warrington to the question of the recovery of some of the excess dividends which had been paid to the directors of this company, and the Under-Secretary of State intervened to ask him whether this would not have some wider implications than purely in the insurance industry, but surely the whole purpose of this Bill and of our discussion today is that the insurance industry has certain characteristics, and that therefore one may have to look at certain things with which one would not wish to be concerned in relation to the run-of-the-mill companies. In cases where people are being exploited by insurance companies for the sake of short-term profits, we may have to take particular measures.
As I understand it, this would not in any way infringe the principle of limited liability. This principle, as I understand it, is that the shareholders are not responsible for the debts of a failed company except in respect of uncalled share capital. If the Policyholders Protection Board were to find it necessary to incur expenditure in relation to the failed company, the first place in which it should look for that money, before recovering commissions from insurance brokers or levying policyholders in other insurance companies is by a partial recovery of dividends to the proprietors paid shortly before the failure. It seems to me to be a perfectly reasonable approach in the particular and unusual situations in the insurance industry.
We are anxious to see appropriate and proper protection provided to policy holders, and I have already suggested one or two ways in which I believe that can be done. The first is that instead of selecting industrial life offices for this treatment, it should look at those companies which run their business on the basis of with-profits activities.
Secondly, we require prohibition of financial speculation with other people's money, of the type which went on under the London Indemnity and the Nation Life schemes. Thirdly—and this is going into an area which I have not covered in what I have said this morning—on liquidations, we need a change in the regulations, which I believe could be incorporated if not in this Bill at least in the Bill which is to be introduced in the near future, which would give priority for outstanding claims in the case of a non-life liquidation.
Although it might appear that there are divisions in the House on one level, on another there is agreement that we want to achieve effective and realistic protection for the holders of insurance policies. I hope that, if not today, at least at some time in the near future we shall be able to reach agreement on measures to do precisely that.
I want to support as firmly as I can the amendment moved by the hon. and learned Member for Warrington (Mr. Williams) which has been approved by so many Government supporters and by myself and one of my hon. Friends.
There is no disagreement in this House or outside it that the Bill affects one of the most efficient and reputable of all British industries. The British insurance industry has long held the respect and admiration of the world. It has been said already that it is responsible for much of our invisible exports, and it maintains the twin hallmarks of reliability and integrity.
If we give this Bill a Second Reading and later it becomes an Act of Parliament, the Government will have taken a major step towards permanent involvement in this respected industry. I should regard that as a regrettable step.
However, it is not on grounds of dogma that I am opposed to Government involvement in this industry. It is, as has been said by so many Government supporters, because the Bill makes no contribution to the efficiency of the industry and fails completely to tackle its problems.
As the Secretary of State said, the British Insurance Association has admitted that the worst of its fears have been allayed during the Bill's passage through another place. The association's strenuous opposition to the Bill, which was so evident and so skilfully deployed when it was first introduced, has now diminished to an astonishing extent. However, that does not indicate to me that in its present form the Bill will be a valuable aid to our society. Nor do I believe that it signifies that the Bill will be a useful addition to the statute book.
If I may say so without offence to the eminent members of the British Insurance Association, it is typical of much of British industry today that when it is presented with a piece of obnoxious legislation it finds that amendments, alterations, omissions or additions but above all compromise eventually make the legislation welcome and acceptable. I regret this attitude. It is similar to that of a man sentenced to life imprisonment for a murder which he did not commit rejoicing when his sentence is commuted to one of 20 years instead of continuing to fight to prove his innocence. One injustice cannot be relieved by replacing it with a lesser injustice. In this case the House should not be content to allow a monumental folly to be replaced by a lesser folly without a determined effort to get rid of both.
None of our industries today is free from its problems, and insurance is no exception. However, the Bill does not attempt to deal with the problems, and they are outlined in the amendment. The Government's reply to the amendment seems to be that these are serious matters which will be dealt with in a later Bill. If that is the case and if they are matters which require attention, why do the Government proceed with a Bill which has found so little favour in the House today?
The object of the Bill is clear. It is to protect the public against failure. No one can oppose that objective. But to achieve this the Secretary of State seeks to place a levy on all reputable and sound companies. To my way of thinking, that is the wrong way to do it, and I agree with the hon. Member for Farnworth (Mr. Roper), who expressed that point of view more adequately than I could do so. There is no doubt that the levy will be paid by those who are efficient and who manage their companies sensibly.
The increased premiums themselves will be another twist in the inflationary spiral. The Minister excused this by saying that it was very small, but how often do we hear today that one more addition to the budgets of individual families does not matter because it is so small? They all matter. They all add up in the long run.
The hon. and learned Member for Warrington referred to the debate in this House on 7th March which was initiated by the hon. Member for Battersea, South (Mr. Perry). The hon. and learned Gentleman reminded the Minister that of all the back benchers who spoke in that debate not one supported the principle of a levy. I took part in the debate, and I referred back to Hansard yesterday to total the number of hon. Members involved. There were 11 from both sides of the House, and they were unanimous that this was the wrong approach to the industry's problems.
The Secretary of State has shown complete and utter contempt for that debate. We might just as well not have had it. He has proceeded with gay abandon to inflict his pet scheme on the industry despite those protests from both sides of the House. The Under-Secretary appears to be amused. But he was present during that debate—
The hon. Gentleman has interrupted at least four or five times already. He will have a chance to speak later. Many hon. Members wish to contribute. What I am saying is undisputed. It has been referred to by the hon. and learned Member for Warrington, and the record is there in Hansard.
It is a contemptuous way to treat the House of Commons. Two Government supporters who contributed to that earlier debate have signed the amendment. I hope that they will continue their opposition so that we can go into the Lobby together against the Second Reading of this Bill.
When any reputable insurance company has gone into liquidation or run into financial trouble in recent years, the insurance industry has rallied round to support and to help the company sort out its problems or to help those who have been affected by the crash. But there have been exceptions and, as the hon. Member for Farnworth pointed out, those exceptions were where the companies concerned had traded recklessly and offered premiums at unrealistic rates. But again there is nothing in this Bill which will alter that situation, and that is the real problem which should be tackled by this House.
The other side of the industry which has been referred to in various speeches is that of the brokers. If the Bill reaches the statute book I would welcome the amendments from the other place which make the brokers liable to repay some of the commission that they may have obtained through recommending companies which subsequently failed. My hon. Friend the Member for Somerset, North (Mr. Dean) said that this might act unfairly because the commission might have been spent and brokers might not be able to repay the money when called upon to do so. My hon. Friend is a member of the insurance industry, but I am not. In my view it would not be beyond the wit of the brokers to take out a liability policy to cover themselves for such eventualities. That would be a sensible and prudent way of getting over that particular objection to the Bill. It is certainly what I do to cover any possible liabilities which may occur in my own business through some unforeseeable event. If it had not been for Lord Peddie's amendment the brokers would have got away scot free.
I welcome the Minister's pledge that there will be no attempt to remove the principle of the amendment, although the clause itself may be amended to make it more practicable. I admit that the majority of brokers are eminently respectable and responsible, but my fury against those who are the black sheep has been aroused by a particular case that has been brought to my attention concerning the failure of Nation Life. A disabled spinster was attracted by a coupon in a newspaper. She completed the coupon asking for details of Nation Life. In the meantime, she discussed the matter with her bank manager, because her total life savings consisted of £3,000 in the Halifax Building Society and £7,000 in the Chelsea Building Society. Her bank manager prudently advised her against switching her investments. When she was telephoned by the broker she told him of this decision. The salesman for the broker did not accept the decision and arrived at her home at 5.15 one evening. He did not leave until 11.15, when he had two letters which he had dictated and which he took to the building societies the next day authorising the release of the funds which he then put into Nation Life. That sort of activity is in no way tackled in the Bill. That is the sort of problem of the insurance industry that we should be tackling, not imposing a levy on those firms which have successfully run their businesses in an eminently satisfactory manner.
The preamble to the Bill provides that it will make no difference to the Civil Service manpower. I doubt that very much. I doubt whether all the information which we have been given by the Minister today will be assimilated by his Department without an increase in manpower. The work will grow and cause greater interference in one of our most respected industries.
The Minister has shown great tenacity in bringing the Bill this far. As his hon. Friends have said, they have been to see him on many occasions during the past few months to tell him of their opposition. Nevertheless. the Bill has now reached this House. I hope that it will go no further this afternoon. Certainly if the hon. and learned Member for Warrington presses his amendment I shall go into the Lobby with him and his hon. Friends
In view of the speeches that we have heard so far, it may come as some relief to the Minister to hear that there is at least one hon. Member who supports him on Second Reading. There can be no doubt that the Bill is very different from that originally presented. This undoubtedly has been due to the excellent work in another place, and a substantial contributory factor has been the representations made by many of my hon. Friends and the pressure that they have applied to the Secretary of State and his junior Minister. For all those reasons, the Bill has been improved and is different from the original.
I support the Bill for one simple reason: it will give some protection to policy holders. I do not think that any hon. Member who has been personally connected with constituents who have suffered the fate of seeing their savings disappear as a result of the collapse of their insurance companies can deny the need for such protection.
My hon. Friends genuinely and sincerely have expressed many reservations about the Bill, but if the amendment is pressed to a Division and, by some mischance, is carried, it would effectively kill the Bill. I believe that the place to put the Bill into a better shape is in Committee, because everybody is agreed that at present it is by no means perfect. Therefore, it would be wrong, improper and somewhat irresponsible to kill the Bill today. If I am fortunate to be selected as a Member of the Committee, I shall endeavour to improve the Bill. I suggest that that is the way in which we should proceed.
I was somewhat astonished this morning when I heard my hon. and learned Friend the Member for Warrington (Mr. Williams) say that he had the full authority of the Life Offices' Association to say that it was implacably opposed to the Bill. I thought that I had better check that statement. The information that I shall now give to the House is new and thus extremely valid.
There is a difference of opinion within the insurance industry. The House has already been informed that the CIS and the Scottish Life Offices are opposed to the Bill. It is possible to get the whole matter into the wrong perspective if, in the light of that information, we take it that all the industrial life offices are opposed to the Bill. They are not. Some of them are, but others are not. Those which are not opposed to the Bill are by no means satisfied with it in its present form, but they do not wish to frustrate its passage at this stage. They want to see improvements and changes, but they do not wish to see the Bill killed today. Therefore, I support the Bill because it will give protection to a large number of my constituents who may suffer the tragic misery that others have suffered.
It is no use saying, as many hon. Members have said, that if people who take out insurance policies were more prudent and discerning, they would put their money in only reputable companies and therefore their policies would never be at risk. People are not generally discerning in that way. They will take advice, usually from their brokers, and regrettably that advice is normally determined by the broker's rate of commission. People will invest in companies about which they receive that advice. They cannot themselves know whether the company is reputable.
Because the Bill gives some protection to policy holders generally, the House should support it.
I declare my interest as a director of a firm of insurance brokers.
This Bill will have little effect on larger firm of brokers, since it excludes Lloyd's, overseas operations, limited companies, reinsurance, marine and transit business and so on. It does not relate to many of the substantial interests in the City. However, it relates very much to those old-established reputable companies a large proportion of whose business is in personal policies—the branch offices and the salesmen in the industrial life offices, those providing "home service" insurance and the larger companies which traditionally provide much personal insurance.
There is a substantial body of expert opinion on the Government back benches in this matter and I am surprised that the Government have paid little heed to it. I regret that. On an issue such as this, which is not ideological or partisan—the feelings for and against the Bill have little to do with party divisions—it is regrettable that they have not listened more objectively to some of the views expressed.
The Secretary of State said that the Bill had gained a broad measure of acceptance. I gained a totally different impression from reading the debates in another place. I thought that it left there friendless. It was friendless here until the hon. Member for Gateshead, East (Mr. Conlan) rode in on his white charger gallantly supporting the Government. But so far his has been a solitary voice. I suspect that there is considerable opposition here and outside to the Bill, although naturally, after a time, people begin to acquiesce in the inevitability of the legislation and try to improve it.
My hon. Friend the Member for Worthing (Mr. Higgins) said that the Bill had been considerably improved by the amendments made in another place, but I do not see it like that. I think that it has done a sort of striptease act. More and more of its unpleasant features have been removed, but what has been left exposed is by no means attractive. It has been stripped down to basic principles. Naked and unashamed, the principle is just as objectionable as when it was dressed up in unpleasant garments.
The Secretary of State has fallen into the trap of having made so many concessions as to water down his original intention, to the point at which the Bill is a shadow of its former self, to satisfy critics who, because of their total opposition to the basic principle, are still unsatisfied.
It is interesting to see what has gone. It was rumoured in the early stages that there would be a permanent statutory fund. Now there will not. At one time, it was said that there would be 100 per cent. compensation. Now, it is 90 per cent., scaled down in lesser cases. A majority on the board will now be representatives of the industry. That is very good. The powers of rescue also have apparently been considerably reduced.
I apologise, because I have been rebuked already for intervening, but the hon. Gentleman relies on a good deal of information which is simply not right. A number of the points that he has made were always within our intention and were simply underlined in certain amendments introduced in the other place. But the principle was never in issue.
I am delighted to hear that, but in that case it is surprising that provisions in the original Bill needed amendment at all. I am not criticising the Government. They have met criticism helpfully so far. They have made numerous concessions and I hope that they will continue to do so. If, by some mischance, the Bill should go through further stages, I hope that they will continue to be as helpful and forthcoming as they have been so far.
But at the end of the day, I wonder whether the Bill is worth the trouble. Who wants it? It has been said that policy holders of Nation Life would want it—and those who foresee themselves being in a similar position. There have been references to newspaper reports of the court hearing of the Nation Life liquidation this week. One that I have here says:
The 32,000 policyholders in the crashed Nation Life Insurance group had the hope of getting up to 50p in the £1' held out to them yesterday.… And they can hope for at least a further 25p in time.
I quote a newspaper so that we cannot be accused of raising false hopes. But that is a prospect of a possible 75p in the pound, from a company which could fairly be described as having given excessive benefits. Under the Bill, policy holders in future would probably receive no more than 75p in similar circumstances. That is the answer to the hon. Member for Gateshead, East.
Under present regulations and controls, even in a case like this, which clearly slipped through the net—I hope that it has been considerably tightened since—the policy holders would be no better off under the guarantee fund than under the present liquidation arrangements, except to the extent that the process would be a bit quicker, but even that is in some doubt. It appears from the Bill that considerable steps will have to be taken before one can know whether policy holders will receive compensation.
With respect, I think that I said that this would have been a case —this is a matter of speculation of course —in which it would be considered that excessive benefits had been granted and that that was one of the contributory reasons for the company's collapse. The Bill specifically says that in those circumstances the scale of benefit would be reduced. That is right. If we are to have such a Bill, that provision is necessary.
But it would be misleading the policy holders of Nation Life—who of course stand to rain nothing from the Bill—if they were to be given the impression that in similar circumstances in future they would be that much better off. However, I concede that there is this long delay in the liquidation process which the Bill might avoid. I support all efforts to reduce the tortuous, long-drawn-out and painful process of liquidation. That is a separate issue. The more we do that, the more beneficial it will be not just to policy holders but to other creditors.
Who else wants the Bill? I submit that the insurance companies generally do not want it, although some might be prepared to go along with it. Very few hon. Members want it. I suspect that the Leader of the House would be happy to have one fewer Bill committed to Standing Committee. It can only be the Secretary of State who now feels that he has a commitment to the Bill, and I suspect that he, too, will be happy if we decide today that this has gone far enough and should be abandoned.
My hon. Friend accused the Secretary of State of proceeding with gay abandon. I am not sure that that is always his public image, amiable though we have always found him, but the Bill has now taken such a pasting and attracted such opposition that it would be sensible to let it lapse and to go back to the industry to see whether more workable and acceptable arrangements can be found.
As I said, having made all these so-called improvements, we are left with the basic principle, and it is that which I find objectionable—that people who have taken out policies, consciously with older-established, reputable companies, should subsequently have to pay a tax, which is what it is, on their policies because of the failure of some fringe company which has got through the Department of Trade net. It is basically wrong to penalise these people. It is very hard on those, particularly in the home service industry or in the old-established companies, who are doing a first-class job visiting their clients and their prospective policy holders and persuading them to accept policies with their companies, to be told that subsequently if one of their fringe competitors goes under they will have to help bale them out.
The other objection in principle is that this does not discourage but, on the contrary, will encourage irresponsible underwriting. If a man can get through the Department of Trade net—through the very tough regulations that it has—and wants to make money quickly, he will find it easier under the Bill, not harder. He will be able to say to prospective clients, "Don't worry. It seems a generous policy and too good to be true, but I have already passed the Department of Trade's regulations and, don't forget, there is the Government's rescue fund to bale you out if things go wrong". That is an encouragement to irresponsible underwriting, and that cannot be argued against.
We discussed this with the industry when it put forward its own scheme because it was worried about it, but we agreed that the balance was about right. There is no safe fall-back position, but it is only for the more orthodox life policies that the 90 per cent. figure is available. Emerging from that, it was thought to be just as right to prevent the kind of conduct and encouragement of that conduct of which the hon. Member for Faversham (Mr. Moate) has spoken.
I accept that the Government have gone a long way to meeting this objection. Nevertheless, the basic principle remains.
The other objection in principle relates to what the Secretary of State has just said—that the Department now has the capacity for immense regulatory powers. These powers are immensely strong, and it is right that they should be. The principle of caveat emptor, which has been discussed, has long been in a special category for insurance because for centuries we have accepted that there is special insurance legislation. It is not, as the Secretary of State implied, just another form of investment. We have always accepted that the Government have special responsibilities in this area.
The 1973 Act has not yet been fully tried out. Once the full armoury of weapons is brought into operation, and once these controls, over investments, quarterly returns, underwriting returns and premiums and so on are exercised fully, it would be very hard indeed for someone to get through the net unless the Department were negligent. It is wrong to criticise civil servants. It should be the politicians who are criticised. But it is a fact of life that we have given theoretical responsibility to the Department of Trade, the DTI or the Board of Trade—as it then was—without giving it the staff and clear political instructions to carry out the powers vested in it by the Act. That was the position in the past, but it should not happen now. The officials must know their responsibilities fully and they should be able to exercise them to prevent abuses of the type that we have recently experienced.
I turn to a more specific point. There has been concern that the board should not be—I do not say this in an offensive manner —the creature of the Government. The Secretary of State has allowed that there shall be a majority of members of the board coming from industry, and that is a helpful decision. The Secretary of State holds, I understand, very few powers to direct the board to mount rescue operations or to become involved in that way. That is good.
However, I am concerned—and this might seem a rather small mechanical point—how the board will operate. From reading the Bill it seems that it will be activated only when a company starts to get into trouble. There is no provision in the Bill for funds or for manpower for the board to be permanently manned. It seems to be the case that if a company gets into trouble according to the judgment of the Department, the Secretary of State will presumably pick up the tele- phone to inform the five members of the board—I hope I have the number right—and then and only then will they begin their work. The members have no staff back up and no prior information. They exist only at the behest of the Secretary of State. Almost by definition they could then follow the thinking of the Secretary of State about what should or should not be done.
I should like some guidance from the Minister on this because an important principle is involved. Is it to be an independent body, acting independently, or is it to be an extension of the Government Department? In saying that, I am conscious that it could be the Conservative Party that is in power. I am not suggesting that the present Secretary of State would act in a malicious way. I am saying that I do not agree that these powers should be held by Government.
I turn to deal with one other specific matter, namely, Clause 17, the recovery from intermediaries. I am aware that there was considerable criticism of brokers as a result of the Nation Life failure. This is not a good clause, because it panders to a degree of popular prejudice aroused by that collapse. It is not right to lay the blame on intermediaries for selling insurance when the blame must be fairly and squarely laid at the door of those who conduct irresponsible underwriting policies or the Department, which fails to observe that that irresponsible action has continued. It is, once again, passing the buck. It is the Government dodging their responsibilities. If a company is conducting its affairs badly, it is up to the Department to stop it. If the Department is receiving quarterly returns, it has the power to stop it and should be able to do so. The man who produces the business is no more responsible for that bad underwriting or bad financial management than is any other person.
If the Secretary of State goes back and reclaims commission which is, to put it another way, the salary of the man who did the business, equally he should go back to the staff and reclaim salaries or to the Inland Revenue and reclaim corporation tax because it was paid on profits that were unrealistic in relation to the underwriting policies to that company. There is a dangerous principle here, and I hope that the Government will look at it carefully. By all means let us look carefully at liquidation and from whom we can and cannot recover. However, we should look at that in the context of liquidation not as a whole, not just in the sphere of insurance companies—although I hope there will not be any such liquidations in the future and that this proposed fund will never be required.
In many ways the Bill gets the worst of all worlds. It offends almost everyone. It offends the principle of noninvolvement of the State in British insurance. That has been one of the hallmarks of the success of British insurance—why this country has succeeded where so many others have failed. Furthermore, it is unlikely to help policy holders should a collapse ever happen again.
I hope that the Government will pay heed to all the words that they have heard from Labour Members and even from some Conservative Members and will withdraw the Bill and think again. If they cannot do so, I should say that I am sympathetic to the amendment tabled today and shall consider carefully whether to support it.
The surprising thing about the Bill is that it was ever presented. It comes odd from a Government who pride themselves on their willingness for consultation. No one can complain that there has not been consultation on this matter. There have been consultations with the insurance companies and with the several trade unions involved, but all this has come to nothing because they have told the Minister that they do not want the Bill. Most people still do not want it. It has been pushed and has been accepted, under duress, by some. However, I do not believe that the trade unions will ever accept it.
The Bill is loved by no one except the Minister and his Department. It is a measure which has been introduced primarily to give protection to those people who want the services of the insurance companies and who in many instances, very foolishly, have been going in for the cheapest rates and the highest return. The unfortunate thing is that these people, in their folly, have now got to have their risk covered by the people who more sensibly invested in the traditional insurance companies.
I accept that some standard of protection must be afforded for cases such as we have seen, but, on the other hand, I think that what is needed far more urgently is not protective measures but preventive measures. We need machinery in the Minister's Department which will keep a very close scrutiny on these smaller companies, on the policies that they are offering and on they way they use their funds.
I see no reason why the Department should not vet every new policy that is offered to the public. It would not involve very much work. We are talking about fringe companies. It would require far less manpower in the Department than will the operation of this measure.
If the Minister could give consideration to a matter of that description—prevention rather than protective measures at present the Bill would be totally unnecessary.
The Bill we are considering today is very different from that which was originally introduced into another place. As we know, it has its origin in the failure of the Nation Life Insurance Company, but it is designed to extend a measure of protection to life insurance policy holders in the event of any future failure and it is not retrospective so far as the Nation Life company is concerned.
I have listened with interest to what the Minister has said about his desire not to have retrospective legislation. It is a view with which I have a good deal of sympathy. The original Bill, as introduced in another place, gave very considerable new powers to the Secretary of State to intervene in the affairs of the insurance industry—powers, in the opinion of many inside and outside the House, which were excessive and unnecessary. I for one am very glad that those powers have been limited and that the Bill we now have before us is in a less objectionable form.
The Bill as I now see it provides for indemnifying, in whole or in part, or otherwise assisting those policy holders whose interests are threatened by the inability of insurance companies to meet their liabilities. In this difficult and risky world in which we live, there are many citizens who feel that the Government have a duty to ensure that the insurance business continues to be conducted to the same high standards as have in the past always been associated with the City of London. They require this protection because of the failure of a number of companies whose policies have been sold during the past few years by reputable, respectable brokers, after the policy holders had received advice from managers of their banks that the policies that they were about to take out were acceptable and safe.
That is why the public are disturbed. This is clearly why the Government were originally motivated to bring forward the Bill and why we are discussing it.
I believe that in seeking that sort of protection the public do not want to see the Government become involved in the insurance industry. They do not necessarily want to see the Secretary of State or his officials giving directions to the insurance companies—not at all. What they want to see is the insurance industry clearly able to regulate its own affairs They want to be reassured that all is well and they want to feel that there is a sensible measure of protection when things go wrong. They want these various protections Ix-cause they are concerned that their life savings shall be protected from the possibility of loss due to bad management or to other causes which are not apparent to them when they entrust their savings to an insurance company.
In short, they want to see an industry scheme with the necessary statutory backing. I do not believe that they are too concerned about the technicalities of such a scheme, and they look to Parliament to ensure that it is watertight. I am, therefore, very glad to have heard from the Secretary of State today that he feels that his views and those of the industry have substantially converged.
In looking at the Bill before us and bearing in mind that it is so different from the Bill which was originally presented in another place, I think that it is quite clear that those views have substantially converged. Certainly that is my understanding of the discussions I have had with representatives of the British Insurance Association and of the Life Offices Association, although it is well known that there are some individual members who are not entirely happy.
The Bill, as we know, sets up the Policyholders Protection Board. That board will be the instrument for indemnifying and protecting policy holders. I am very glad that it will be comprised of a majority of people—at least three—who will be drawn from the insurance industry. They will be directors, chief executives or managers of authorised insurance companies. That is good, because we shall at least have as members of the board men—and perhaps women—who are steeped in the world of insurance and who are experts.
But there is one person who will have to represent on the board the interests of policy holders in authorised insurance companies. That one person will clearly have a very substantial responsibility. I cannot help wondering who he, or perhaps she, might be, because he will also represent, possibly, the interests of many of the employees of insurance companies who are themselves policy holders and who have an equal interest in this matter.
Whether or not he will be mythical will depend very much on the skill of the Secretary of State in appointing that person. Certainly I share the hon. Gentleman's interests in the character of the person appointed. I shall await with interest the publication of his name.
I think that the board will represent the insurance companies to some extent and the policy holders as well. If that is so, I for one believe that it will be welcomed. I believe that it meets the interests of both the insurance companies and all those who entrust their savings to them.
Clause 2 provides that the Secretary of State shall give guidance to the Policyholders Protection Board after consulting its members on any of their functions. I welcome that new provision. I welcome the fact that the Secretary of State will have to seek guidance from the board and that he will not be as dictatorial in giving directions as he might have been—although not this particular Secretary of State—had the Bill proceeded in the form in which it was originally drafted.
But no guidance can be given unless draft documents containing it are first presented to both Houses of Parliament, that, again, is a very welcome change, not simply because it limits sensible the powers of the Secretary of State but because it will enable Members of both Houses to comment on any guidance which the Secretary of State may wish to give.
However, the most important clause is Clause 16, which sets out the powers of the board to protect the policy holders of companies in financial difficulties.
It is this clause that enables the board to take appropriate measures to secure
the transfer of all or any part of the business carried on by a company in financial difficulties to another authorised insurance company".
It is, therefore, the kernel of the Bill and it gives statutory effect to what has been the policy of the reputable insurance companies and of the insurance industry in general for a considerable time.
I would have found it impossible to have given my support to the Bill as it was originally drafted, particularly to the original Clause 16. I find the clause that I am faced with today much less objectionable. I particularly welcome the fact that the transfer of business or help from one company to another in financial difficulties may be given only after the provisional liquidator has been appointed—that is an important point—and that the board may not take any steps towards arranging assistance where it would be cheaper for it to proceed on the lines set out in earlier clauses relating to a company in full liquidation.
The important point to note is that the initiative now rests with the Policyholders Protection Board comprised mainly of insurance people, rather than with the Secretary of State. This is the most welcome change in the Bill in its present form.
The board is to be financed by means of a levy on
authorised insurance companies carrying on general business in the United Kingdom".
This levy has been at the heart of the controversy which we have heard ex-
pressed today and which was given expression to in great detail in the debate earlier this year initiated by the hon. Member for Battersea, South (Mr. Perry). Those misgivings lead me to consider whether I should support the Bill. I have concluded that many of my constituents who lost their savings in the Nation Life collapse and others who worry about the future would probably rather contribute a small amount by way of levy to ensure that the distress and anguish which they and many others have suffered shall not occur again than that they should support what I believe to be an entirely ethical and proper view but nevertheless one which in these difficult and risky days one can not always afford to take.
I say that only after careful thought, because I have great sympathy with the argument presented earlier this year by the hon. Member for Battersea, South. However, I shall not oppose the Bill today. There are many points in it which I should have liked to discuss had time allowed. But time does not allow. I therefore look forward to participating in the discussions in Committee, if possible, and to seeking to resolve some of the difficult points which have been mentioned today, in particular the clawback provisions.
I have listened very attentively to everything that has been said in the debate, but I remain to be convinced of the necessity for the Bill. To get a true picture of the insurance industry one must realise that it is by far our largest industry. Its total assets, which have been built up over about 300 years, amount to £25,000 million, or, in American terms, £25 billion. This is but a fringe of the insurance industry.
The industry is divided into many different facets. There are the life offices, whose business is divided into industrial life and ordinary life. There are the general companies, which function all the way through in different facets of accident cover. The contribution of the industry to the nation's stability is second to none. It provides the seedcorn for British investment, supplying all our leading industries with investment when required.
It is necessary to differentiate between companies and friendly societies which deal in life insurance or general insurance only and companies which take over an insurance company and inject another sphere of activity into it. None of the traditional life offices is in any difficulty today. Over 95 per cent. of British insurance companies are stable and solvent all of these are in the traditional industry of insurance.
Trouble arises when ordinary insurance companies are taken over by fringe companies like Nation Life and London Indemnity, which tried to link insurance with property bonds. I wish hon. Members would get it into their heads that there is a difference between the traditional life offices and offices on the fringe of insurances. Nation Life and London Indemnity overstepped the mark. They persuaded people to make deposits ranging from £2,000 to £10,000 in lump sums by single premium. The traditional life office collects premiums every week, every month, every quarter or every year. Traditional life offices do an infinitesimal amount of single-premium business compared with their other business. Nation Life and London Indemnity collected sums ranging from £2,000 to £10,000 on the specious argument that the policy holder could get back 95 per cent. of the money if the policy was surrendered.
The argument was advanced earlier that there is not a wealth of talent to go to for advice on insurance matters. The 60,000 insurance agents who call at people's doors provide an adequate, sufficient and highly intelligent assessment of insurance. Anybody who contemplates taking out insurance should speak to one of those people.
The home service insurance agent will give a person the advice to which he is entitled and which will suit his pocket. Behind the home service insurance agent is a whole battery of officials who vet the business that the agent does. If they think that he has sold an industrial life policy when he should have sold an ordinary life policy, they advise the intending policy holder to take out an ordinary life policy. Sixty companies ranging from the Prudential Assurance Company Limited to the Co-operative Insurance Society Limited sell insurance on the doorstep.
The impression might have been gained by some, after listening to one of my colleagues, in particular, that there is a danger of the insurance industry collapsing. The insurance industry is the most stable of British industries and is a reflection of Britain's prosperity in the past. The assets it has built up here and abroad, and the business it has done abroad, are an example that British business should follow. If British industry had adopted some of the ideas of the insurance industry we might not be in the state we now are.
Will the Bill actually protect policy holders? I venture an opinion on this matter as someone who has been in the industry—"on the knocker"—for more than 30 years. There is an impression among some of my hon. Friends that when one speaks up for an industry one must be getting a "back hander". I am not in receipt of money payments or anything from the insurance industry for what I am about to say or for my support for the industry. I say what I say because I have worked in the industry for so long and I am pleased to be of assistance to it. People get the impression that the industry is failing the nation, and this is not so. To answer my question, I do not believe the Bill will help policy holders. The first paragraph (b) of the Explanatory Memorandum states blatantly that one of the purposes of the Bill is
to provide for the imposition of levies on the insurance industry for the purpose of financing this protection.
That is wrong. People who have been prudent and cautious and have placed their contributions carefully should not be made to pay for the mistakes of those who wanted to take a risk in the hope of getting a quick return and who bought a pig in a poke. Perhaps I should explain, Mr. Speaker, that I am in some physical difficulty, as you may know, and I am not fully able to cope.
The Bill will help the spurious. It will assist the broker or the person who wants to sell insurance on the side in order to make a quick profit. There was a pertinent article in the Daily Telegraph on 2nd June which is a good example of a situation in which I am sure people will be taken advantage of, and the Bill will give them no protection. The headline reads
Life insurance claim misleads soldiers
It says that Service men, particularly in the British Army of the Rhine, who have
signed on for perhaps seven or 14 years are susceptible to being sold insurance policies by some high flyer. The newspaper is exposing the system under which a broker is selling deferred house purchase policies to the troops. The sale of deferred house purchase policies is the biggest twist in the insurance industry today. The policy holder can never guarantee that he will get a mortgage or that the amount he takes out in the life policy will be sufficient to cover the value of the house.
Service men are being exploited by being sold deferred house purchase policies ranging from £5,000 to £15,000. They are taking on a commitment to pay premiums for 20 years, but they are being caught. I sent this article to my right hon. Friend the Secretary of State for Defence and he wrote back saying that the Ministry was aware that this practice has been going on for a long time. The Department has tried to advise Service men to be careful where they place their money and what policies they buy but, despite this advice, brokers go to BAOR and sell deferred house purchase policies, with very little prospect of their coming to fruition. The purchaser of such a policy will obtain no recompense from any fund set up by the Minister.
I suggest that the Bill does not touch the real problem, namely, the spurious selling of insurance policies which have little prospect of ever truly paying off. Therefore, I wish to emphasise the problem created by the sale of deferred house purchase policies.
I have sat for a long time listening to this debate, and because I have in mind today's rather light timetable, I hope that we are all insured against any breakdown or strain caused, because I want to gallop through my points.
We know the reasons why the Bill has been introduced. I shall not enter into controversy about those reasons. I shall not bore hon. Members with the details. of which they are probably well aware. The situation was highlighted by the failure of Nation Life and the London Indemnity Insurance Company. There is no doubt that the policies issued by those companies were designed to appeal to people who were prepared to gamble for more than an average yield on their investment and people who were seduced by eye-catching advertising about overgenerous returns.
Those policy holders were not from the category containing the many millions of policy holders who pay monthly or at more frequent intervals to the traditional companies which contract industrial life business, or the policy holders with ordinary policies associated with either the purchase of homes or the life of the breadwinner.
The Government are to be congratulated in their attempts to provide legislation which will protect policy holders. I welcome any legislation which would prevent disasters of the kind experienced in recent times in the insurance industry. Unfortunately there is a good deal of hesitation in supporting this legislation, since the Government appear to be more concerned with cure than with prevention. The main criticism is that the cost of the cure has been placed, in the main, on the lower income family—the ordinary policy holders who are not directly associated with the cause of the problem which gives rise to the Bill.
The insurance industry is being asked to insure itself, company by company, for life and continuity. Those companies which take speculative and dangerous risks that threaten the life and existence of a company are being asked to pay a levy of up to 1 per cent. Those companies which are prudent and non-risk-taking, with long-standing operations and a record of stability, are asked to pay the same levy of up to 1 per cent. In normal insurance practice the industry would not tolerate this situation. It would ensure that the speculative gambling company taking dangerous risks would cover those risks with higher premiums. That is the right approach. but it is not reflected in the Bill. The premiums are equalised over whatever companies are involved.
My interest in the Bill stems, first, from my concern for the defence of the small policy holder and. secondly, from the need to protect the interests of work people in the industry.
I declare an interest as a member of USDAW. USDAW has long experience of organising the major section of insurance workers within the Co-operative movement. Hon. Members will be aware that USDAW has expressed concern about the provisions in this Bill. Some amendments were accepted in another place. Nevertheless, the Bill does not embody the necessary provisions which would prevent the collapse of a life insurance company as a result of the issuing of overgenerous terms in life policies and the speculative use of assets.
The provisions in the Bill create an additional problem, in that many small savers from working families could be asked to bail out better-off policy holders who paid substantial single premiums, as was the case with the two companies I have mentioned. The small savers have policies with reputable firms. The premiums are collected on a door-to-door basis, and profits, in the main, are distributed to policy holders in the form of bonuses. That type of insurance policy creates no problems for anyone. There are no over-generous terms. Indeed, it is often considered that the terms ought to be more generous. Bonuses fluctuate according to the state of the life funds. Save for a total collapse of our financial institutions they will not be subject to the problems associated with the policies issued by speculative companies. Yet the premiums for both are the same.
The main criticism of the Bill is that its provisions are not in the interests of such policy holders. The provisions do not offer such people any valuable protection. The thinking behind the Bill is sound. Only legislation which enables the Department to have an oversight of the issuing of new types of policies and the investments of insurance companies can achieve proper protection.
There are other unions involved besides USDAW. ASTMS and NUIW are on record as being against the Bill. To avoid misunderstanding the trade unions, being reasonable bodies, have said that they understand the origins of the Bill. They have pressed amendments upon the Minister in good faith and will continue to do so. I am sure that they will be accommodated. Basically, the unions say that insurance company failures have affected fewer than 1 per cent. of policy holders, yet a blanket, across-the-board levy is advocated. This levy could adversely affect the financial stability of long-established companies. The cost of that levy is bound to be met by the policy holders. That will have several effects. Either there will have to be higher payments by policy holders on new business or there will be less attractive policies and/or smaller bonuses to policy holders.
That could lead to business being depressed, which is bound to have a general effect on the prospects of companies and a more specific effect on the earnings prospects of employees in the industry. An example of the direct effects can be seen in the estimates that have been made by one company that the levy could cost it £3 per week per employee. Unlike many other businesses, the insurance companies cannot pass that on in increased prices. That is bound to cause difficulties for trade union members, working people in industry, and their negotiators in trying to increase their earnings and better their working conditions.
In the light of the various matters raised by my hon. Friends in their contributions, one would hope that the Government would have second thoughts about the Bill. I hope that they will appreciate that there is strong support for the amendment. Whatever the outcome, I hope that my right hon. Friend will amend the Bill to meet sonic of the points that we have raised and will continue to raise, and will heed the representations that the trade unions make to him on behalf of their members.
As one would expect, this has been a thoughtful debate with many Members from both sides of the House contributing a great deal to it based on their knowledge and experience of the industry. I find myself in some difficulty in winding up for the Opposition because some Labour Members—notably the hon. and learned Member for Warrington (Mr. Williams) in moving the amendment and the hon. Member for Battersea, South (Mr. Perry), in what I can only describe as a typically punchy speech—spoke so strongly against the Bill that they almost made me change my mind.
My hon. Friend the Member for Faversham (Mr. Moate) described the Bill as being the worst of all possible worlds. None the less, I marginally do not change my mind about giving it a Second Reading despite the strong arguments that have been advanced for not doing so. I think it appropriate for me to mention that I am a member of Lloyd's and that Lloyd's is not touched by the Bill.
The Secretary of State said that the purpose of insurance is to give security against all contingencies. In that I am sure that none of us would disagree with him. It is against that background that all of us approach this subject with a good deal of trepidation. Not only is it a complicated subject, but it is also clear that people expect benefits from their insurance policies to be more or less sacrosanct. That was a point that was made strongly in a sensible speech by my hon. Friend the Member for Uxbridge (Mr. Shersby).
A policy is bought either to provide against some catastrophe, such as fire, theft or premature death, or to provide future income at some important stage in life—namely, for a pension or for children on marriage. Having, bought a policy, most of us think no more about it. We store the policy away and pay the premiums and that is the end of the matter. The very thought of an insurance company going bankrupt is, therefore, anathema.
The British insurance industry has a most impressive record of growth. It is a record that compares favourably with many of its international competitors. In the past two years it has shown a great deal of responsibility in standing behind and supporting insurance companies that have come close to trouble.
It was when the Secretary of State moved on to say that the Bill is insurance of insurance from which we can all benefit that I think he was carried away by hyperbole. The hon. Member for Battersea, South referred to the Bill at that point as a policy holder's punishment Bill. That is because it will benefit only some groups of policy holders. Those who are in insolvent companies will be financed by those in solvent and reliable companies. It is a measure of protection, but I suggest that it is akin to putting a penny on every loaf of bread so that those who buy brown bread shall buy it half a pence cheaper than they would otherwise buy it.
This is precisely the principle which applies at Lloyd's. All Lloyd's brokers contribute to a general fund so that they insure their customers against the possibility of disaster.
The Secretary of State makes the delightful point that the Lloyd's scheme is run by the industry itself. It is run and monitored by Lloyd's. I shall not go further into this aspect because others have done so, but we would have preferred a voluntary scheme run by the industry itself which members of the industry had to join. The Secretary of State said that he had sought to secure such a scheme, and I wish that he had succeeded.
The protection offered under the Bill is inevitably discriminatory and partisan. Rarely has a Bill reached this House with such a chequered history. My hon. Friend the Member for Faversham chose to describe it as having lost all its clothes in another place. I think of it rather as having been neutered. Noble Lords, in a mood of rare butchery, cut out most of the offending parts. Today, the Bill's chequered history has continued. The Secretary of State assured us that further amendments are to come, mentioning particularly the point about industrial life policies. The hon. Member for Battersea. South immediately pointed out that these cannot be separated from normal life policies. My hon. Friend the Member for Faversham pointed out also that an important point of principle is involved in the question of industrial life policies.
This leads me to favour strongly the suggestion made by my hon. Friend the Member for Somerset, North (Mr. Dean). This is that, because of the confusion about the attitude of the Life Offices' Association, the discussions going on with intermediaries concerning the policing of their functions and the possible return of commission by them, and the amendments to which the Secretary of State referred, it is surely appropriate that the consultations with the industry should continue and that the Committee stage of the Bill should not begin until October in order to give adequate time for those consultations.
The hon. and learned Member for Warrington said that there was strong and continuing hostility to the Bill. He pointed out that the unions concerned were still strongly opposed to it and would continue to oppose it by all means available. He also said that the Life Offices Association and the Association of Scottish Life Offices were opposed to it. In that statement, he was contradicted, if that is the right word, by the hon. Member for Gateshead, East (Mr. Conran).
I understood that my hon. Friend the Member for Gateshead, East (Mr Conran) referred to the Industrial Life Offices' Association. He did not disagree with what my hon. and learned Friend the Member for Warrington (Mr. Williams) had said about the Association of Scottish Life Offices. Nor was he able to make a clear statement about the position of the Life Offices' Association.
Perhaps I can help on this point. My understanding is that the Life Offices Association remains opposed in principle to the concept of a guarantee scheme but that it has informed the Department of Trade that it is prepared to accept that the Bill should go through subject to amendments which it is discussing with the Department. The fact that it is discussing fairly substantial amendments with the Department reinforces the argument that the Committee stage of the Bill should be postponed until October so that the consultations can take place fully.
Another matter of detail to which I should like to refer relates to Clause 16. The Secretary of State tied himself into knots on this Clause and probably, as my hon. Friend the Member for Worthing (Mr. Higgins) pointed out, got very close to getting a knot in the wrong place. What the Secretary of State said was that under Clause 16 the board would not be able to arrange a rescue operation to keep a company in being if it cost less to put the company into liquidation. Does it follow that the board can arrange a rescue only if it costs more to do so? That cannot be what the Secretary of State intended, and I suggest that the Under-Secretary of State should clarify that when he replies, for surely—this is the real point—the board would not attempt a rescue if it were cheaper to other policy holders in other companies to proceed on the lines set out in the clauses of the Bill relating to full liquidation.
There is a further point in Clause 16 to which I think we shall wish to refer in depth in Committee. It is extremely difficult for a board to decide whether or not it is cheaper to allow a long-term company to go into liquidation. Previously in the case of a long-term company, if it ran its affairs at all properly, it should have had long-term assets matching its long-term liabilities. At a given point in time these long-term assets might well be just below or just above the 90 per cent. mark, but a board would take the view that, if these assets could be carried through to maturity dates, they would rise in value, and at that stage they might be very much closer to covering all the liabilities than to covering 90 per cent. But this in inevitably a matter of judgment, and the board could only make a judgment. How this will work out only time and practice will tell.
What Clause 16 shows is that there is still to be a very large amount of discretion, of responsibility, remaining with the board. I am very pleased that at least three members of the board will be drawn from the industry, but I should like to see that part of Clause 2, which enables the Secretary of State to give guidance to the board, dropped altogether. As the board has to follow his guidance, I fail to see what is the difference between guidance and direction. I do not think it exists.
Even so, the guidance is subject to the affirmative procedure of the House. We all know that in practice that means a very short debate, often late at night, with the payroll vote of the Government to ensure that the affirmative order goes through. I do not believe that this is any sort of substantial check on the ability of the Secretary of State basically to tell the board what to do. We do not wish to see this board operating in any way as a tool of the Secretary of State, and I hope that the guidance process will be dropped altogether.
One other point relating to the board which will be touched on in Committee is that of alternate directors. Alternate directors are in a surprisingly privileged position in the Bill, yet, as Ministers and their officials know, under company law alternate directors have no responsibilities or official position at all. An alternate director is not a director as far as the Companies Act is concerned. This is the point— how they would act on this board, and what would happen if the board on any occasion were to consist only of alternate directors—that we shall want to explore at the Committee stage.
As the hon. and learned Member for Warrington said, there is a great deal of hostility still against this Bill. I believe that the principle is wrong that anyone should be held responsible for something over which he has no control. That is what will happen under this Bill. It will be the Department of Trade which carries out the supervision, which nominates the authorised insurance companies, which inspects the balance sheets and which looks at the actuarial certificates, yet it is the solvent company and, through the levy on premia, its policy holders who will carry the responsibility and the financial burden if things go wrong. The purpose of the Bill, therefore is not to protect the policy holders in prudent companies. It is to protect those in imprudent companies and, as my hon. Friend the Member for Worthing said, to protect the Minister and his officials in the Department of Trade.
As I said earlier, it would have been far better to enforce the regulations which exist under the Insurance Companies Act 1974 and to have worked out an industry-operated scheme. Unfortunately, the industry and the Department of Trade did not see eye to eye. This Bill has been introduced. It was emasculated in the other place and many of its objectionable features were removed. But we are now asked to give it a Second Reading.
On balance, and having listened to all the comments made in this interesting debate. I do not propose to suggest to my hon. Friends that we vote against the Second Reading. However, the point made by the hon. Member for Gateshead, East was right. The place to put this Bill into better shape is in Committee, and that is what we shall seek to do.
Some action of this kind has been inevitable ever since the Vehicle & General crash. Under this Bill, some control of policies is offered—in fact 90 per cent. of cover is offered, and that only in so far as benefits are reasonable. This will be a curb on those seeking to offer excessive benefits.
There is the further fact that the process of harmonisation in the Common Market is going on, and this is bound to lead to some restrictions on the insurance policies offered. Therefore, insurance companies cannot be totally free in this respect. They are bound to be looking across the Channel at what European companies are doing.
We shall seek in Committee to ensure that the board and the fund work for commercial reasons and work for the benefit of policy holders rather than for political reasons and to aid the State direction of funds invested with insurance companies into projects sponsored, for example, by the National Enterprise Board. It is to ensure that the Bill is worked for the benefit of policy holders and for the stable growth of the British insurance industry that we shall seek to improve this measure in Committee.
This has been an important and serious debate, and I do not hide from the House the fact that I am disappointed that thus far a number of my hon. Friends have indicated a great deal of discontent with the proposals that we have announced. However, they have recognised, and it is right to recognise, that when my right hon. Friend made his initial statement in October last year we faced a traumatic situation in the insurance world.
At that stage, the BIA had not produced proposals. They came along later and, in our view, they remain deficient in a number of respects which I shall not go into now. From that time on, my right hon. Friend and I and officials in our Department have consulted people representing different interests in the industry. This has been acknowledged by my hon. Friends today. We remained flexible throughout the period when the Bill was in another place. A number of amendments moved by my noble Friend Lord Peddie were accepted and incorporated in the Bill, especially in Claus 17, dealing with intermediaries. I shall say a few words about that in a moment
I am not saying, and my right hon. Friend has never said, that if constructive amendments are put to us in Committee we shall remain inflexible in the face of them. Of course we shall not. This is not a party political issue. We are dealing with a very clear consumer matter We are trying to protect the consumer as best we can, and if further and better proposals within the general ambit of the Pill are put to us we shall consider them constructively.
I want to say one or two general things about the Bill before turning to the specific matters that have been raised by hon. Members on both sides of the House. The Oxford English Dictionary defines an "insurer" as
One who, or that which, makes sure on certain guarantees.
I do not know whether the hon. Gentleman wishes to intervene, but I hope he will stop speaking from a sedentary position. That definition goes to the heart of the philosophy underlying the Bill.
The Bill represents another chapter in the chronicle of consumer protection which has unfolded over a number of years under successive Governments. In our view, insurance represents a special case for the protection of the consumer who, in this instance, is the policy holder.
It has been rightly said that millions of people enact in their daily lives that precept which Oliver Wendell Holmes described so succinctly
put not your trust in money, but put your money in trust.
The overwhelming majority of people insure as an investment for their future—it is probably the only real investment they make in the whole of their lives—or against certain specific risks, and believe that they are putting their money in a trust which will be inviolate.
Nation Life, about which a good deal has been said today, was a member of the BIA, as was Vehicle and General. The ordinary individual might be led to suppose that it had a cachet of respectability ataching to it. However, if that trust is broken, should the policy holder, in all instances, be exposed to the trauma, the delay, the distress and the anxiety which so many suffered in 1973–74? Are they, in the main, the authors of their own misfortune? I do not think that my hon. and learned Friend the Member for Warrington (Mr. Williams) dealt with that point.
Could the doctrine of caveat emptor be applied in its full vigour to such people? Do they have the knowledge, expertise and ability to be able to determine the reputable company from the not so reputable, the prudent policy from the less prudent and the ability to apply such foresight as to forecast the economic conditions which can so easily imperil the assets of even reasonably well run companies?
Hon. Members must recognise that 1974 presented a danger point. Therefore, I believe that the answer to each of the questions that I have rhetorically posed is a loud negative. Most people, however literate, rely for their selection of insurance not on their own judgment but on the expertise of others, some of whom may allegedly be professionals, in an advisory capacity. Unhappily, I am not wholly convinced that in all cases the advice tendered is as dispassionate, prudent or expert as it should be.
I am not seeking to stigmatise all intermediaries, but it is essential to improve standards of responsibility in some areas of insurance broking. We have made constructive proposals, which have been taken up by the four organisations that deal with broking. By setting up the joint working party I hope that constructive proposals will emerge. Let none of my hon. Friends think that this is an easy matter. It is not easy to determine the responsibilities or the duties of intermediaries, or even to define intermediaries.
It would be folly to rush into a definition that is ill-equipped to deal with the position. We have accepted the principle now embodied in Clause 17 which enables the board to recover from intermediaries sums received by way of commission from a failed company, but I will not hide the fact that there are many practical difficulties and that we shall have to consider the wording, but certainly not the concept, again.
What I have said hitherto begs the question of how one provides that necessary protection without encouraging the irresponsible operation of insurance companies. The way to stop financial joyriding is to arrest the driver, not the automobile. Therefore, the first and most vital feature in this network of protection is effective surveillance. What has been done since 1974, both by the previous Government and by ourselves, is to use a whole battery of regulations effectively.
I urge the House to consider the answer I gave on 14th April to a Question asked
|Power||1973 Act||1974 Act||Times used|
|Restriction on new business||13||29||4|
|Requirements about investments||14||30||140|
|Maintenance of assets in United Kingdom||15||31||168|
|Custody of asset||16||32||148|
|Limitation of premium income||17||33||77|
|Acceleration of information required by accounting provisions||19||35||10|
|Residual power to impose requirements for protection of policyholders||21||37||112|
|Notice of proposed exercise of power to restrict new business||22||38||50|
|—[Official Report 14th April 1974; Vol.890, c. 47–8.]|
It is misleading to suggest that we have not used those regulations to great effect. I concede that they are still not adequate, but each of them had to be worked out in consultation with the insurance industry. That takes time. There is a whole variety of further regulations in the pipeline. I do not propose to recite them here because all who have taken part in the debate know the important proposals which are before the industry for strengthening our supervisory power—
I have already conceded that the regulations were not adequate at that time, and we need a general building up and a strengthening of the regulations. I understood my hon. and learned Friend to be arguing that it was necessary to build up this process to ensure that there was not another Nation Life, but he cannot guarantee that all the regulations and supervision will achieve that result. Every Chancellor believes that he has the answer to the use of tax loopholes, but a whole battery of accountants is employed, with enormous productivity, to overcome his assiduity. He fails, and in his next Budget he has to make further proposals to stop evasion.
However sophisticated the regulations employed, it is conceivable that we shall still encounter people who will manage to avoid the stringency of those requirements.
The question of adequate regulations begs the whole point. We hope that they are adequate. We use the expertise that is available within ilk Department to try to ensure that we block up the loopholes. However, I cannot guarantee that.
An important feature that we have introduced into the provisions before the House is that we shall have a board drawn from industry. It will be essentially technical. However, what is more important is that we shall have a body of advisers to help us exercise increasing surveillance and supervision. These advisers will indicate, drawing on their practical knowledge—something that has been deployed throughout the debate—where they think we may be going wrong and where we have inadequate powers to deal with the situation. That produces a wider responsibility in an industry of this kind, and it is right that this should be so. Therefore, the regulations that we have the ability to introduce under the 1974 Act are the first line of defence—the first line of protection—but the Bill is complementary to them. The two are not mutually exclusive. This is the point that my right hon. Friend and I have been seeking to make over the past few months.
I turn to the specific points raised in the debate. The hon. Member for Mid-Sussex (Mr. Renton) said that the Bill had been neutered in the House of Lords. I do not believe that this is the case. The principles underlying the Bill and the major provisions in the Bill have survived what the hon. Gentleman had thought was a process of emasculation. I have already said that consultations will continue, but I cannot accept the proposal that we should not enter the Committee stage until October, because that would be impossible within the time scale.
I believe that the hon. Gentleman sum marised accurately the position in relation to Clause 17. I shall not go into that further, because there are a number of other points which I am anxious to cover.
The hon. Member for Worthing (Mr. Higgins) said that my right hon. Friend the Secretary of State had cast doubts on the integrity of the insurance industry. There was no intention on the part of my right hon. Friend to do that, and I do not believe for one moment that he did so. He was not being defeatist about the regulations; he was being realistic, in the sense that we cannot guarantee complete security, however sophisticated the process of surveillance may be.
The hon. Gentleman asked for an assurance that we had no intention of upsetting the Lords amendments. Except for certain drafting matters on which I cannot give an undertaking, I can give such an assurance in relation to the principle. Clause 17 presents certain difficulties, The hon. Gentleman asked for information on occupational pension schemes, Insurance taken out by pension funds should have the benefit of the protection offered by the Bill. This is a case where surely there will be general agreement that the policy holder should be protected. If this kind of insurance is to be protected, I see no reason why it should not pay the levy. The Life Offices' Association suggested that companies which specialise in managed pensions business—there are less than a dozen subsidiaries of certain major companies in this sphere—might be exempt. The association has, for the time being at least, withdrawn the suggestion, because it believes that the definition is too limited. I can hardly be expected to comment on a proposal which is not before me.
If it is accepted that pensions should be protected the question arises whether this should be as to 90 per cent. or 100 per cent. The Government's aim is to secure the full payment of the guaranteed minimum pension, whether through the Bill or through the machinery of the Social Security Pensions Bill. I am engaged in discussions as to how this can best be achieved with representatives of the industry and with my hon. Friend the Minister of State, Department of Health and Social Security.
My hon. and learned Friend the Member for Warrington said that there was strong continuing hostility to the Bill. He said that almost everyone in industry opposed and continues to oppose the Bill. He is guilty of hyperbole—very pleasant hyperbole, but hyperbole, none the less. This point was emphasised by the hon. Member for Mid-Sussex when he spoke on the reactions of the Life Offices' Association. My hon. and learned Friend was not right in what he told the House about that position. We met representatives of the trade unions last night, as my right hon. Friend said. At no stage at our meeting did they say that they were urging their colleagues in the House to vote against the Second Reading of the Bill. We had very frank and full discussions with them.
Concerning the winding up proposals, my hon. and learned Friend made a number of suggestions about the liquidation processes. I think that one must find an orderly way out of the labyrinthine difficulties which the present law prescribes, but one cannot do this effectively by dealing with certain matters in isolation. What happens then is that one gives rise to further anomalies. I am very conscious of the deficiencies in the law relating to the winding up of insurance companies. We are making a detailed study of the subject in the Department, in full consultation with the industry. We believe that the right course is to await the outcome of these studies before deciding what amendments to the existing law are required, and then to deal with the revisions in a comprehensive manner. We fear that by making piecemeal amendments which have not been fully thought through we may do more harm than good in relation to the law.
I shall deal with the three points made by my hon. and learned Friend. He proposed that outstanding claims of policy holders should be given priority in a winding up. This would represent a major change in the basic rule relating to the priority of creditors in a winding up—that ordinary creditors rank equally. While it would improve the position of policy holders with outstanding claims, it would do so only at the expense of other policy holders and of creditors, whose position would be made correspondingly worse. We are not at present convinced that this would be a desirable amendment to make, and we are sure that it would not in any event be right to embark on such a fundamental change without full consideration of the implications in the context of our review of the whole position.
My hon. and learned Friend's second point was that the board should be given power to enable the liquidator to make payments to policy holders as they fall due. But the board already has this power under Clause 13(2)(b) and paragraph 7(3) of Schedule 1, so my hon. and learned Friend's point is met in that respect. It is hoped that wherever possible the board would make an arrangement of this kind with the liquidator and thereby reduce the need to call on the levy.
My hon. and learned Friend's third point was that the benefits of policy holders should be scaled down appropriately before any assistance is given by the board. But the law already provides procedures for obtaining the sanction of the court to writing down policy holders' benefits. I presume that my hon. and learned Friend has in mind assistance by the board under Clause 16. It will be open to the board to make such assistance conditional on benefits being written down to the level at which the board would be required to protect them under its duties elsewhere in the Bill.
Concerning shareholders—my hon. and learned Friend and I have discussed this matter previously—the real point that we are getting at is that the shareholders who milk funds are already exposed to the rigours of the law when inquiries arise, as they do whenever a failure occurs.
I have been asked by the hon. Member for Somerset, North (Mr. Dean) and others about the status of the board. My right hon. Friend has no intention of dictating to the board. It may be that guidance will be required on tech- nical matters from time to time, but he cannot give such guidance without consulting the board. I fear that I cannot go into that matter in any further detail now.
I turn to the comments of my hon. Friend the Member for Farnworth (Mr. Roper). He rightly said that the industry and the life offices were not united about these matters, that they were not homogenous. There is clearly a difficulty about dealing with the matter along the lines that were bruited by my right hon. Friend at the beginning of the debate as regards industrial life insurance.
We stress that we are prepared to think about these things again to try to meet any further objections that can be raised. I cannot deal with the fundamentalist approach. All that I am saying in making these concluding remarks is that we have tried to show our good will. We have tried to show that we are ready to accommodate my hon. Friends as best we can within the general ambit of the Bill.
We do not believe for one moment-nor are my hon. Friends saying—that it is always rich people or, as my right hon. Friend put it at the beginning of the debate, the unscrupulous who engage in insurance with companies of the type that have failed. That has been conceded. However, we have a duty to protect a large number of people—people who have put in their redundancy payments; people who have obtained damages, perhaps, for injuries sustained in accidents; people who have sunk their life savings—relatively small they are, too—into insurance on the advice of others. We have a duty to try to protect those people, consequent upon the observations my right hon. Friend made on 29th October of last year.
We are concerned about stopping reckless management and control, but we cannot define what limits are safe. We cannot deal with the question of speculation without the full panoply of the regulations we are seeking to acquire. We need, too—this is just in case we go wrong and nobody in this world can be perfect—the back-up power that the Bill provides. I therefore hope that my hon. Friends will give further consideration to the amendment they have proposed.
The hon. Member for Croydon, North-West (Mr. Taylor) regretted Government involvement in the industry. The hon. Gentleman is a fundamentalist in a different way. However, he was instrumental in the Early Day Motion which expressed regret that the proposals we have made are not retrospective. I have never known anybody stand on his head so publicly as the hon. Gentleman has done.
I have not time to give way. I would give way if I had time, but I have only two minutes in which to say a great deal, and I am clearly not going to be able to cover it all.
The question of over-generous benefits has been raised time and time again. Of course there are proposals in the Bill to deal with the way in which over generous benefits may be provided for.
This, clearly, has been a difficult debate for my right hon. Friend and myself. I do not wish to hide that. We believe that we have an overwhelming and paramount duty to people of the type who suffered the difficulties which were experienced in 1974. We must co-operate on this. The Opposition have indicated that in general terms they support the principle. I hope that my hon. Friends will do likewise and that, with that measure of co-operation, we shall achieve a real degree of help for the type of policy holder about whom we are all profoundly concerned.