This group of amendments is mainly to do with flood insurance measures, and includes the Government’s response to the recommendations on flood insurance from the Delegated Powers and Regulatory Reform Committee. It also includes a small number of minor changes.
Lords amendments 70, 75, 81 to 83 and 91 to 95 are in response to the Delegated Powers Committee’s recommendations on the flood insurance measures. The amendments include changing the scrutiny procedures so that the affirmative resolution procedure is used for all regulations—in certain cases on first use only—and placing some definitions in the Bill.
We agree with the Delegated Powers Committee that the definitions are important. However, it was not possible to include all of them in the Bill as they require further consultation and, in the case of “relevant insurer”, have separate meanings for Flood Re and for the flood insurance obligation—the alternative proposal. By defining those terms in regulations that will be subject to the affirmative procedure, Parliament will be able to fully scrutinise these definitions in due course.
The Delegated Powers Committee also recommended that the powers to make regulations to provide for the sharing of council tax data should be subject to the affirmative procedure. However, to meet the commitment to establish Flood Re in 2015, we need to release the council tax information as soon as possible after Royal Assent to ensure that IT systems can be put in place. Lords amendments 77 to 79 place that data- sharing power in the Bill. I hope that hon. Members will see that that is necessary owing to the challenging timetable to deliver Flood Re. Lords amendments 74, paragraph (ab) to amendment 93 and amendment 100 make consequential changes based on the new power. Although that power does not mandate the release of data, the Government are committed to doing so. They also give a power to add to the list of data releasable in the future. If we do that, the powers also allow for the application of a criminal sanction—for example, where the additional information is of a particularly sensitive nature warranting the protection of a criminal sanction for misuse. It is right that we have powers to protect the release of public information, but the sanction is not automatic and we will consider whether one is necessary following consultation.
I wish to turn briefly to another Lords amendment on the subject of Flood Re’s reserves. To ensure that the power set out in clause 54 cannot compromise the sound operation of Flood Re and its orderly management, a small change was made to make it clear that the scheme administrator’s consent is to be sought first if regulations are proposed to be made requiring reserves to be paid to Government. That consent means that the scheme administrator is able to object to any prudentially unsound proposals, as well as to make representations on the retention of some or all of the reserves; consequently, there is no longer a need to consult the Prudential Regulation Authority as well. Members can be assured that the Prudential Regulation Authority will continue to be closely consulted on this and all other regulations made in relation to the Flood Re scheme.
Lords amendment 72 allows the Secretary of State to require Flood Re, through regulations, to provide information for relevant insurers to pass on to their policyholders who will benefit from Flood Re. We expect the information to cover the Flood Re scheme, flood risk and the actions householders can take to reduce the risk and impact of flooding.
I am intrigued by and interested in this amendment, not least because so many of my constituents—perhaps the majority of them—live in flood-risk areas. Will the Minister say a little bit more about what he envisages the Secretary of State will require to be provided to residents in terms of mitigating risk? This is an interesting idea, but my question is about the breadth of that information and whether it will include particular providers of certain solutions.
The first thing that will be taken forward is information that a policy has been ceded to Flood Re. It is important that people should know that, as the scheme has a life span and the whole direction of policy is to protect more homes and to move to a post Flood Re period in due course. What exactly that information will take forward is a matter for discussion with the industry. When it comes to particular technologies or particular things that may help in certain circumstances, there are experts out there who offer that advice to policyholders. The Government’s current repair and renew scheme is in operation. There is also a body of work out there involving local authorities, which is giving people confidence in what might be done to support them. It is not our intention to be too specific as we consider this measure in the Bill.
I am sure that, like my hon. Friend, other Members will welcome this amendment, because it reflects our belief that it is important that policyholders whose buildings, contents or combined insurance policy are ceded to Flood Re know about their flood risk so that they can take simple steps to manage it. I am talking about signing up to free flood warnings as well as investigating other longer-term options.
To plan for the future, households also need to understand the likely impact of the transitional nature of the Flood Re scheme which is subsidising their premiums. Members should note that it is expected that standardised information will be sent to the customer by the relevant insurer that is ceding the policy to Flood Re, as that maintains the relationship between insurers and their customers.
Lords amendments 84 and 85 provide the power to define in regulations the meaning of “flood” and “flood risk” and are as a consequence of the amendment that I have just described.
Lords amendment 96 addresses the risk that secondary legislation made at the end of the life of Flood Re could be classed as hybrid. I can assure Members that, in any event, we have every intention of carrying out a full consultation before making that secondary legislation to ensure that any private interests are properly considered.
There are also a small number of technical changes made by the Lords amendments to the Bill. They cover the definition of the “eligibility threshold” and are intended to ensure the flood insurance measure is legally enforceable, as the risks relating to flooding are not calculated consistently across the various insurers.
On another matter, the Lords amendments to clauses 56 and 71 on the period of operation of Flood Re ensure that employment contracts within the scheme are transferrable.
Turning finally to the subject of sustainable drainage systems, we have also corrected an error to schedule 3 to the Flood and Water Management Act 2010 to ensure that unused bond funds, called in by a SUDS approving body, can be returned to the right person.
As the Minister has explained, this group of amendments relate to the provisions in the Bill on flood reinsurance. Again, we will support the amendments, which we believe have materialised primarily because of pressure from a wide range of Members in the other place and from the official Opposition. However, we believe that more could have been done.
In many ways, this is yet another example of a missed opportunity to produce effective and robust legislation. We support the Flood Re scheme and believe that it is important that affordable cover is made available for those who are struggling and are at greatest risk from future floods. It is also important that the policy should be underpinned by the principle of minimal impact on wider bill payers, so it is important that the levy agreed between the Government and the industry remains equivalent to about £10.50 for each UK household with both buildings and contents insurance in place.
We also welcome the fact that Flood Re is designed to be progressive, with the benefits targeted on lower income households, but we are disappointed that the Government could not support Labour’s amendment in the other place, which would have at least enabled parliamentarians to shine a light on the potential problems created by the arrangements for leasehold and tenanted properties. As Lord Whitty pointed out, there are complicated qualifying or excluding conditions surrounding the ownership and occupation rules under the scheme.
The rules could also have an impact on the private rented market, as there is a fear that single property landlords, for instance, might find that their exclusion from the scheme means that the cost of insurance eats away at their capacity to invest in their properties. As Lord Whitty pointed out, the consequence could be increasing levels of dilapidated housing stock with potential impacts at a neighbourhood level. The only option that might be open to the landlord to raise funds for improvements could be to raise rents or the service charge, so tenants might suffer indirectly as a consequence of being excluded from the Flood Re scheme. The risk is clear: the number of new landlords prepared to invest and buy property will diminish in the areas that are affected. Given the housing crisis facing the country, that is not a welcome prospect.
Although we recognise that the actuarial calculations for Flood Re are delicate and depend on various assumptions, we feel it is important that Parliament understand the position. Labour’s amendment would address that by ensuring that a report was made available so that Parliament could see for itself the consequences of including or excluding different combinations of property before taking the Flood Re scheme forward via statutory instrument.
We also feel that the Government have failed to grasp the importance of using reliable scientific evidence on the potential impact of climate change when making estimates of the current and projected number of properties eligible for inclusion in the Flood Re scheme. That is perhaps not surprising, given that the Secretary of State has been known before now to deny the reality of climate change, but the threat, as most of us agree, is real and we need to be sure that the scheme will operate effectively within its 25-year span and will be adaptable to weather conditions resulting from climate change. If they are to adapt effectively, it is crucial that households can access information that identifies current and projected estimates of the number of people eligible for the scheme.
It is entirely sensible that we should seek the advice of the Committee on Climate Change to inform as accurately as possible our calculations on the challenges that the Flood Re scheme will face over time. Only then can households truly take the necessary action to minimise risk. The Government have tabled amendments providing information on transitioning from Flood Re to risk-reflective pricing, which Labour has been arguing for throughout the passage of the Bill.
Flood Re cannot operate on a static basis. It needs to respond to changing weather patterns, and we continue to believe that the Secretary of State should take advice from a credible expert source. Lord Krebs, chair of the adaptation sub-committee, has indicated that he would be willing to take on that role. However, our amendments, along with others on access to the national database and the right to appeal, were not accepted by the Government. We think that is short-sighted, but we support the amendments in this group and will continue to engage positively on this important issue.
When we took evidence on the insurance aspects of the Bill during the Select Committee’s scrutiny stages, we were told that the package on Flood Re stood as a whole and that we could not consider any exceptions—not small businesses or leaseholders, or anything else, and certainly not band H. I hope that my hon. Friend the Minister will permit me a wry smile as I see that some of those exceptions have been included.
I hope that my hon. Friend will clarify the position on leaseholders. I—like many others, I am sure—have been contacted by constituents asking me to consider the implications for an owner who buys a leasehold property, as my constituents did in their block of flats. Apparently, the cost under Flood Re of the flood insurance alone will run to thousands of pounds, which they cannot afford and which they believe will affect their ability to resell those properties. I would be grateful for an explanation of where we are on that.
I understand that my noble Friend Lord de Mauley confirmed in the other place that domestic contents policies will be available to all under Flood Re, regardless of whether the properties are leasehold or freehold, rented or owned-occupied, except for properties in band H and those built since
Will my hon. Friend the Minister confirm the intention behind the exception for band H properties? It seems bizarre. We are going to exclude from Flood Re leaseholders who are perhaps on lower incomes and often in smaller, more affordable properties, but people in band H tend to be wealthier and in a better position to afford insurance. I want to understand the situation so I can explain to my constituents why these exceptions have been considered.
I know that the date of
It would also be helpful to understand the position for small businesses, particularly farms. If the farmhouse itself has been flooded, will that be covered in the provisions of Flood Re?
The greatest concern—I am sure the Minister will recall that I raised it earlier—remains that the Government may end up as an insurer of last resort because Flood Re will not cover a one-in-200-year or one-in-250-year event. We found out that the winter floods in 2013-14 were a one-in-200-year event, so it will be sooner rather than later that the Government will end up as the insurer of last resort. The House will be interested to learn what provisions the Treasury has in place if that occurs earlier than might have been assumed, because there will not be money in the pot if the winter floods are repeated in the autumn of 2014 and 2015.
Angela Smith raised an interesting issue that we discussed in Committee. The evidence we took was that the subsidy was then £8.50. It has already gone up to £10.50, and we need an assurance from the Minister that there will not be an open remit to the insurance industry and that the level of subsidy will be reasonable. Before the Bill leaves this place today, the Minster should comment on what the Treasury has in place were the Department and the Government to be an insurer of last resort.
I have two more issues pertaining to this group of amendments. One concerns regulated as opposed to negotiated access. Amendments were proposed to make it clear in the Bill that access should be regulated, not negotiated. The amendments were unsuccessful, but I understand that the Department has given a commitment that access terms should be regulated. Can the Minister give a commitment today that that will be in the regulations that will give effect to the Bill?
An issue that caused great concern in our pre-legislative scrutiny in Committee and later was the de-averaging of charges. Concern was raised about the risk of a competition or EU challenge to the Department’s guidance or Ofwat’s implementing rules on harmonised or regionally averaged wholesale charging, which could result in a forced de-averaging of charges. My understanding is that that could be seriously bad news for rural areas and I would like the Minister to put my mind at rest. Amendments were proposed to address that risk, but the Government did not accept that the risk existed or, if it did, that the existing provisions in the Bill were not adequate to address it. Any de-averaging of charges that might arise through application of the Bill would be highly regrettable.
Otherwise, I welcome this group of amendments, but I hope that the Minister can put my mind at rest on the concerns I have raised.
I intend to make only a short contribution. The Minister probably heard most of what I said in Committee, but if something is worth saying once, it is worth saying three times, so I will do so.
I begin, as I did in Committee, by welcoming Flood Re, which is important. I pay tribute to the Government for getting us here eventually. It is incredibly important for my constituents and those of my near neighbour, my hon. Friend Mr Stuart, who is here for this important debate. I am grateful and delighted that we have a scheme up and running to ensure that insurance cover will continue.
I am still concerned about the scheme’s limitation to properties built before 2009—a point that is often made by my constituency near neighbour, Diana Johnson. Many people in my constituency and constituencies nearby who bought their properties in good faith post-2009 have struggled to obtain insurance. I am still concerned that major developments on flood plains are continuing, including the Lincolnshire Lakes project near the River Trent in my constituency, where the proposal is to provide up to 10,000 properties in a major flood risk area on the River Trent’s natural flood plain. I have called on the developers to put a hold on that until we know where we are with flood defence funding for the Humber catchment area, but unfortunately that has not enjoyed the support of local Labour councillors, who accused us of scaremongering in trying to prevent that building on a flood plain. That is a concern because I am worried that the properties will be built but will not be covered by Flood Re and that there will be a whole set of other problems.
When I was in my constituency on Friday, visiting Hook church, which was launching its new heritage boards, I was approached by a single-property leaseholder who is concerned about whether he will qualify for Flood Re. He is not a major investor, but an individual who is using the property as a pension pot. He has been rejected for flood insurance yet again because of the flooding in Goole two years ago, and he is worried that he will not come within Flood Re. I echo the words of my hon. Friend Miss McIntosh about the need for clarity.
I welcomed amendment 72 when I intervened on the Minister. Informing residents that they are indeed part of Flood Re and providing practical advice on their exact flood risk and how they can deal with it are important. The Minister mentioned the renewal and repair grant, which is an excellent proposal. Providing people with the means and advice on how to protect their properties is important, and funding is required. Whether or not there is funding, there is a big job to be undertaken to ensure that residents are properly informed about their flood risk and how they can protect their properties.
Many residents have it in mind that the only way to protect their property is through every-increasing defensive banks in our area, and that may be true, but it is not the answer to everything, particularly as my constituency is so low-lying. Much of it is below high-tide level, so it is impacted not only by tidal and river flooding, but by surface water flooding. Getting information to residents to ensure that they know how to protect their property is vital. I welcome amendment 72 and look forward to establishing in more depth what information will be provided on flood mitigation measures.
The Minister mentioned the renewal and repair grant. I hope that it is in order, Madam Deputy Speaker, to raise that while I am on my feet. Many of my constituents are trying to use the grant, but there seems to be confusion about whether they will be able to access it if the Environment Agency has come up with community improvement schemes. That is a particular issue for one of my communities because the Environment Agency, after pressure from many of us, has come forth with a scheme that will be in place next year to raise defensive banks at Reedness in North Yorkshire. It is not now clear whether those properties will be eligible for a renewal and repair grant. They will still be at risk of flooding and, in the spirit of amendment 72, which is about providing people with more information on how to protect their properties, it is important that they still have access to the grant. It is not their fault that their improvement scheme will come forward more quickly than other schemes. I hope, Madam Deputy Speaker, that I am in order by linking the matter to amendment 72. I can see from that near-thumbs up that I am straying, so I shall move on.
Right of appeal is another issue that I spoke about in Committee. We need a mechanism of appeal for residents who are judged to be outside Flood Re. We know from the debates in Committee and elsewhere that that will be a very small number of people, but they are an important group all the same. It is important to have a mechanism that allows people to understand why have they have been drawn outside the scheme, and that they should have a right of appeal. Like my hon. Friend the Member for Thirsk and Malton, I ask Ministers to consider this.
I do not want to say much more. [Interruption.] I hear some chuntering from Opposition Front Benchers—in support of my last comment, I hope. If Angela Smith wants to intervene, I will gladly give way. No? Okay.
The hon. Lady tells me to sit down; that is a good way to work cross-party, if ever there was one. I will heed her advice, however.
I hope that the Minister will be able to respond to those few comments, particularly on leaseholders. This is an important issue for residents who have made small investments for their pension pots, or in lieu of a pension pot, and who may now be drawn outside the scheme. Other than that, I support the scheme and the amendments outlined by the Minister.
I thank all hon. Members who have contributed to this debate, across a broad range of issues, and welcome their questions.
All three Members who spoke mentioned leaseholders. Let me put on record again the point alluded to by my hon. Friend Miss McIntosh. All contents policies would be eligible for Flood Re, whether leasehold, freehold, rented or owner-occupied, provided that the properties were built before
My hon. Friend says that the scheme applies if there are no more than three flats in the building. Where we lived—the current residents now have the problem—there could be 12, 16 or 20 properties. These are small properties that tend to be more affordable and occupied by those with a mortgage. Residents have put it to me that the increases are unaffordable already. Insurance companies are extracting those increases from them when they renew their insurance policies in an area that they know has already been flooded at ground-floor level because of the properties’ proximity to the river. I urge the Government to revisit this, because it is not acceptable. I do not want to pander to the Opposition’s argument about the standard cost of living, because that would be inappropriate, but I do believe that the Government should make the insurance affordable by reducing the cost. They should take out the below-three number because they have to reflect what working families are living in.
We believe that a significant proportion of the leasehold sector will fall within the scope of Flood Re if the properties are at the highest levels of flood risk. I should emphasise, however, that we expect that most properties will not need to be in Flood Re and will find better prices through normal routes. We have been assured that there is no evidence of a systemic problem with freeholders being unable to obtain insurance for their leasehold properties. Specifically, feedback from members of the Association of British Insurers, representing over 60% of the market, including specialist commercial property insurers, showed no expectation of a widespread issue in an open market. As for the small businesses that are outside the scope of Flood Re, we and the ABI will monitor the market over time.
My hon. Friend the Member for Thirsk and Malton raised a number of other issues, including small businesses, as she has done before. It is important to focus on the fact that the scheme is for residential properties, not for the commercial insurance market. Commercial cover tends to be far more bespoke and of a different nature to the policies that householders usually have. This is relevant to her point about the levy that is paid into the pot. In seeking to add to that pot in terms of what is paid out and the level of risk, we would have to add to what everyone else is paying for. We think that the balance is right and that the level of a more transparent cross-subsidy—there is already a cross-subsidy within the market that has been more hidden—is focused on household policies and not on commercial policies. The danger is that, once we start to get into the more commercial arena, we are then asking for a cross-subsidy from householders to commercial landlords. We therefore think it important to draw this line. Landlords already benefit from tax relief on the cost of their buildings insurance policies. They can offset many of their costs through taxable allowances that can significantly reduce their tax bill—to zero, in some instances. Angela Smith referred to this being more progressive, and I welcome her support. That is one of the reasons why we have had the scheme structured as it is.
My hon. Friend Andrew Percy mentioned properties built after
Flood Re will be an authorised insurer operating under the requirements of solvency II. Insurers must hold capital reserves that can be used to cover the cost of a catastrophic event. To assess the required capital reserves, insurers must keep their detailed catastrophe models up to date, including any changes in levels of insured risk such as from climate change. Flood Re will need to take account of climate change as part of its regulatory obligations in ensuring that it remains solvent over time. We therefore expect it to seek the best available advice on climate change, including external verification of its assumptions. Detailed audited information about Flood Re’s ongoing operation will be reported to Parliament on a regular five-yearly basis. Parliament will have the opportunity to vote on the levy and the eligibility thresholds of the scheme. I assure colleagues that the impacts of climate change will be considered during the entire lifetime of the scheme to ensure that Flood Re is resilient to changes to flood risk.
I would like to reassure my hon. Friend the Member for Thirsk and Malton about one-in-200-year events and what we experienced during the winter flooding this year. Although she may be right to point out that we had the wettest January in about 250 years, that does not equate to a one-in-200-year flood event; they are different things. As we have heard from hon. Members in several debates over the past few months, the effects of flooding are extreme for the families and businesses affected, but because about 8,000 properties were affected during the recent winter floods, we were nowhere near triggering the sorts of events that she mentioned. Should a one-in-200-year event occur, however, we have been clear that the Government have no direct liability. The Government would take primary responsibility for deciding how all available resources would be used, but the Government are not an insurer of last resort in that they do not have financial liability for Flood Re.
Will my hon. Friend hark back to the evidence the Select Committee heard from the insurance industry during pre-legislative scrutiny? We were told categorically that, if there is a one-in-200-year event, the pot into which the subsidy will be paid, on which we all agree, will not be sufficient to pay out the resources, and it is generally accepted by the insurance industry that the Government will step in. Perhaps that is a different phrase from the one that my hon. Friend might use, but it means that the buck stops with the Government.
We have been absolutely clear that, in such an event, the resources from the Flood Re pot would be significant and the Government would be involved in discussions about how that money would be used to help the people affected.
Although we have been focusing on Flood Re, my hon. Friend also asked about de-averaging. I want to use this opportunity to put on the record the fact that the Government’s charging principles on de-averaging are unambiguous. Ofwat must not allow de-averaging that is harmful to customers, particularly rural customers. Our charging guidance will follow soon. I am happy to commit, as I have before, to making it plain in that document that there must be strong, definitive boundaries for the scope of any de-averaging and that households in particular must be protected.
We should not, however, be over-simplistic. There is no doubt that there are areas where better cost reflectivity could have substantial benefits for the environment and the resilience of our water supplies. It must be right that the new upstream markets should reflect the environmental costs of supply and that there are economic incentives for business users that use large volumes of water.
My hon. Friend the Member for Brigg and Goole asked about the operation of current Government grant schemes. It might not be appropriate to go into that in detail now, but I would be happy to respond to correspondence from him on the specifics of how the scheme in his area is working.
I thank hon. Members for their contributions to our debates on the Bill today and at various other stages in this and another place. I hope that the House will agree with their lordships’ amendments.
Lords amendment 67 agreed to.
Lords amendments 68 to 100 and 105 and 106 agreed to.