Orders of the Day — Friendly Societies Bill

– in the House of Commons at 12:00 am on 16 November 1984.

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Order for Second Reading read.

Photo of Mr Ian Stewart Mr Ian Stewart The Economic Secretary to the Treasury 9:35, 16 November 1984

I beg to move, That the Bill be now read a Second time.

The Government were advised in May this year that there were significant doubts about whether a number of friendly society contracts were enforceable at law. At the end of May 1 therefore announced that we would introduce legislation to protect the position of those who had entered into those contracts in good faith. The legislation would also prevent such doubts arising on future contracts, broadly by restoring the law to what it was previously understood to be.

The legal doubts concern the enforceability of some 300,000 life insurance contracts taken out before 1 June 1984 with certain recently formed friendly societies. The main problem was that the brochures advertising the contracts purported to confer benefits that were almost certainly greater than the statutory limits on tax-exempt contracts, and different in their nature from the types of contract admitted by the rules of the societies concerned. Doubts have also arisen about the way in which the limits should be applied in the case of assurance contracts in which the benefit was linked to investments, and about whether the surrender value of an annuity should be counted against the limit on gross sums. Those doubts apply to friendly societies generally and to the limits on taxable as well as tax-exempt business.

I shall refer to the material clauses of the Bill. Clause 1 deals with the particular problem that arose in respect of 11 societies registered since 1966. It removes doubts about enforceability of past contracts issued by those societies on account of additional terms being imported into the contracts by the way in which the contracts were advertised. The clause enables such additional terms to be disregarded in determining compliance with the statutory limits on friendly societies' tax-exempt life insurance business and in determining the validity of any contract to which the clause applies.

Clause 2 deals with a lesser problem identified for societies generally and redefines the provisions for the future so that the same problems will not recur. It does so by modifying the operation of the limits on an individual's entitlement to tax-exempt benefits from registered friendly societies. Increases in the value of a contract due to investment linking are to be disregarded for the purpose of the limits, in the same way as declared bonuses on with-profit policies are already disregarded. It ties the limits to the sums assured, thus avoiding the need to take account of surrender values. It applies those modifications with retrospective effect, thus removing doubts about existing contracts on both those counts. By abolishing the limits on taxable business, clause 2 also removes doubts about possible breaches of those limits in the past on similar grounds.

Most of the provisions that I announced in May will be in next year's Finance Bill. However, it was important to resolve the legal position without delay. The Government were therefore anxious to introduce the legislation as soon as possible in the Session. The Bill includes only those provisions that could have no place in a Finance Bill, primarily the validation of the existing contracts. The Bill is mainly technical. It is entirely helpful to friendly societies and their members. I therefore commend it to the House.

Photo of Dr Oonagh McDonald Dr Oonagh McDonald , Thurrock 9:38, 16 November 1984

The Bill applies to friendly societies, 4,000 of which were in existence long before 1966. Most are very small, set up during the past 100 years, and some have a longer history. They were working-class, self-help organisations. About 50 undertake taxable business—a very small proportion of that total—and may have about 2 million members between them. Eleven post-1966 societies were set up to undertake a different sort of business. When the limits on tax exempt business were increased in the Finance Act 1980, some friendly societies regarded it as an encouragement to do such business—societies were set up specifically to deal with such insurance policies. When the Government decided to change those limits in this year's Finance Bill, the activities of friendly societies attracted the attention of lawyers. They examined promotional literature and the policies that societies were issuing, and doubts about the validity of some policies arose. That is bound to happen when lawyers closely examine one's activities. No doubt they found uncertainties partly because of the rules of friendly societies.

As the Minister said, the Bill is welcomed by the friendly societies. I took the trouble to contact the National Conference of Friendly Societies to ensure that it was welcomed and that no further questions needed to be raised. The Bill will indeed settle uncertainty and doubt about some policies. A few of the doubts have been dealt with neatly as clause 1 simply excludes promotional literature from counting as part of the contract. Perhaps the same principle could be applied elsewhere.

I have only one point to make—I wish that the Government were prepared to deal with other issues concerning people's money and savings to exclude doubt and uncertainty and to remove the possibility of people losing their savings. I think, for example, of licensed dealers who are now allowed to sell shares over the counter. Shareholders have found that their shares have disappeared and that they have no recompense. The Government's energy and industry in bringing forward the Bill is to be commended. I only wish that they showed the same energy and industry in regard to dealing with abuse and uncertainty in money dealings that affect small investors and savers.

Photo of Mr Peter Griffiths Mr Peter Griffiths , Portsmouth North 9:42, 16 November 1984

I support what my hon. Friend the Minister and the hon. Member for Thurrock (Dr. McDonald) have said and I have no criticisms of the Bill. It is clear that political battle is not about to be joined. My hon. Friend said that we shall return to this matter in the next Finance Bill. Although the Bill, which deals with only a small part of friendly societies' activities, is to be commended, there is a case for my hon. Friend to consider the traditional role of friendly societies, especially in cities where there is a long tradition of a combination of skill and working people. That applies to Portsmouth, although it is in the bustling and relatively prosperous south, as much as to northern cities.

The pre-1966 societies have never engaged in the type of activities that the Bill covers. They have never regarded themselves as being in competition with insurance companies or in the provision of mortgages. They have always emphasised their philanthropic role and their aim of mutual self-help.

There are 2 million members of the pre-1966 societies—including 35 of the main societies—and none of them has ever engaged in activities that could be regarded as damaging to the Revenue. They have not sought tax avoidance or to skate on the edge of the law. Will my hon. Friend consider amending friendly societies legislation to ensure that pre-1966 societies carry on their traditional philanthropic role while the newer ones are regarded as what they are—insurance companies? They are not true friendly societies. I do not wish to labour the point but it is important that, when drawing up legislation such as this—which I am happy to support — we recognise the important social purpose that has been fulfilled for many decades by the traditional friendly societies. We should do nothing to weaken their role, nor should we tar them with the same brush as others whose purpose and activities are quite different.

Photo of Mr Ian Stewart Mr Ian Stewart The Economic Secretary to the Treasury 9:46, 16 November 1984

With the leave of the House, I should like to answer some of the questions that have been asked.

With regard to licensed dealers and securities, I hope that the hon. Member for Thurrock (Dr. McDonald) will wait for my right hon. Friend the Secretary of State for Trade and Industry's White Paper on financial services which will cover many issues relating to investor protection. I am grateful for her welcome for the Bill. The same is true of my hon. Friend the Member for Portsmouth, North (Mr. Griffiths). I shall consider what he said. I should like to add my own words of approval and support for the traditional friendly societies. The boundary between the pre-1966 friendly societies and later ones is not quite as clear cut as he suggested. Some of the Bill's provisions will also assist traditional friendly societies because of doubts about the application of the limits on investment linking — a problem met by all societies.

What I said about the Finance Bill 1985 was mentioned in my statement of 31 May. My comments are consequential on decisions in the Bill. They go no wider. I listened to my hon. Friend's comments with interest and shall consider what he said.

Question put and agreed to.

Bill accordingly read a Second time.

Bill committed to a Committee of the whole House.—[Mr. Donald Thompson.]

Committee upon Monday 19 November.