APPLICATION OF ASSETS OF COMPANY WITH LONG TERM BUSINESS (Hansard, 17 July 1973)

§ Mr. Kenneth Baker
I beg to move Amendment No. 6, in page 7, line 43, at end insert: '(5) For the avoidance of doubt it is hereby declared that money from a fund maintained by a company in respect of its long term business may not be used for the purposes of any other business of the company notwithstanding any arrangement for its subsequent repayment out of the receipts of that other business.'. This is an amendment to one of the four clauses in the Bill—Members who followed the Committee proceedings will appreciate their importance—in the interests of long-term policy holders. It provides that long-term business assets must be applied for the purposes of long-term business except when and to the extent that an actuarial investigation discloses a surplus. Subsection (1) contains 381 the essential provision, to protect the long-term policy holder, that the assets of the long-term business may, as I have said, be applied only for the purposes of the long-term business. It has been suggested that the clause does not make it clear that a loan on the long-term business funds cannot be made to the general insurance business side of a composite company or for the purpose of any non-insurance business carried on.
The new subsection removes any doubt on this point. I am not suggesting that this type of arrangement, commonly referred to as an inter-class loan, is improper in every conceivable circumstance, but it is prima facie undesirable that long-term fund money should be used to support an ailing motor insurance business carried on by the same company. Subsection (3) provides a mechanism whereby problems of liquidity, as distinct from solvency, can be handled. The House will appreciate that in exceptional circumstances the Secretary of State could consider an exception under Clause 38.

§ Mr. Kenneth Baker
I beg to move Amendment No. 7, in page 7, line 44, at end insert 'and no company of which any such insurance company is a subsidiary'.

Mr. Deputy Speaker
With this we will take Amendments Nos. 8, 11 and 47.

§ Mr. Baker
The amendments are all consequentially inter-linked. The effect of this amendment would be to prohibit an insurance company's holding company—as well as the long-term insurance company itself—from paying a dividend when the insurance company has an inadequate long-term fund.
This was the subject of an interesting debate in committee. The Institute of Chartered Accountants sponsored the idea and concept behind the amendment. Its justification for it was based on the fact that a company could conduct its long-term business entirely through a subsidiary and thereby abdicate its responsibility for deficiencies in the insurance funds. We accept that this is a fair point.
As the beneficial owner, the holding company has at least a moral responsibility and should be required to hold any reserves under its control available to 382 rectify the position of the long-term fund until such time as its adequacy is restored. This does not necessarily mean a subvention from the holding company if the cause of the inadequacy is ephemeral; it does, however, provide a strong incentive for seeing that things are put right as soon as possible.
Hon. Members who attended the Committee proceedings will recall that the amendments tabled there would have extended the ban to subsidiaries of the insurance company, and they will recall that I argued against that because payments of dividends by subsidiary companies in this situation would flow back into the long-term fund.
Amendment No. 8 is merely a necessary drafting change consequential to Amendment No. 7. Amendment No. 11 is also consequential upon the first amendment. Its effect would be to make any default by the holding company a further ground for the use against its insurance subsidiary of any of the intervention powers specified in Clauses 13 to 21.
Amendment No. 47 adds a reference to Clauses 6 and 8(5) in subsection (3)(b) of the penalty clause, Clause 52, the effect of which would be to make any default by the holding company in contravention of the dividend ban an offence for which the "residual" penalty would be the maximum fine of £400.