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With this, it will be convenient to discuss the following:
Government amendment 2.
Government new clause 1—The Flood Reinsurance Scheme—
‘(1) For the purposes of this Part, the Flood Reinsurance Scheme is a scheme which—
(a) is established for the purpose mentioned in subsection (2), and
(b) is designated for the purposes of this Part by regulations made by the Secretary of State.
(2) The purpose referred to in subsection (1)(a) is the purpose of providing reinsurance to relevant insurers in respect of such risks relating to flooding as are identified by the scheme, in such a way as to—
(a) promote the availability and affordability of flood insurance for household premises while minimising the costs of doing so, and
(b) manage, over the period of operation of the scheme, the transition to risk-reflective pricing of flood insurance for household premises.
(3) Subsection (5) applies where the terms of the FR Scheme governing the availability of reinsurance under the FR Scheme for an insurance policy include a requirement as mentioned in subsection (4).
(4) The requirement is that the part of the premium for the policy which is attributable to risks relating to flooding does not exceed a specified amount (“the eligibility threshold”).
(5) The Secretary of State may by regulations make provision as to the level of the eligibility threshold, and may make different provision for different purposes.
(6) Regulations under subsection (5) may, in particular, make different provision for different insurance policies by reference to the value of the household premises to which a policy relates.
(7) In this Part, the Flood Reinsurance Scheme is called “the FR Scheme”.’.
Amendment (a) to Government new clause 1, line 23, at end add—
‘(8) Prior to making any regulations under subsection (5) the Secretary of State shall require the Committee on Climate Change to provide current and projected estimates of the number of properties that would be eligible for—
(a) inclusion in the Flood Reinsurance Scheme;
(b) the value of levy required under section [Schemefunding]; and
(c) the likelihood of additional levy or contributions being needed from time to time.’.
Government new clause 2—Scheme administrator.
Government new clause 3—Scheme funding.
Government new clause 4—Scheme administration.
Government new clause 5—Replacement of the scheme or administrator.
Government new clause 6—Disclosure of information: preparatory purposes.
Government new clause 7—Flood insurance obligations—
‘(1) The Secretary of State may by regulations require a relevant insurer to issue in a prescribed period insurance policies that provide cover against a prescribed description of risk for a prescribed number of registered premises.
(2) The regulations may prescribe different numbers of registered premises for different descriptions of risk.
(3) The descriptions of risks that may be prescribed are those relating to the effects of flooding.
(4) The regulations may provide for a prescribed number relating to a relevant insurer to be determined by reference to factors that include in particular—
(a) a target number (see section (Flood insurance obligations: target number));
(b) the relevant insurer’s share of insurance business of a prescribed description.
(5) The regulations may—
(a) make provision about determining the size of a relevant insurer’s share of insurance business of a prescribed description;
(b) provide for a relevant insurer to be exempt from the obligation described in subsection (1) in prescribed circumstances, whether wholly or so far as regards a particular description of risk, including circumstances relating to the amount of insurance business done by the relevant insurer;
(c) make provision about the circumstances in which a relevant insurer ceases to be subject to the obligation described in subsection (1), whether wholly or so far as regards a particular description of risk;
(d) make provision about the cases in which issuing an insurance policy is not to count towards discharging an obligation imposed on a relevant insurer by the regulations, including cases in which an insurance policy is not to count because of the content of its terms;
(e) make provision for allowing an insurance policy issued by another insurer to count towards the discharge of an obligation to issue a number of insurance policies imposed on a relevant insurer by the regulations;
(f) make provision about determining the number of registered premises for which a relevant insurer has issued insurance policies, including provision for varying, by reference to the risk band applicable to the particular registered premises, the extent to which insuring those premises counts in determining that number.
(6) Provision under subsection (5)(a) may require an insurer, in determining the insurer’s share of insurance business of a prescribed description, to use information about that insurance business held by—
(a) the Secretary of State,
(b) a person acting on behalf of the Secretary of State, or
(c) the FCA.
(7) Subsection (5)(e) is not to be taken as requiring a change in the person who is the insurer in relation to an insurance policy.
(8) Regulations under this section may include provision in respect of cases where an insurer has not provided such information as is required by regulations under section (Flood insurance obligations: information) including—
(a) provision for determining whether the insurer is a relevant insurer,
(b) provision for determining whether an exemption applies, and
(c) provision for determining what share of insurance business of a prescribed description the insurer is to be treated as having.
(9) Before making regulations under this section, the Secretary of State must consult such persons as the Secretary of State considers appropriate.
(10) In this section “prescribed” means specified in or determined in accordance with regulations under this section.’.
Amendment (a) to Government new clause 7, line 35, at end insert—
‘(g) make provision about the circumstances in which a relevant insurer may require mitigation activity to be a condition of cover under an insurance policy.’.
Amendment (b) to Government new clause 7, line 35, at end insert—
‘(g) make provision about the circumstances in which a relevant insurer may require an insured to retain certain elements of the risk under the Flood Reinsurance scheme.’.
Amendment (c) to Government new clause 7, line 35, at end insert—
‘(g) make provision about the circumstances in which a relevant insurer must build awareness of flood risk amongst those living in high risk households.’.
Government new clause 8—Flood insurance obligations: target number—
‘(1) The Secretary of State may, from time to time, by regulations prescribe a number to be a target number for the purposes of regulations under section (Flood insurance obligations).
(2) A target number is the number of registered premises to be covered against a prescribed description of risk by insurance policies issued in a prescribed period by those relevant insurers upon whom obligations are imposed by regulations under section (Flood insurance obligations).
(3) The regulations may prescribe different target numbers for different descriptions of risk.
(4) The regulations may in particular provide for a target number to be expressed as a percentage of the number of registered premises.
(5) The regulations may, at any one time, prescribe target numbers for two or more consecutive prescribed periods.
(6) In this section “prescribed” means specified in or determined in accordance with regulations under this section.’.
Amendment (a) to Government new clause 8, line 15, at end add—
‘(7) In prescribing a target number the Secretary of State shall refer to the advice of the Committee on Climate Change given under section [The Flood Reinsurance Scheme](8).’.
Government new clause 9—Flood insurance obligations: information.
Government new clause 10—Flood insurance obligations: further provision.
Government new clause 11—Register of premises subject to greater flood risk.
Government new clause 12—The register: further provision.
Government new clause 13—The register: reviews and appeals.
Government new clause 14—The register: expenses of relevant bodies.
Government new clause 15—Compliance reports.
Government new clause 16—Functions of the FCA.
Government new clause 17—Reports by the FCA.
Government new clause 19—Interpretation.
Government new clause 20—Period of operation.
Government new clause 21—Regulations and orders.
New clause 37—Right of appeal for households on removal from the flood reinsurance scheme—
‘(1) The Secretary of State shall by order establish a right of appeal for a household which has been removed from the Flood Reinsurance Scheme.
(2) The Financial Conduct Authority shall be responsible for the hearing and administration of appeals under subsection (1).
(3) An order under subsection (1)—
(a) shall be made by statutory instrument; and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(4) An order under subsection (1) must be made before the Flood Reinsurance Scheme has been implemented.’.
New clause 38—Flood reinsurance scheme: report on properties—
‘(1) The Secretary of State must prepare and publish a report on—
(a) how many properties are not eligible for the Flood Reinsurance Scheme; and
(b) the cost of including properties under (a) in the FR scheme prior to it coming into effect, and must lay a copy of the report before Parliament.
(2) The report shall include a breakdown of the cost of including properties that fall under the category—
(a) Council Tax band H;
(b) built between 1 January 2009 and 31 December 2012; and
(c) built after 1 January 2013.’.
New clause 39—Flood reinsurance scheme: council tax band—
‘(1) The Secretary of State shall by order enable low income households to qualify for the Flood Reinsurance Scheme, regardless of their Council Tax band.
(2) An order under subsection (1) shall contain a definition of “low income households”.
(3) An order under subsection (1)—
(a) shall be made by statutory instrument; and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(4) An order under subsection (1) must be made before the Flood Reinsurance Scheme has been implemented.’.
New clause 40—Flood Reinsurance Scheme national database—
‘(1) The Secretary of State may by order (the “commencement order”) appoint a day on which section [The Flood Reinsurance Scheme] is to come into force.
(2) An order under subsection (1)—
(a) shall be made by statutory instrument; and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(3) The Secretary of State may only make an order under subsection (1) if a Flood Reinsurance Scheme national database has been established.
(4) Any Flood Reinsurance Scheme national database must—
(a) be accessible by the public;
(b) outline a property’s risk of flooding; and
(c) indicate if the property is covered by the Flood Reinsurance Scheme.’.
It is a pleasure to serve under your chairmanship once again, Mr Gray. With your permission and the permission of the Committee I should like first of all to discuss clause 47, the placeholder clause, and then move on to the Government new clauses.
Members of the Committee will recall that when the Water Bill was introduced to the House on 27 June it included a placeholder clause on flood insurance. The purpose of the clause was to ensure that the scope of the Bill was wide enough to allow us to introduce full flood insurance clauses by Government amendment following a public consultation over the summer.
Thank you for your guidance, as always, Mr Gray. I hope my dress is appropriate. [ Interruption. ] There may well now be interventions to give me sartorial advice, but I will move swiftly on.
As Members are aware, the Government have tabled a number of new clauses to the Bill. New clauses 1 to 21 set out our legislative approach for the new arrangements for flood insurance following the expiry of the voluntary agreement between the Government and the insurance industry. They replace the placeholder clause 47 in its entirety, so the clause is no longer needed. The Government therefore oppose the clause standing part of the Bill.
I will now set out at some length—with due apologies to the Committee—the thinking behind and argument for our approach as set out in the new clauses. I am delighted to introduce the new clauses on flood insurance, which were much anticipated on Second Reading. Colleagues from across the House were broadly supportive of the proposed approach and are, I know, looking forward to debating the detail of the new clauses in Committee.
The new clauses set out the future arrangements for flood insurance following the expiry in June 2013 of the voluntary agreement—called the statement of principles—between the Government and the members of the Association of British Insurers. We are seeking powers to establish a not-for-profit reinsurance scheme called Flood Re. We are also seeking powers in reserve to regulate for affordable cover if Flood Re should prove to be unworkable or not deliver our policy goals and if prices in an open market prove unacceptable. Having a fallback means that customers can have confidence that the issue will be addressed in one way or another. In the mean time, insurers have voluntarily agreed to continue to abide by their commitments in the statement of principles until Flood Re can be introduced.
We have always been clear that the only sustainable approach to managing flood risk is to move gradually towards more risk-reflective prices in order to increase the incentives for households and communities to manage their flood risk.
I apologise for bringing this up so early in my hon. Friend’s speech, but I am due to leave the Committee temporarily. I know that small businesses are not included in the Flood Re programme. What about domestic small businesses such as bed and breakfasts? Will they be included?
The approach that we have taken, which has been agreed with the insurance industry, is that we will base the new Flood Re system on council tax bands. Therefore, any business based in a property that is primarily a residential property, and on which the occupier therefore pays council tax, will come into the system. Any business based in premises used primarily for business will not be covered. An example might be a farm business. If council tax is payable on the residential property—the farmhouse—that will be covered, but barns and outbuildings, which may be subject to a business rate, will not be covered. That is how the system will operate. I thank my hon. Friend for giving me the chance to clarify that.
I am grateful to the Minister for giving way so early in his speech. While he is on the subject of banding, can he set out how the scheme will work in practice, given that four nations will be covered by Flood Re, each of which has its own variations on how it approaches local government valuations?
We will have the opportunity to return to these issues, but in England and Wales there are council tax bands. Wales has a band I due to the revaluation there, so the hon. Gentleman is right to point out that there is a slight difference. However, in the agreement, we have set the boundary at band G, so bands H and I will be excluded. Scotland has council tax bands, so the scheme will carry on there. The approach in Northern Ireland is slightly different—he and I have antecedents who will be looking down on us at this point. Northern Ireland has a system of rateable value, so an assessment will be made of council tax banding based on valuation, which will allow an equivalent system to be drawn up.
I do not wish to keep the Minister longer than I must. Can he confirm whether he intends to discuss the approach in more detail later in his speech, or would he prefer that I tease it out of him now?
I think it would be helpful for me to set out the broad principles, and then we can return to that issue. I am more than happy to address any particular concerns, and if they are so technical that I am unable to share advice with the hon. Gentleman now, we can proceed either via inspiration, which we have found to occur from time to time, or subsequently in writing, if he is happy with that approach. However, I will see what his requests are when we get to that point. I thank him for his intervention.
To return to the issue of risk-reflective prices, we want the system to increase incentives for households and communities to manage their flood risk. However, there was a risk that the expiry of the statement of principles could lead to sudden shifts in pricing and cause hardship for those at a higher risk of flood. That is why we are introducing measures to help those at risk in the medium term. We want to ensure that transition takes place in an orderly and equitable fashion. That message emerged clearly from the consultation, so we have strengthened the provisions in that respect.
One of my concerns is that perhaps we are being too soft on the insurance companies and that basically they are handing over the risk to the fund and potentially the Government, so what would happen at the time of a major flood if the fund was to run out? Will the Government not still be the insurer of last resort?
I will discuss later what will happen if there are particular demands on Flood Re, especially in its earlier period of operation, when the levy is building up its fund, but we are clear—I will put this on the record now for the benefit of my hon. Friend and the rest of the Committee—that there is no Government liability for Flood Re. As I have said before, the UK has a multi-billion-pound, world-leading insurance industry and we believe that it has the ability and the financial strength to resolve this issue without calling on hard-pressed taxpayers, so I can reassure my hon. Friend the Member for Tiverton and Honiton on that account.
Concern has been expressed that future trends, including impacts of climate change, have not been adequately considered. In fact, both Flood Re and the flood insurance obligation are designed to adapt to changing risk. For example, no firm limits have been set on the numbers of policies that could be covered under Flood Re. Our impact assessment makes assumptions about likely numbers, which I will come to later.
The Minister makes some very interesting points, but with regard to climate change, the intention, as I understand it, is to include pre-2009 properties, which are “uninsurable”. Given that, to some extent, “uninsurable” is a moving goalpost because of climate change, how will he define it and where will he define it? Will it be in the Bill or in subsequent legislation?
We will have the opportunity to explore the concept of uninsurability, if I may call it that, at a subsequent time. Essentially, the principle is that there are no households that would be excluded—we heard some evidence on this from the ABI—but over time Flood Re may develop an approach for properties that flood very frequently, and that is where the concept of uninsurability will come in.
I am not seeking to take away from the Minister’s speech, but going back to the point made by the hon. Member for Newton Abbot, I recall that we heard evidence from the ABI that in fact 14,000 properties would be outside this scheme—properties that were built before 2009 and are not in band H—so perhaps the Minister can get some inspiration as to whether that is the correct position.
These are estimates of properties that might be at very high flood risk or repeat risk of flooding, but as the scheme starts, properties will be included. It is only if the flood risk is developed that we move forward.
As I said, no firm limits have been set on the numbers of policies that could be covered under Flood Re. Our impact assessment makes assumptions about likely numbers, which I will come to a little later. The design of the flood insurance obligation—the fall-back policy—builds in incentives for the highest-risk households to reduce their risk in order to become more attractive to insurers seeking to meet their quotas. However, I should emphasise to hon. Members that our policies are there to smooth a transition to risk-reflective pricing, not to act as a permanent intervention in the market.
The action that we are taking on flood insurance is only part of the story. The Government are spending record amounts on managing the risk of flooding. Events last week showed how effective our flood protection systems can be, with our early warning systems and defences protecting up to 800,000 properties. Of course, there were some very difficult circumstances in areas that did flood, but looking at the evidence, when compared to previous very high tides such as in 1953, the Environment Agency has estimated that up to 800,000 properties were protected as a result of defences that have been installed and maintained since that time. On Sunday, I saw for myself the positive impact that our policies have had at Jaywick in Essex, which was devastated in 1953 but was saved by its defences last week. In investing in these defences, Government take account of the changing risk of flooding and coastal erosion caused by climate.
I will start by setting out our proposals on Flood Re—new clauses 1 to 6. The Flood Re scheme would effectively limit the amount that most households should have to pay for flood insurance, providing the certainty that I know my constituents, and other hon. Members’ constituents, will seek on their insurance bills. That will deliver for the first time both availability and affordability for people in high-risk areas and is an improvement on the statement of principles.
New clause 1 would give the Secretary of State the power to designate a flood reinsurance scheme once it has been established by the insurance industry. It also provides the Secretary of State with powers to set eligibility thresholds or effective limits for premiums for the flood insurance part of a policy.
Flood Re will have a duty to promote the availability and affordability of flood insurance for domestic premises by making reinsurance for flood risk available to all insurers that underwrite domestic buildings and contents insurance policies in the UK. Flood Re will also manage the transition to more risk-reflective pricing over the period of operation of the scheme.
New clause 4(3) would provide Government with the powers to introduce a requirement on the scheme administrator to manage this transition and to publish a plan setting out how that will be achieved. Flood Re would target support towards those who need it most, helping those who are particularly challenged by the cost of living. We have debated that in relation to the rest of the Bill and I know it is a real concern for hard-pressed families.
Premiums would differ according to council tax bands, or their equivalent in the devolved Administrations, and people would know the maximum they could be asked to pay on the flood risk part of their insurance premium, as well as on excesses, should they have to claim. We do not want people to live in fear of being unable to afford their insurance.
We anticipate that around 500,000 high-risk households could benefit from the flood reinsurance scheme, and pay less for their insurance than they might otherwise. The price of a high-risk combined buildings and contents policy would be about £720 per year for a band C household. While that might be higher than some high-risk households are paying now, without Flood Re, such policies could be well over £1,000.
I want to tease out of the Minister that estimate of half a million. I think this is the first time we have had that figure in front of us. I know that it was not in the letter he helpfully sent me yesterday. Could he say a little more about how that figure of half a million homes was reached?
In all these issues, we are guided by those in the industry who have the information at their fingertips. I know that the hon. Gentleman is concerned about the accessibility of that information. That is an issue we will discuss later; it is a good point. Alternative estimates have been made, for instance by the British Insurance Brokers’ Association, that were slightly lower. In all of this we have been in discussion with the Association of British Insurers who, we feel, have the most up-to-date information, and that is where the figure of 500,000 came from.
Unlike the statement of principles, which effectively tied a customer to a particular insurer, customers would be free to shop around to get the best overall deal from an insurer of their choice. That is an important step change.
During scrutiny of the Bill I have occasionally been slightly critical of the Government. On this occasion I want to make it clear that we have negotiated a good deal on affordability for those seeking insurance. It is not simply a case of whether people can get insurance; it is whether they can afford it, so that insurance companies do not hype the risk and hike up premiums with it.
I am pleased my hon. Friend feels that and is not shy in holding Government to account, as other hon. Members do when they feel we have further work to do on developing a policy. He is right, hence the concentration on council tax bands, which assumes that those with properties in the lower bands would perhaps have lower incomes. Affordability is an important question, and I am grateful to him for drawing further attention to it.
On the subject of householders being able to shop around for the best deal from insurers of their choice, a household policy would be ceded to Flood Re only if the flood insurance element of their premiums would otherwise have exceeded the limit for their council tax band if offered at market price. That is the trigger for moving into the system.
We are absolutely clear that helping high-risk households must not lead to unfair price rises for others. The Association of British Insurers has assured Ministers that Food Re can be introduced without impacting customer’s bills in general, and there will be no liability for the Government or the taxpayer from the scheme. I want to emphasise that point to my hon. Friend, who raised the issue earlier.
We have been explicit that the Flood Re scheme is designed to cover risks and pay out reinsurance claims only if a flood exceeds a one in 200 year event. To put that in perspective, a one in 200 year event would be six times worse than the flooding experienced in 2007. The UK has a multi-billion pound, world-leading insurance industry, and we believe it has the ability and the financial strength to resolve this issue without placing an additional burden on taxpayers. We have been clear that Flood Re is not guaranteed by the Government above the one in 200 year level. We set out in the memorandum of understanding with the Association of British Insurers that if flooding exceeds that level, the Government of the day would take primary responsibility, working with Flood Re and representatives of the insurance industry, for deciding how available resources are distributed to Flood Re customers.
I am delighted to hear of the progress that has been made. The negotiation has certainly been a good one. However, in my constituency, which does flood, people have had problems making claims with insurers and getting them paid in a reasonable time to deal with the damage. Has the Minister looked at that issue and talked to the bodies concerned to ensure that the scheme will be smooth, rather than chaotic, as insurance provision is at the moment?
The Association of British Insurers and their members are not here to speak for themselves. I was elected as the Member of Parliament for North Cornwall just after the floods that affected Boscastle, Crackington Haven and Canworthy Water in 2004. My experience was that some insurance companies—particularly for commercial insurance—were hard to pin down. However, on Friday, when it became clear that we were experiencing a major flooding event on the east coast, the Government ensured that agencies and departments, local authorities, the police and volunteer organisations—whose work we value—co-ordinated their efforts so help reached where it was needed.
I had a conversation with a representative of the Association of British Insurers who told me that the industry’s ability to make assessments on the ground is much better than it was a few years ago. It is now clear that, sadly, we may have more flood events. There was a lot of pressure on the industry a few years ago, but it is now confident that it has the resources to process claims quickly. If insurance companies occasionally slip up, hon. Members will have the opportunity to raise issues on behalf of their constituents. I am sure that insurance companies, which no doubt will be following the debate, will take the hon. Lady’s point on board.
The memorandum of understanding with the Association of British Insurers sets out that if flooding exceeds a one in 200 year event the Government of the day will take primary responsibility for apportioning money and working with Flood Re and representatives of the insurance industry to ensure that resources are distributed to Flood Re customers. That will be part of wider Government action in response to such a national emergency to minimise the loss of life and provide essential services. As I have described, that happened at the end of last week. Fortunately, no lives were lost as a result of flooding on that occasion.
I echo the Minister’s sentiments. We are thankful that no lives were lost.
I want to bring the Minister back to our earlier exchange, because I have had a chance to read the evidence that we took in response to questions led by the hon. Member for Newton Abbot. I must press the Minister, because there was genuine confusion in the evidence session. Mr Kerr said that a group of people whose houses were built before 2009 were uninsurable and would not get insurance under the new Flood Re scheme. That appeared to be contradicted by his colleague from the British Insurance Brokers Association. I need the Minister to get some inspiration about which statement is correct before he winds up. Are there 14,000 properties built before 2009 that will not be covered by Flood Re?
I understand from the discussions I have had that the concept of uninsurability will emerge as Flood Re operates, in terms of the numbers of properties affected and the ability to take account of the cases that the hon. Gentleman raises. While there might be estimates of the number of properties that would be in that situation, that point is what we need to remember.
I can confirm to the hon. Gentleman that there are no plans to exclude those at the highest risk at the outset. However, it may be necessary to assess properties that might come into that category as the scheme develops, to establish whether they are flooding repeatedly year after year perhaps, or whatever—those at the very highest risk. When the system begins operating, there will not be that concept of uninsurability.
I am most grateful to the Minister and I genuinely take him at his word. It may be helpful to members of the Committee if he could write to us this afternoon, before the deadline for tabling new clauses, to put that explicitly into writing for the benefit of all members of the Committee. Can the Minister give us that undertaking?
My hon. Friend the Member for Weston-super-Mare makes the point that it is already on the record that that is the intention. However, I am quite happy to write to the hon. Gentleman; that is no problem.
This is an industry-based scheme and so the details of the scheme will develop, but this concept of uninsurability is not there at the outset. However, we must have a means of ensuring that the use of the funds, which after all will be built up by a levy from other payers, is proportionate. We have to deal with that question. We must have a way of considering properties that repeatedly flood and draw disproportionately on the funds of Flood Re. As I say, I will happily write to the hon. Gentleman and the rest of the Committee; it should be a fairly brief note. I will endeavour to do that today and get it out.
I am most grateful. May I just clarify something? As you know, Mr Gray, being a good parliamentarian, we cannot just rely on what the Minister says because it is then privileged and cannot be used in any future court case; a letter in writing is required to provide comfort. The problem I have, and I do not want to go down this track, is that if we do not have a letter by the close of play today when new clauses have to be tabled, on Tuesday I would start to say that we had not had adequate time to scrutinise this measure; I am sure that the Minister does not want that either.
No, I hope that we have moved forward in a process with which the hon. Gentleman has felt comfortable; we have had the opportunity to do that. The time pressure we are under to ensure that this system is in operation is, obviously, the reason for clauses being tabled when they have been. I will address that point with the hon. Gentleman.
Regarding the operation of Flood Re, the memorandum of understanding also set out that the system would form an integral part of the reinsurance sector. Reinsurance is routinely purchased by insurers to limit their exposure to risk, and this scheme effectively shares flood risk across the domestic home insurance industry and reinsurers, to allow insurers to provide insurance at affordable levels.
Flood Re will be regulated in the same way as any other reinsurance company by the Financial Conduct Authority and the Prudential Regulation Authority. It will be subject to their rules, and it will have to comply with company law and a wide range of financial services regulations.
New clause 2 provides the power for the Government to designate a body as the administrator of the scheme by regulations. Should the scheme ever need to be replaced with a new scheme, new clause 5 provides powers for the Secretary of State to make provision for arrangements to be made to ensure that there is a smooth transfer. That will be very important, both for insurers and for those policyholders who are being reinsured through Flood Re.
New clause 5 also provides for arrangements to be made if the administrator needs to be replaced with a new administrator, including powers to transfer property, rights and liabilities to a new administrator. I assure the Committee that it is hoped that those measures will not be needed, but we have to legislate for those eventualities.
New clause 3 provides for the Secretary of State to require all relevant insurers to pay a primary levy to the scheme administrator, and for further ad hoc amounts to be contributed if and when they are needed. It also makes provision about the circumstances in which those powers may be used, and additionally about how any reserves in Flood Re may be disbursed. It will apply to all insurers underwriting household insurance policies in the UK, both buildings and contents policies.
Stepping away from the clauses for a moment, it might be helpful to describe briefly how Flood Re’s funding is intended to work. Insurers that decide to reinsure the flood risk element of a household policy with Flood Re will pay in the premium to Flood Re based on the relevant eligibility thresholds for participation in the scheme, which will be effectively limited to a level lower than the market price for that risk.
By definition, therefore, Flood Re will on average make a loss on every policy it holds. Flood Re therefore needs an additional source of income to fund that loss and to cover its liabilities. That is where the levy comes in. The primary levy captures the existing cross-subsidy insurance market between those at low and high risk of flooding.
The majority of households not at flood risk should not see any increase in their bills due to Flood Re’s introduction. The Government have been clear throughout that limiting the impact on household bills was a vital component of the scheme. Flood Re will use the income to settle claims, buy reinsurance and pay for the administration of the scheme.
Subsection (1)(a) of new clause 3 therefore allows the Secretary of State to require all relevant insurers to pay the primary levy. The levy will be set by regulations at a level that would initially equate to £10.50 on each combined household policy in the UK for the first five years of the scheme. However, to facilitate a smooth transition to risk-reflective prices, that and other aspects of scheme funding and eligibility will be reviewed by the Government in consultation with Flood Re at regular intervals during the scheme’s 25-year lifespan. It is anticipated that future discussions will lead to decreases in the primary levy and corresponding increases in eligibility thresholds, which will ensure that the policy objective of a smooth transition to risk-reflective prices is being delivered.
I am sure that the Minister understands the need for interventions as we go along, because we are discussing a new and complex process. Will he say a little more about the process going forward? As he seeks to raise eligibility requirements, does he see that being underpinned by secondary legislation? Does he see that being done by further primary legislation? Perhaps he will set that out for us.
The intention in setting up the scheme is that we put things adequately in place with the Bill, so that we do not need further primary legislation as we move through the transition. The Bill gives the Secretary of State the power, in consultation with the industry, to look at how much people are paying into the levy and to look at those eligibility thresholds.
Again, I do not want to interrupt the Minister mid-thought, but I want to ask something, because this issue is important to all constituents. He will recall from his time on the Select Committee on Environment, Food and Rural Affairs that it has always had concerns about parliamentary scrutiny. Will he clarify whether the intention is to have secondary legislation as the process proceeds?
It is certainly intended that the policy will be reviewed every five years by Government to assess the level at which the levy and the eligibility thresholds are set. That will ensure that the objectives for Flood Re will continue to be delivered, and that includes the transition to a risk-reflective price. Thresholds and the levy will need to be set in secondary legislation, as the hon. Gentleman rightly assumes, so Parliament will have the opportunity to take a view in the normal way as part of that scrutiny process.
Subsection (3) of new clause 3 specifies powers through regulations for the scheme administrator to pursue the non-payment of the required levies by individual insurers as a civil debt, should that prove necessary. Joint modelling by Government and the industry suggests that the primary levy, Flood Re’s reserves and its reinsurance cover should be sufficient in most years for Flood Re to cover its costs. If Flood Re makes a profit, that will be retained by the scheme and create reserves that, in the first instance, could cover a shortfall. However, given the unpredictable nature of flood damage, there might be circumstances where Flood Re faces a shortfall and does not have those reserves or where losses are below the point at which reinsurance takes effect, such as with consecutive flooding events, or in the early years of the scheme as the reserve builds up. New clause 3 therefore allows for further ad hoc contributions to be sought from all by way of a top-up levy. Subsections (1)(b) and (2) of new clause 3 refer to the top-up levy.
Analysis suggests that top-up contributions should be required, on average, only once or twice in the first 10 years of Flood Re’s operation. In those circumstances, Flood Re may be required to call on those top-up contributions urgently in order to remain solvent and to ensure it meets its capitalisation requirements under EU law.
From both a commercial and a prudential perspective, it is therefore important that the individual calls for a top-up levy would not require prior parliamentary approval. However, to ensure appropriate parliamentary oversight, subsection (2) sets out that Parliament would approve the framework for how the top-up levy should operate, which would be set out through affirmative regulations that cover both the circumstances and the maximum amounts of funding requested. We propose that the regulations under new clause 3 would specify that Flood Re could only ask for top-up contributions when it had a funding shortfall and no other way of covering the claims due, and it could only ask for the amount it actually needed. Those controls are needed to limit the costs for insurers, which they might otherwise pass on to households through higher bills.
The Minister touched on the issue of civil recovery mechanisms. Scotland has its own judicial process so could he tell us what discussions he has had with the Scottish Ministers? I am unclear because I am not a lawyer whether, because it is financial services that we are using, we would follow Scots law or English law for civil recovery in Scotland.
We have proceeded throughout our consultations with the industry on the basis of our discussions with the devolved Administrations to go through their concerns. As the hon. Gentleman points out, this is a financial matter and so applies across the United Kingdom. It is therefore important that we have those interactions right.
On the specific point about how civil recovery costs would work against defaulting companies—those which are not meeting their commitments to the scheme—we need a process to ensure that it does not fall as a cost on those companies that are paying in. I would need to look in more detail into some of those aspects of how the different legal systems would handle the situation. The Office of the Advocate General for Scotland has approved the drafting of the new clauses. Civil recovery in Scotland will be possible under the draft clause, so I can reassure the hon. Gentleman that no company that happens to be based in Scotland could escape its commitments if it failed to meet them. The hon. Gentleman has a way of prompting these thoughts into my mind which is quite striking.
There is another reason why having controls on this aspect of Flood Re is important. We expect the Office for National Statistics to classify at least some of Flood Re’s funding as public money. That is why it is necessary that these amendments provide the Government with the powers to specify a control framework to ensure the scheme is managed appropriately while respecting that Flood Re needs an amount of operational freedom to manage its business effectively.
Based on current assessments of Flood Re’s finances, we will look to prevent Flood Re from incurring net losses of more than £100 million in any one financial year. This, combined with controls preventing borrowing across years, will limit Flood Re’s impact on the public finances. I am sure that all Committee members would agree that it would not be acceptable to have an independently managed body that could add to public debt or borrowing without some controls. The industry proposes that insurers should be able to present top-up contributions as member capital to Flood Re, rather than as cash. This capital call could be retained as an asset on insurers’ balance sheets, and would not then be a cost to be passed on to consumers.
Flood Re could then use these contributions to cover any shortfall and pay the claims due. There must be an expectation that the capital could be paid back to insurers, subject to the terms of the scheme and providing that Flood Re had built up sufficient reserves and it would not be prudentially detrimental to do so. Flood Re would not be permitted to pay a dividend or return on capital invested. We believe that this is the most appropriate way of safeguarding any impact the top-up levy might have on household bills, and of meeting insurers’ needs to minimise volatility for their profit and loss accounts, and minimise the amount of capital provision they need to make. Discussions on the detail of how to control the amount of capital which could be built up are continuing. I would like to take this opportunity to pay tribute, as I have done in the past, to the approach taken by the Association of British Insurers to considering a way to make the scheme work that meets the industry’s need to ensure that the market functions correctly and gives us confidence that where moneys are treated as public money, the correct scrutiny is in place.
Given Flood Re’s management of public money, it is right that the Government should take the powers in subsections (5), (6) and (7) of new clause 3 to make provisions about the reserves in Flood Re when it is being wound up or if it is de-designated. Detailed discussions with the ABI about how that might work in practice continue. Both the primary levy and any additional contributions that might be required have the potential to affect public finances, so it is appropriate that any decisions made by the Secretary of State regarding Flood Re’s funding will need the consent of Her Majesty’s Treasury.
New clause 4 provides the Secretary of State with powers to set rules for how the Flood Re scheme is administered. As already noted, it is important because it relates to Flood Re’s management of public finances and accountability to Parliament. I draw the Committee’s attention in particular to our proposed arrangements for parliamentary accountability, which with the Committee’s permission I will set out in detail for the record.
Subsection (2) of new clause 4 sets out that those regulations may require the scheme administrator, in managing the scheme, to consider value for money, the public interest and propriety and regularity. The Government will use the power to ensure that Flood Re is established with economy, efficiency and effectiveness at its core. Subsection (4) sets out what restrictions might be put on Flood Re’s finances through regulations in order to limit the scheme’s impact on public finances. We are taking powers to restrict Flood Re’s ability to borrow or be in debt, impose limitations on its drawdowns and transfers and place restrictions on the level of net loss that it may incur in any financial year. The restrictions will not affect Flood Re’s ability to provide reinsurance cover or manage itself as a going concern, but they are important controls that will ensure the sound management of public money. The operations and impacts on costs for households are in line with those expected.
I draw the Committee’s attention in particular to our proposed arrangements for parliamentary accountability, a matter that will rightly and properly be of concern to all Committee members, although it was the hon. Member for Dunfermline and West Fife who raised the matter in his intervention. Our approach is to establish Flood Re as operationally independent and transparent, giving it the freedom to operate as an integral part of the reinsurance industry while retaining essential controls to minimise any undue impact on households, policyholders and the public finances.
As far as possible, we want Flood Re to be treated like a private sector body, even though it will be managing public money. We are therefore proposing specific arrangements for Flood Re to be directly accountable to Parliament for its ongoing operations. Clearly, that has novel implications for accountability and scrutiny arrangements, with less direct Government management, oversight and accountability than would be expected for a conventional arm’s-length body, and greater direct accountability for Flood Re.
We propose that the relevant Ministers will be accountable to Parliament concerning general policy matters relating to flood insurance, with DEFRA’s accounting officer accountable to Parliament for the net expenditure for Flood Re as reported in DEFRA’s accounts. However, as an industry-owned and managed entity, Flood Re would be accountable to Parliament for the details of its operations.
I put my hand out when the Minister mentioned oversight. If he was not about to spell out what the scrutiny process will involve, can he do so?
Yet again, the hon. Gentleman is uncanny in his ability to provoke a response from me. I will now set out some of the accountability arrangements, particularly with regard to how the company will be scrutinised.
To provide effective oversight, the clause provides the Secretary of State with powers to introduce through secondary legislation requirements on accounting, including the role of the National Audit Office in scrutinising Flood Re. The approach has been agreed with the NAO. The NAO will be able to examine the scheme’s value for money aspects, propriety and regularity. It will have a right of access to documents and the ability to report to Parliament on its investigations. Flood Re’s audited accounts will also be laid before Parliament.
In addition, the clause provides powers to require Flood Re to appoint a responsible officer. The responsible officer will be responsible for Flood Re’s finances and accounts and will be directly accountable to Parliament for value for money, propriety and regularity. They will also be responsible for responding to any studies or reports carried out by the National Audit Office.
Although Flood Re will be directly accountable to Parliament for its ongoing operations, it will be spending public money that will be accounted for in DEFRA’s accounts. Subsection (8) deals with powers for the Secretary of State to seek information from Flood Re, to account for its finances in the Department’s accounts.
Taken together, the powers provide both an effective means of parliamentary oversight of the Flood Re scheme and appropriate Government controls of Flood Re’s impact on the public finances.
Access to council tax data by the industry is essential for Flood Re to work. Without it, Flood Re cannot offer premiums that differ according to property value and thus allow support to be targeted towards lower income households. That would mean that Flood Re would not deliver its intended benefits.
Before we move further away from the scrutiny, might I tease out of him a little bit more information? Although I welcome his mentioning the NAO, does the Minister intend that the Select Committee on Environment, Food and Rural Affairs, the Treasury Committee or the Public Accounts Committee would regularly be involved? What does he think is the appropriate way for Parliament to hold Flood Re to account?
Any appropriate Select Committee could seek to interrogate the NAO about any information that is put into the public domain through its investigations. The Public Accounts Committee has a role here, but as a great advocate for the EFRA Committee, I am sure that the hon. Gentleman feels that it might find an opportunity to consider some issues, too. We have written to the Public Accounts Committee and the EFRA and Treasury Committees to information them of the approach. They are able to inquire into these issues, should they feel it appropriate. There will be multiple opportunities to consider scrutiny as we move forward, for example, in terms of the operation of the scheme in this way and, as the hon. Gentleman has teased out of me, in secondary legislation on the future of the levy.
Subsection (6) provides for regulation-making powers, allowing for council tax information to be shared with Flood Re and the insurance industry.
As we move on to income, does the Minister accept that some lower income households are in higher council tax bands and that the reverse is also true? Is this not a quite crude mechanism?
One of the key advantages of the council tax band system is that it is related to property values, so it is established: the bands exist. Were we to move into more in-depth analysis of people’s income, and so on, it would complicate the system a great deal. Our intention has always been to keep the system as straightforward and easy to operate as possible, because we do not want to add hugely to the costs of the scheme’s operation.
In my constituency there are few band H properties, but there are some and the people who live in them are not necessarily particularly well-off; some are, some are not. Given that there will be small numbers of such properties, does the Minister envisage any system of appeals, if people in band H properties are not in a position to take on the cost of uninsured losses?
We have considered this issue in detail. We received information from the Joseph Rowntree Foundation, which stated that there are some 14,000 band H nationally in which occupants may be on a low income. Only a small proportion of those would be subject to the scheme. Most of the one in six properties at risk of flooding are protected by flood defences. The analysis we have carried out demonstrates that including band H would be a regressive measure. That is the approach I outlined in a letter to Committee members. Strong support was expressed in the consultation for using council tax bands as a way of making such judgments. Our analysis suggests that relative to other bands, a move to risk-reflective pricing would have a limited impact on the affordability of a combined insurance policy for band H households. We think that we have got it right in cutting the scheme off at band G.
Are we actually saying that council tax banding is a crude and blunt instrument? I think that is what is reflected in the Opposition’s comments. Within living memory, however, the Opposition have not attempted to change the council tax bandings—that has not happened since the early 1990s—which suggests that they are satisfied with such a crude and blunt instrument for funding local government. I think, therefore, that they should accept that the proposal is a reasonably simple way of addressing the issue.
The hon. Gentleman sets out his view that people are used to using the system and it has stood the test of time. Various parties have proposed changes to the system, but it has not been the coalition Government’s policy to move away from council tax banding.
I understand what the hon. Member for Meon Valley is saying about the measures being crude, and that is true of any proxy indicator. A whole range of proxy indicators on local government funding cover a range of services, but we are talking about individuals. I am concerned that there may be a very small number of people in band H properties who are flooded and not eligible for Flood Re. Why can we not look at some kind of appeal system for those individuals?
Our intention is to make the system transparent. It is not a permanent system; we are moving towards a more risk-reflective process, as I have made clear throughout. The analysis that we have done, for all the reasons I have given, demonstrates that it is correct to draw the cut-off at band G. The hon. Lady is free to raise those issues and take a different view, but it is not my position to move away from what has been agreed with the industry.
We want Flood Re to be up and running as soon as possible, an intention that I am sure hon. Members’ constituents will support. New clause 6 provides the Secretary of State with powers to enable Her Majesty’s Revenue and Customs to release council tax data in good time before the designation takes place, to allow the insurance industry to make the preparations necessary for the operation of Flood Re. Although it is unlikely, should Flood Re not come into effect for any reason, the new clause will allow regulations to be made to specify that any data disclosed to the industry in respect of council tax would have to be destroyed. Subsection (6) of new clause 4, and new clause 6, provide the Secretary of State with powers to legislate that any data released under the scheme are protected by a criminal sanction. Those provisions are important to ensure the necessary safeguards around the use of those data.
Subsection (7) of new clause 4 provides powers to allow Flood Re to share data with the Environment Agency and its equivalents in Wales, Scotland and Northern Ireland, or with other bodies that are specified in regulations. That would enable Flood Re to share information on flood risk, such as the geographic location of properties supported through Flood Re. That information will help the Environment Agency and its devolved counterparts to improve flood risk models and to target flood risk investment to where it is needed most.
Hon. Members and their constituents are particularly interested in exactly who would be able to benefit from Flood Re. Our public consultation called for evidence that businesses were struggling to obtain appropriate insurance. Having examined the responses, we remain of the view that there is insufficient evidence to justify Government intervention in the provision of insurance cover for businesses. My hon. Friend the Member for South East Cornwall sought to explore that point earlier. The insurance industry is developing a more detailed set of eligibility criteria for Flood Re. The key issue in determining who is eligible is whether they currently hold a domestic policy.
I now turn to the flood insurance obligation, and I hope that hon. Members will agree that it is important to hold it in reserve in order to give our constituents peace of mind. We are seeking powers in new clauses 7 to 18 for the Secretary of State to regulate to require insurers to provide cover to households at higher risk of flooding at an affordable price, through the flood insurance obligation. We hope that such powers will never need to be used, but we want to have the power to implement a fall-back solution should it become necessary.
The flood insurance obligation will work as follows. The Environment Agency, working with its equivalents in the devolved Administrations, would create a register of those properties at higher risk of flooding. The Secretary of State would set an overall target for the number of registered properties that the industry as a whole needs to cover. Insurers would then be required to provide insurance cover to a proportion of those properties to meet a quota, which is calculated in proportion to their share of the overall market, or risk enforcement action by the Financial Conduct Authority. As a result, insurers will be incentivised to compete with one another to ensure that they meet their quota requirements. We recognise that the obligation does not offer certainty about the cost of insurance in the way that Flood Re does. However, our modelling suggests that the creation of an artificial market for properties at greater risk of flooding will drive insurers to compete with one another to provide cover for the properties on the register, which will have the effect of keeping prices down.
New clause 7 puts in place the framework for the obligation. It allows the Secretary of State to require all insurers selling domestic home insurance in the UK to issue insurance policies to meet their quotas. Regulations may make provision for individual insurers to calculate their quotas with reference to a market-wide target set by the Secretary of State, which will mean that each insurer will have to insure its fair share of higher-risk properties. Different targets could be set for different types of insurance risk, such as for buildings and contents cover. That should enable both home owners and tenants to access affordable insurance.
Insurers that have a small share of the market could be exempted from complying with the obligation altogether, which will support new entrants into the market. That exemption is important also in ensuring that the intervention in the market is proportionate under European law and protects the freedom of insurers to establish and provide services.
New clause 7 also gives us the ability to define what constitutes a qualifying policy for the purpose of counting toward an insurer’s quota, should it be required. It would not be in the public interest to allow insurers to count towards their quotas polices that provide inadequate or misleading cover to households, such as polices with unreasonable exclusions. Similar protections are available for customers under Flood Re. Given the highly competitive nature of the domestic home insurance market, we hope that we will not need to exercise that power.
In order to maximise insurers’ capacity to meet their quotas and at the same time to develop their business in the direction they see fit, we intend to build some flexibility into the regulatory system. In practice, that means allowing those insurers that are likely to exceed their quotas to trade the credit for issuing policies to households at high flood risk with insurers that do not have sufficient policies to meet their own quotas. The trading of credits under the obligation will not alter the relationship between insurers and their customers.
New clause 7 also provides for an insurer’s market share to be determined if it fails to provide the information required by regulations made under new clause 9. That will prevent the implementation of the obligation being delayed by an insurer’s failure to co-operate.
New clause 8 provides the Government with the power to set a collective target for the number of registered properties for which the industry as a whole must provide cover so that individual insurers can determine their share of the target. Not all households want insurance, so the aim would be for the target to reflect existing levels of take-up and likely demand. In addition, our policy intention is that the obligation should be phased out over time in order to support a gradual transition to risk-reflective pricing. Accordingly, the Secretary of State needs to be able to set the overall target at a level below 100% of the properties on the register.
New clause 9 gives the Government the power to set out in regulations arrangements for the provision of information or documents by insurers to the Secretary of State or a person acting on his or her behalf. There are two principal requirements. Insurers will need to provide information or documents to demonstrate first whether or not they are liable for the flood insurance obligation regulations, and secondly the number or value of insurance policies that they have written in a particular period.
Such information is fundamental to the operation of the wider flood insurance obligation. The information collected will enable the total size of the UK home insurance market to be calculated, so that individual insurers can determine their share of the market.
The approach we are taking is to ensure that all the companies are carrying their fair share of the risk. That is very much the intention, so, as I have said, we need that information from them to be able to look at the size of the market, and then we will be able to see how much each company would need to make to carry its fare share. The hon. Lady is absolutely right about ensuring a fair share across the industry.
I will go on to that in more detail, and if the hon. Gentleman is unhappy with what I set out, I am happy to take a further intervention from him.
The Secretary of State may publish that information in order to enable insurers to determine their individual market share. Insurers are required to submit annual returns to the PRA. The information collected relates to household risks. That is not suitable for the purpose of the flood insurance obligation, first because it does not distinguish between buildings and contents insurance policies, and secondly because certain types of firms are not required to provide that information to the PRA.
New clause 10 enables the Secretary of State to provide for enforcement of the requirements on insurers made under clause 9 to provide certain information. The information required under clause 9 is fundamental to the operation of the wider flood insurance obligation, so it is right that we have a robust enforcement mechanism, as provided in the clause.
Regulations will allow the Secretary of State to impose sanctions such as civil penalties against those insurers who fail to comply with the requirements to provide information. The regulations would set out the procedures to be followed if sanctions are imposed and could provide for costs incurred in connection with imposing sanctions to be recovered. Insurers would be able to appeal against the sanctions or a requirement to pay costs to the first-tier tribunal.
I suspect that the Minister anticipates this question, which goes back to my earlier point about devolution and the Scottish justice system. Again, I stress that I am not a lawyer, so I am seeking genuine inspiration. Will he set out how it will work for insurance companies—there are many, as you know, Mr Gray—that are based in Edinburgh and elsewhere in Scotland?
As I set out in my earlier answer to the hon. Gentleman, we have consulted with the devolved Administrations throughout the process. As I reassured him following his earlier intervention, with regard to Flood Re as opposed to the flood insurance obligation—our back-up—the Advocate-General has had the opportunity to look at the clauses and is happy with them. I hope that that reassures the hon. Gentleman.
To encourage non-compliant insurers to take remedial action quickly, provision is also made to require an insurer that continues to fail to comply to pay further sums. Ultimately, if insurers remain non-compliant, further civil and criminal enforcement action could be taken by the Financial Conduct Authority.
New clause 11 provides for the creation and maintenance of a register of properties in the UK that are at greater risk of flooding and are therefore more likely to be experiencing problems with the availability and affordability of flood insurance. The register is essential for the obligation to work properly. Our expectation is that the register will be based on flood risk information held by the bodies with principal responsibility for flood risk management in the different parts of the UK: the Environment Agency, the Scottish Environmental Protection Agency, Natural Resources Wales and the Department of Agriculture and Rural Development in Northern Ireland. New clause 11 also provides for the exclusion from the register for properties built since 2009.
Inclusion on the register is intended to help enable households to access affordable flood insurance. We hope that that will be attractive to them, but provision has been made to enable households automatically to opt out of the register if they wish. Of course, that would mean that they would not benefit from the obligation.
We believe it is appropriate that existing households and potential buyers or occupants should be able to find out whether a particular property is on the register and therefore stands to benefit from access to more affordable flood insurance. The clause therefore makes provision for the publication of the register in whole or in part. Our intention is to make the register searchable by address. Given that the register will be based on flood risk information that is already publicly available, we feel that that is a sensible and proportionate approach.
The creation of the register will rely on the input and expertise of the devolved Governments and their agencies, and as such, we have agreed that the Secretary of State would consult their Ministers before making regulations under this clause.
The Minister is aware that we have tabled a new clause on the national database. It sounds as though we are pretty much at the same place, so will he confirm that the database will be accessible not only to potential house buyers, but to mortgage lenders, who obviously need to have comfort before they can lend the money to a potential house buyer? Who exactly will have a right of access to the database?
The hon. Gentleman raises a fair point. If the data are available to a prospective buyer it would be difficult to restrict their availability to other interested parties who would want to look at them. I shall confirm the approach on the basis of consultation.
We intend to make some of the information on the register publicly available, so existing households and potential buyers and tenants would be able to enter an address into a database to find out whether a property was on the register. However, the full register would be accessible only to insurers, the Environment Agency and its devolved counterparts. Aspects of it would be publicly available, so it is my understanding that it would be accessible to mortgage lenders if they wanted to search the database.
At the point where a potential buyer was making such an investigation and a sale was proceeding, they would no doubt be in contact with a potential lender, and that relationship would mean that the information could be shared between them. However, I want to make it clear that the full register would be accessible only to insurers, the Environment Agency and its counterparts in the devolved countries, and to the FCA.
New clause 12 enables the Environment Agency and its devolved counterparts to carry out functions involved in the creation of a register of properties at greater flood risk in the UK. Regulations could require them to create and maintain a register, for example, by considering any applications to join the register, notifying relevant persons when a property was entered in the register, and giving access to information contained in the register.
The Environment Agency would be responsible for co-ordination and for encouraging consistency in carrying out the functions imposed on the relevant bodies. The new function would not have an impact on the devolved competencies of each Administration with regard to flood risk mapping. The intention is purely to ensure that insurers would ultimately be able to access a UK-wide register, and that different approaches to mapping in the different jurisdictions would not disproportionately benefit some UK households, such as by making it significantly easier to join the register in a given area, at the expense of others.
New clause 13 provides for a person with a qualifying interest in a property to seek a review of a decision to exclude a property from the register. It also allows for appeals in the event that the person is not satisfied with the decision.
This question should have occurred to me earlier, but I hope that the Minister will forgive me for not giving him notice of it.
I can imagine a situation in which someone in a band H property wanted to challenge their inclusion in the register. I hope that the Minister will correct me if I am wrong, and things would not work in this way, but it seems to me that that person would be excluded from Flood Re and therefore could be subject to very large insurance premiums for flood insurance. They might therefore want to be able to challenge the decision to include them in an area of flood risk. As far as I can see, the clause would exclude that possibility.
The provisions that I am discussing relate to the flood insurance obligation, which is our back-up alternative should Flood Re not come into operation. The issue that my hon. Friend refers to relates specifically to Flood Re.
Not at all. We are debating a big group of new clauses, and it is important that we discuss issues relating to Flood Re and to the alternative approach in the flood insurance obligation, so I am grateful to my hon. Friend.
New clause 13 provides for a person with a qualifying interest in the property to seek a review of the decision. That is what my hon. Friend was querying.
New clause 14 provides the Secretary of State with the power to make regulations to raise a levy from insurers to cover the costs of maintaining the register. The levy would be raised by the Secretary of State with the approval of the Treasury, to cover the expenses that the Government would incur in the administration of the register. The regulations may state the rate of the levy and the way it would be calculated.
A levy on insurers is a fair and appropriate way of meeting those essential costs. If the Government were instead to bear them through general taxation it is likely that there would be implications for spending in other areas, such as flood risk management, which is essential for keeping down the cost of insurance in the long run. The power is intended, subject to Treasury agreement, to make it possible for the Government to recover the costs incurred not just by the Environment Agency but by its counterparts.
New clause 15 provides the Secretary of State with the powers to make regulations to require insurers to make a report of their compliance or non-compliance with the obligation to the Financial Conduct Authority. Our intention is to align the monitoring and enforcement regime for the flood insurance obligation as closely as possible with existing regulatory practice in the financial services sector. We expect that the regulations made under the new clause will require insurers to report breaches of their obligation only to the FCA. However, the powers set out also enable us to regulate to require a more stringent compliance reporting regime, should that be deemed necessary.
It is our view that the Financial Conduct Authority is the appropriate body to receive compliance reports from the insurers, as it will be responsible for monitoring and ensuring their compliance with the overall flood insurance obligation. The FCA will receive compliance reports from insurers and, under provisions in new clause 16—Functions of the FCA—will be empowered to take enforcement action, should an insurer breach the requirements of the compliance reports.
New clause 16 gives the Treasury powers to apply the Financial Conduct Authority’s existing supervision and enforcement powers to its new role of monitoring and enforcing insurers’ compliance with the requirements set out in new clause 7. Such requirements include issuing a prescribed number of qualifying insurance policies to registered properties at greatest risk of flooding, as set out in new clause 7, and making a report of their compliance or non-compliance with that obligation to the FCA, as set out in new clause 15. The provisions also enable enforcement by the FCA in the case of inaccurate data returns from insurers and late or missing returns where DEFRA sanctions under new clause 10 have been exhausted. The provision allows for the FCA to recover its costs by imposing fees on firms, should that be necessary, in line with its existing practice in wider financial services regulation.
New clause 17 gives the Treasury the power to make regulations requiring the Financial Conduct Authority to prepare reports in relation to its role in monitoring and enforcing compliance, as set out in new clause 16. Such reports may contain information about the number of firms that have reported breaches of the flood insurance obligation and the enforcement action that it has taken against them. That information will enable the Secretary of State to review the operation of the obligation and consider whether changes to the level of the overall obligation target are required, ahead of the next compliance period.
New clause 18 enables the Treasury to confer on the Prudential Regulation Authority and/or the Financial Conduct Authority the ability to suspend temporarily or modify the flood insurance obligation requirements. That intervention power will be a reserve power, to be used only in exceptional circumstances. The intention is that the PRA and/or the FCA could exercise the power where the continuation of the obligation requirements on an individual insurer pose a threat to the statutory objectives of the regulators, or an individual insurer is failing or likely to fail to satisfy threshold conditions imposed by the regulators. For example, an insurer may be under extreme financial stress. In such circumstances, it may be inappropriate for the insurer to continue to write high-risk business.
Regulations will detail which parts of the relevant regulations may be disapplied or modified and in what circumstances. The PRA and FCA would be required to notify the Secretary of State when using those powers.
We hope that those circumstances will be rare, but it is important that we have a provision. Whether that information would be made public is an important question and there is provision for that information to be provided to Parliament.
The need for the Prudential Regulation Authority and the Financial Conduct Authority to exercise the intervention powers to suspend temporarily or modify the flood insurance obligation provisions recognises that insurers operate in a wider regulatory sphere and that other obligations may need to take precedence over the flood insurance obligation. The amendments also include measures that apply to both Flood Re and the obligation. New clause 19 provides the power to define certain terms used in the amendments, such as “household premises” and “flood risk”. We believe that it is important to set the definitions through regulations; because they are technical, we need them to be clear and we want to allow appropriate consultation.
For both Flood Re and the obligation, we need to specify the definition of an “insurer” and a “relevant insurer” to ensure that all insurers operating in the UK domestic home insurance market, including insurers based overseas and operating in the UK, are covered. That will create a level playing field for all insurers, which did not exist under the statement of principles.
We will need to have a different definition of “flood” for Flood Re and the obligation, because it is possible, although unlikely, that both Flood Re and the obligation could be in force at the same time—for example, if Flood Re is being wound down and the obligation is in the process of being implemented. Unlike Flood Re, eligibility for the obligation is based on flood risk mapping data, which is why different definitions are needed.
New clause 20 concerns the proposed lifespan of the flood insurance measures, which we intend to limit to no more than 25 years. We believe that it is right to plan to provide support over that period to smooth the transition to risk-reflective pricing. The approach to managing that transition will be subject to regular review as part of the levy setting discussions. Alongside that, the Government will continue to focus on appropriate controls on spatial planning, maintaining flood defences and other resistance measures and, at household level, protecting properties in higher flood risk areas by encouraging the installation of flood protection measures and resilient repairs after a flood.
Hon. Members will be aware that, throughout the debate, we have talked about the powers to make regulations or orders. New clause 21 sets out the parliamentary procedures for all regulation and order-making powers, which are relevant to the flood insurance amendments.
I noted at the beginning of this speech the levels of interest in and broad support for our proposals on flood insurance during Second Reading and the public evidence session. The proposals are designed to tackle issues that are of considerable concern to many of our constituents. They cannot take away the pain and distress caused by flooding, but having affordable and accessible flood insurance can help to deal with the devastating aftermath. I therefore propose that the new clauses stand part of the Bill.