§ Order for Second Reading read.
§ 7.0 p.m.
§ The Minister for Trade and Consumer Affairs (Sir Geoffrey Howe)
I beg to move, That the Bill be now read a Second time.
The purpose of the Bill is to improve the protection given to insurance policy holders. It is another example of the measures being introduced by the Government under the general heading of consumer protection. It is clear that we must do all we sensibly can not only to protect the policy holder but also to maintain the name and reputation of our insurance industry which does so much for our invisible earnings. The House will recall that the overseas earnings of this industry in 1971 were £380 million, that figure representing almost double the figure in 1968. More than half of the United Kingdom's invisible earnings come from the insurance industry.
The aim in legislation in these matters is to strike a proper balance between, on the one hand, allowing the industry so much freedom that it can be exploited by rogues and, on the other hand, creating for the industry such shackles that it cannot give an efficient, competitive and forward-looking service to consumers here and abroad. We do not want to set up a detailed apparatus of control as is practised in many other countries to the extent that almost every aspect of the business is very tightly regulated. Our more liberal traditional attitude seems to be more in line with the principles necessary to create a common market in insurance than some of the attitudes found elsewhere. I believe that we shall be able to persuade our EEC partners of the benefits of our pattern. We shall succeed in doing that only if our system works effectively, detecting and, so far as possible, averting situations of the kind that have arisen in the past.
Recent events in the United States have reinforced the need for effective powers in these matters, as indeed nearer home did the V & G case. I have in mind 119 the Equity Finance Life Corporation on the other side of the Atlantic which the Economist described not many weeks ago as one of the biggest swindles in history. Hon. Members will be familiar with why it has been regarded as the duty of the Government to exercise closer supervision over insurance companies than others. In the first place, it is a business where money comes in first and where claims do not have to be paid out until later, very often much later. The system therefore affords obvious temptations for the unscrupulous and obvious dangers for the incompetent.
Secondly, it is plain that hardship and loss can be caused by the crash of an insurance company, be it a motor company, a life company or any other. We should also remember that there are some risks against which insurance is required by law, principally concerning employers' liability and motorists' third party liability. It is entirely right if we require insurance of that sort by statute that we should see that reasonable steps are taken to ensure that claims can be met. That is the underlying philosophy of the legislation. The Bill reflects the experience of operating important new powers that were established by the Labour Government in 1967. Those powers have been the subject of careful review over the last 12 months.
That review has included discussions with insurers, insurance brokers, actuaries, accountants, lawyers and consumer organisations, and we have tried to take account of as many views as we can, including views expressed by four of my hon. Friends under the leadership, I think, of my hon. Friend the Member for Cheadle (Mr. Normanton) supported by my hon. Friends the Members for Faversham (Mr. Moate), Billericay (Mr. McCrindle) and Pembroke (Mr. Nicholas Edwards). We have not accepted their advice on one main point, namely, the establishment of a registrar, or commissioner as some people prefer to describe him, to supervise these matters.
The principle reason for that was that on balance it was considered right that there should be more direct ministerial responsibility than my hon. Friends' suggestion would provide and we believe that the argument that greater expertise would be necessary for Ministers and for 120 my Department could be met and is being met by the appointment of and the securing of advice from other experts within the Department. We have taken account of the other suggestions made by my hon. Friends together with the suggestions put forward by other people.
We have also taken advantage of the exhaustive independent investigation of the pattern of supervision of the V & G group which was to be found in the report of the tribunal which was set up under the Tribunals of Inquiry (Evidence) Act 1921 and which was debated in the House on 1st May last year. Also, we have recently received the report of the committee under the chairmanship of Sir Hilary Scott who was examining a comparatively new development—the linking of the value of life insurance benefits to that of specified categories of assets.
The Bill has already been subject to careful scrutiny and helpful amendment in another place. One point made in the course of the debates there by my noble and learned Friend the Lord Chancellor has since been subject to some criticism and I should like to take this opportunity of making it clear that that criticism is misconceived. The point I have in mind concerns our attitude towards reinsurance. I believe that the United Kingdom is, apart from Switzerland, the only net exporter of insurance and reinsurance services. That being the case, it would clearly not be in our interests, by practising discrimination against foreign insurers, ourselves to encourage it in others.
The allegations that I have in mind, recently made, were to the effect that we require companies seeking authorisation to carry on insurance business here to place a high proportion of their reinsurance with British companies. Of course we look critically, as the 1967 statute requires, at the extent and quality of reinsurance arrangements proposed by such applicants. Sometimes they are found not to be acceptable without some modification. However, the point I wish to underline is that there is certainly no presumption that an individual reinsurer who is net authorised in Great Britain is ipso facto unsuitable.
I turn now to the main provisions of the Bill and I shall try to describe them briefly under four general headings, 121 beginning with the powers of intervention, then turning to what has come to be known as the "fit and proper persons" problem, followed by a word about long-term policy holders and a word about other new provisions and improvements. First, as regards the powers of intervention, if hon. Members look at the extensive list in Schedule 2 of sections of the 1967 Act which are to be repealed they will see an important feature. If they compare the repeals there set out with Clauses 12 to 24 of the Bill, it is clear that we are not here seeking to invest the Secretary of State with a brand new range of powers to control every move. They will see that we are seeking instead to ensure the breadth and effectiveness of the powers that are necessary. The object is to make sure that we can combine flexibility with effectiveness.
The new clauses confine the Secretary of State's powers to requiring an insurance company to take some specified action in order to protect its policy holders from the risk that their claims might not be met. In the main, the actions are the preventive and remedial measures which the Department was given the responsibility for securing after the failures of insurance companies in the early 1960s. In the course of time they have been found to be broadly right but sometimes inflexible or crude in detail. On occasion there has been some hesitation about using the powers for fear of precipitating by their very use the risk of insolvency which they were designed to avert.
Those powers are reformulated and regrouped with the object of giving more flexibility in the choice of the kind and extent of the action to be taken in differing circumstances. They will permit in this form the application of a fairly mild precautionary requirement at an early stage and allow it to be progressively intensified if necessary to correct a threatening development.
There is a good example in one of the most substantial powers at the Secretary of State's disposal, which appears in Section 68 of the 1967 Act and in Clause 13 of the Bill, the power referred to as the power of restriction. A restriction order requires that the company shall cease accepting any premiums for new 122 policies or renewals but shall continue to deal with claims coming in under the policies still in force and the settlement of claims already incurred. That is obviously a process that could take a number of years.
Under the 1967 Act such a requirement could be applied only to the whole of the insurance business, although the threat to solvency might lie in one particular part of it only. The clause permits a more discriminating intervention—for example, to halt the taking on of more motor business while allowing a perfectly healthy life or property insurance business to continue normally. There are similar refinements in other clauses in this part of the Bill. The grounds on which any of the powers may be used are set out in one place—Clause 12 —instead of being separately associated with particular forms of intervention.
Apart from those requirements, to produce a more flexible pattern of administration there are two new provisions in this part of the Bill, both in Clause 12. Subsection (3) permits the powers of investigation in Clause 20 to be exercised not only where a company's viability is suspect but also where that is not the case but where more information is considered necessary in the interests of policy holders generally. Subsection (5) of Clause 12 permits the forms of intervention specified in Clauses 13 to 20 to be supplemented or replaced by other action where that appears to be more appropriate for the protection of the policy holders. Those are matters that can be considered in more detail in Committee.
I turn now to the "fit and proper persons" provision. An important aspect of the requirements introduced in 1967 was the need for an authorisation to carry on any class of insurance business. The duty was laid upon the Board of Trade, as it then was, under Section 64, to be satisfied before granting such authorisations that the people who would hold key positions were fit and proper persons to carry that responsibility.
We have examined the Department's experience of administering those provisions over the years. In addition to the initial scrutiny, Section 68 of the 1967 Act permitted the power to restrict business, of which I have already spoken, to be invoked if it were subsequently 123 found that an unfit person was already in one of those positions. Our proposals dealing with that group of matters are to be found in Clause 2, Clause 12(1)(e) and Clauses 22, 23, 33 and 34. They were the subject of a great deal of discussion in another place.
The task has been to try to strike a reasonable balance between the two essentially conflicting considerations of fairness and effectiveness. Nobody can doubt that in 99 cases out of 100 the cause of an insurance company's getting into trouble is incompetent or dishonest management. The lesson comes out very clearly from the report of the V & G tribunal, where both matters are referred to. In paragraph 354 the tribunal said:The real cause of the loss was the mismanagement of the Company's affairs".In paragraph 196 it said:The Company was conducting its affairs with the panache and imprudence of a gambler.I must warn the House that I do not believe that the job can be done—at least, not effectively—if we allow entry into the business of those about whose ethical standards or technical competence there must be some legitimate doubt. Inevitably, it is a matter for subjective assessment of possible developments in the future and not judicial determination of past events. There must be a risk of some unfairness, although there is no suggestion that it has been realised in the past five or six years.
Parliament in 1967 struck a balance between fairness and effectiveness by drawing certain distinctions between prospective entrants to key positions and sitting tenants. On the whole, that has proved satisfactory. Probably it is still not stringent enough to amount to anything like a guaranteee of reliability. That would probably be unattainable, but we believe it right to leave it on that basis, with two principal changes: first, to close the loophole that exists when control of a company changes, and, secondly, to give an individual whose unfitness comes to light when he is already in post an opportunity to demonstrate on his own behalf that that judgment is mistaken, instead of restricting that right to the company in 124 question. Inevitably, giving that additional opportunity must mean some delay in the exercise of the Department's powers under the legislation.
There is another important group of provisions. Clauses 7 to 10 tighten up the arrangements for the protection of the interests of holders of long-term policies —that is, life policies—including the reasonable but non-contractual expectations of with-profit policy holders. Clauses 30 and 31 ensure that every effort is made to insulate the long-term policy holders from the consequences of mismanagement of any other kind of business carried on by the same company.
There are other new provisions and improvements. The ones I have so far discussed are really the 1967 provisions in a more sophisticated and up-to-date form. The new provisions, to some of which I should like to draw the attention of the House, include Clause 5, which contains a power to prescribe returns to be made more frequently than annually. That power will enable the fortunes of insurers to be monitored more closely and will enable signs of deterioration to be detected more quickly. They are, in a way, a complement to the revised powers to intervene earlier and less drastically that I have already described.
Clause 6 will enable unusual and potentially undesirable transactions to be required to be notified promptly.
In Clause 32 there is power to describe how assets and liabilities are to be valued for the purpose of determining compliance with the statutory solvency standards. That will include a power to require certain forms of asset, such as goodwill, to be ignored for that purpose. The general effect of the regulations to be made under that clause will approximate to the ideas set out in the V & G tribunal's report that an insurance company's solvency should be looked at on the assumption of an imminent break-up instead of on the more general going-concern assumption.
Clause 41, which replaces Section 25 of the 1958 Act, provides for the making of regulations as to the content and form of insurance advertisements. Clause 42 will require intermediaries who offer the services of an insurer with whom they have a special connection to reveal that fact.
125 There are less notable but none the less useful improvements to the provisions of the earlier Acts. These will pave the way for consolidation of this legislation, hopefully in the fairly near future, in a single statute.
The House will want to know how far the Bill can or will take account of the recommendations of the Scott Committee. We have been having consultations about that already, and I hope we will be able in Committee to introduce any necessary new clauses to take account of the report of the Scott Committee. I do not believe that they need be very numerous. We have kept in touch with the committee's thinking and we have been able to anticipate some of its more general proposals. We have also considered the points made by Miss Roberts in her note of reservation.
Like a number of the present clauses, I expect that some of the new clauses designed to implement the Scott recommendations will empower the Secretary of State to make regulations covering the complex and technical matters which arise. All those regulations will be laid before both Houses and will be subject to the negative procedure. It is in that way that we shall be able to work out, after further consultation, the most practical measures to protect the public. We shall be able to keep abreast of new developments as they arise with refinements and adjustments.
There will be a considerable amount of work in preparing the new regulations and revising the existing ones. We shall do our best to avoid unnecessary delay in putting the necessary flesh on the skeleton which the Bill provides. I hope that the proposals to provide more resources for the protection of consumers in this important area will command the support of the House.
The concluding section of the Explanatory Memorandum sets out our plans for building up a staff of the right calibre and experience. We are trying to introduce ready-made skills and, on the lines suggested in paragraph 351 of the Vehicle and General tribunal's report, we already have the good fortune of securing the services of a former general manager of a reputable insurance company to reinforce and supplement the experience which already exists within the Department.
126 We must strike a balance between overstaffing and under-staffing. Paragraph 351(c) of the Vehicle and General tribunal's report questioned the adequacy of the staff which has been provided in recent years. Since then we have increased the staff from 30 to 60. We propose to go further than that, as the Explanatory Memorandum sets out. The ultimate total envisaged is about 100.
No conceivable system of supervision can provide a complete guarantee that there will be no failures even if deliberate fraud could be ruled out. It is inherent in insurance business that a view has to be taken of events in the future which must occasionally turn out to be wrong to a degree which defeats what appeared at the time to be prudent judgment.
We must take a view as to the point at which the return from increased expenditure on supervision diminishes so sharply or at which the interference with the normal sensible conduct of the business imposes such intolerable costs at the expense, inevitably, of the policy holder that it is right to draw a line. We believe that the improvements in the system of supervision which the Bill makes or will permit us to make mean that we have arrived at what is the right and proper balance. We believe that that is the right way of dealing with the problem because it extends consumer protection.
§ 7.22 p.m.
§ Mr. Anthony Wedgwood Benn (Bristol, South-East)
The right hon. and learned Gentleman's manner in presenting the Bill was so quiet and modest that perhaps the House may not have appreciated the significance of the Bill. Maybe the right hon. and learned Gentleman does less than justice to the legislative innovations contained in the Bill. However, the Opposition support the Bill on Second Reading though we shall be moving amendments in Committee.
I am bound to draw attention to the fact that in the Bill the Government take substantial steps further forward in intervention in private business. I compare the attitude described by the right hon. and learned Gentleman with the letter written by the present Under-Secretary of State for Trade and Industry, the hon. Member for Harrow, Central (Mr. Anthony Grant), who was then at the 127 Board of Trade, in response to a letter written to him by my hon. Friend the Member for Birmingham, Northfield (Mr. Carter) in July 1970 about premiums generally. The hon. Gentleman's letter concluded that in respect of the Government's attitude towards insurance—taking what the Secretary of State for Employment and Productivity said—where there is competition that is the most effective means of safeguarding the consumer and the less it is interfered with the better.The hon. Gentleman's letter continued:I remain of the view that the motor insurance market is competitive.Without making too much of that, the Bill is part of the story of intervention which we have seen in other areas.
After the collapse of the Vehicle and General, we had the tribunal of inquiry. I fear that injustice was done. All the blame was put upon a civil servant. One of my right hon. Friends who had held a ministerial post in the Board of Trade explained his attitude in debate. He indicated that it was wrong to blame civil servants. Even under the legislation which this Bill amends, consolidates and extends, the ultimate responsibility in Government rests with Ministers. I think that the civil servant in question, Mr. Jardine, was badly used by the tribunal.
Following the Vehicle and General inquiry and the tribunal's report the Government got to work on this Bill, and rumours about it began spreading quite early. I quote the Sunday Telegraph of January of this year:What is chiefly worrying some of the smaller companies is that Mr. Walker and his legislators might over-react to the V & G disaster and bring in a Bill which would discourage new entrants into the insurance market, hit the smaller groups and favour the 10 or so giants who already do much of the business in the thriving London market.When the Bill was finally published The Times on 28th January ran a leader under the heading "A Far-reaching Bill." The leader said:The Government's Insurance Companies Bill, unveiled at the end of last week, could briefly (but not unfairly) be characterised in the following terms. It will give the Department of Trade and Industry powers to do anything at any time to any insurance company without giving any reasons.128 I recognise that some amendments were made as a result of a debate in another place. The Times leader continued:For an industry which has historically operated with the minimum of Government intereference, the Bill thus constitutes a watershed of Himalayan proportions.The Minister in introducing the Bill managed to reduce the Himalayan mountains to a mere bump in the middle of the road. This is, of course, a significant Bill.
There is much comment in the Press about the debates going on within the Labour Party as to the extent of intervention that there should be in private industry. We shall be continuing those discussions on Wednesday, as every reader of the newspapers knows. I take the opportunity of drawing to the attention of the Government Front Bench how much we have been guided by its developing thinking through the successive somersaults of the last three years.
I shall commit the offence which I hope the Minister will forgive of quoting his Bill. I shall go quickly through some of the powers which the Government think it necessary to take. I recognise that some of them represent the consolidation of Companies Act legislation passed by the previous Government. Clause 2(1) says:The Secretary of State shall not issue under section 61 of the Act of 1967 an authorisation with respect to an incorporated company if it appears to him that any director, controller, or manager of the company, is not a fit and proper person to be associated with the company.
§ That is direct control of appointments
Clause 6(1) says:
Classes or descriptions of agreements or arrangements appearing to the Secretary of State as likely to be undesirable in the interests of policy holders may be prescribed for the purposes of this section".
§ The clause goes on to say how that should operate.
I now move to the general powers of the Secretary of State. Clause 12(1) says:
Any power conferred on the Secretary of State … shall be exercisable on any of the following grounds (a) that the Secretary of State considers the exercise of the power to be desirable for protecting the policy holders or potential policy holders of the company ".
Clause 14(1) provides:
The Secretary of State may require a company—(a) not to make investments of a specified class or description".
§ That is a power which would permit another Government to prohibit investment in South Africa, for example, were that to be advisable in line with Government policy of the day.
Clause 20(1) provides:
The Secretary of State may require a company to furnish him, at specified times or intervals, with information about specified matters being, if he so requires, information verified in a specified manner.
Clause 21 says:
The Secretary of State may require a company to take such action as appears to him to be appropriate for the purpose of protecting policy holders or potential policy holders of the company".
Then there is the power over appointments, contained in Clause 33(1):
No insurance company to which the Act of 1958 applies shall appoint a person as managing director or chief executive of the company unless".
Then come the provisions that such appointments shall be confirmed by the Secretary of State. To make arbitrary power even more arbitrary, we read in Clause 38(1):
The Secretary of State may, on the application or with the consent of an insurance company to which the Act of 1958 applies, by order direct that all or any of the provisions to which this section applies shall not apply to the company or shall apply to it with such modifications as may be specified in the order.
Just to carry the process of intervention through to its final conclusion, we read in Clause 41(1):
Regulations may be made as to the form and contents of insurance advertisements.
Had such a Bill been put forward or such powers been taken by the Labour Government, the Conservative Party would have had a field day about a monstrous intervention in private industry. I remind the House again of what the then Parliamentary Secretary to the Board of Trade said in 1970:
I remain of the view that the motor insurance market is competitive"—
referring to a Cabinet colleague's view that
competition …is the most effective means of safeguarding the consumer".
§ The Bill represents, therefore, a substantial change in the Government's thinking.
§ I say to the right hon. and learned Gentleman that with power goes responsibility, and every policy holder will now be entitled to regard the Secretary of State for Trade and Industry as the watchdog of his interests and, in a very particular sense in the light of the provisions of this Bill, a guarantor of his policy, for if any man now loses money in an insurance company if it goes bankrupt or cannot meet its obligations, after these powers have been taken by the Government the Secretary of State will become responsible because he will have failed to use the sweeping powers which Parliament has given him under the Bill.
§ Mr. Nicholas Edwards (Pembroke)
I accept that these are sweeping powers but the right hon. Gentleman is forgetting that many of them were contained in the Companies Act 1967. Many similar quotations could be extracted from that Act, for which the right hon. Gentleman was responsible. This Bill repeats or tidies up many of them.
§ Mr. Benn
If the hon. Gentleman reads HANSARD tomorrow he will see that I referred to the fact that this Bill consolidates, amplifies and extends the powers of earlier legislation. I am saying that the present Government have already intervened further in insurance—indeed, into other types of business—than any of their predecessors. An indication of what this means is that the administrative costs of the Department will rise. We have the figures—£170,000 at 1972 prices in April 1971, £310,000 in January 1973 and £540,000 in 1974. This has to be set against the rather boastful answer given by the Treasury today about the number of civil servants. The Bill increases the Civil Service, and quite rightly, with this power of supervision to discharge.
In addition, the amount of inspection involved is bound to increase the administrative costs of the insurance companies. If they are to become liable to be asked to give information, to verify it, and to provide the books at the request of the Minister, their administrative costs will rise. I draw attention to the costs of administration in private insurance already. On the 1970 figures, ordinary 131 life policies already involve 17.8 per cent. of the premiums in administrative costs; industrial life policies 33.7 per cent.; fire policies 39.1 per cent.; accident policies 37.8 per cent.; and motor insurance policies 30.9 per cent. These figures must be contrasted with the National Insurance Scheme, in which 5 per cent. of the premiums goes in administrative costs, or with the Industrial Injuries Scheme, in which the figure is 12 per cent. These figures are available in the Annual Abstract of Statistics of the Department of Health and Social Security.
Let us turn from that to the profits of the insurance companies. I quote three of the major companies—Commercial Union, General Accident and Sun Alliance. In 1964, at a time when the Conservatives were in power, the profit of Commercial Union was £6 million; in 1971 it was £33.5 million, an increase of 558 per cent. The profit of General Accident in 1964 was £3.6 million and in 1971 £18.4 million, an increase of 511 per cent. In 1964 the profit of the Sun Alliance was £2.5 million, and in 1971 £19.4 million, a rise of 776 per cent. This did not, however, stop premiums from rising.
According to the Financial Times of 11th February, an increase in Commercial Union insurance premiums requested was about 20 per cent. Of course premiums are very much higher than they were three or four years ago. This is the obvious reason why I, speaking for myself, should prefer to see something different. I should prefer to see consideration given to the question of whether, for certain forms of insurance such as life assurance, accident insurance, ills which befall every one of us, we ought not to recognise that competitive private enterprise is no longer appropriate. We ought to consider whether the community should not organise this national service on a national basis. It would clearly lead to an enormous saving in administrative expenses; and most of the problems with which we are battling in this Bill, and in the earlier Bills, would no longer arise. The protection of the policy holder would be complete; his savings, which would need to be held and managed on a commercial basis by an entirely independent body, would be secure; failure and fraud would no longer 132 arise; the policy holder would get more for his money.
§ Mr. Peter Rost (Derbyshire, South-East)
The right hon. Gentleman has quoted profit figures for two years and premium percentage increases. Would it not be fairer to relate the two by quoting the profit figures as percentages of the turnover of the companies—the premium income—taking off the investment income which has contributed to the profit, which is a reserve?
§ Mr. Benn
This is a matter for argument but I will satisfy the hon. Gentleman by reading the leading article in the Sunday Express of 18th April 1973. It said:In the face of a profit increase from £18 million to £33 million, the General Accident Assurance Company is applying to the Department of Industry to raise its car premiums by 10 per cent.Other companies with bumper financial results are asking even more. Some want to soak the motorist by an extra 20 per cent.How can such monstrous increases possibly be justified when profits are booming?I do not often find the Sunday Express having similar views to my own, but when I do the hon. Gentleman will appreciate why I brought such an article with me, and use it to rebuff interventions like his.
§ Mr. Joseph Ashton (Bassetlaw)
My right hon. Friend has compared the administrative costs of the private insurance and national insurance. Another difference, of course, is that the National Insurance Scheme has tribunals to which the consumer can appeal against a decision. That is not the case in private insurance, in which the companies lay down their own law.
§ Mr. Benn
My hon. Friend is right. These arguments all deserve further consideration, and we shall be discussing them in Committee. There will be a continuing public debate about them.
As far as motor insurance is concerned, there is a strong feeling, which I share, that where the State requires a person to have third party insurance, and where the question of responsibility is utterly irrelevant—if an old lady has been knocked down here, or there has been an accident there—the provision of private enterprise in this form may not be the 133 best way to handle it. I put this to the House because it is a view shared outside the House which should be reflected in it.
I come now to the very important question whether the inspection which the Minister provides for in the Bill will be effective. It is arguable, at any rate, that in the case of V and G—I am not saying that the new powers would not have been desirable—the problem was a failure of implementation of existing powers and not, unarguably, a question whether further powers were needed.
The Equity Funding case in America has been commented upon very widely in all the insurance Press on both sides of the Atlantic. The Investors Review carries the headline:How Equity Funding took 100,000 people for a £100 million ride.The Investors Review says this about this extremely important case:Exactly how it happened is also anyone's guess. Laziness and sloppiness are the answers often heard on Wall Street. Everyone assumes that in a tightly regulated industry, no one would have the nerve to break the law. The rules are too clear, and threat of an unannounced audit too frightening.The Investors Review then says:Apparently all appropriate authorities felt the same way, believing that no company that advertised as often and as openly as Equity Funding would dare violate the law. So the SEC and the various insurance regulators never bothered staging an audit. Reinsurers never bothered checking on the validity of the policies they bought. They assumed Equity Funding had been audited by state regulatory agencies and the SEC.The problem will begin for Ministers when this House grant them these sweeping powers. They will then have to train themselves and their Departments to intervene vigorously to see that such things do not happen again.
Since V and G we have had the report of the Ombudsman on the Department of Trade and Industry's failure to deal with the collapse of the Competitive Insurance Company in June 1971. I quote from the Financial Times of 30th April 1973:Sir Alan does not suggest that early action by the DTI would have saved Competitive from collapse or that it would have been brought about earlier, thus saving at least part of the losses incurred by the company's 30,000 policyholders. But he does lay blame on 'lack of thoroughness' in certain aspects of the DTI's inquiries and on 'defects in the department's administration'.134 I have some sympathy for civil servants who are required by Parliament to go into this very complicated area and to intervene, because this involves the judgment whether to intervene and how much to bother the Minister, always with the risk that one may be blamed by a tribunal afterwards if one does not take every problem to the Minister.
I come now to the report on Linked Life Assurance. The minority report of Miss E. R. C. Roberts says:With the Committee, I do not believe that the solution lies in giving greater power of control to the Department than we have proposed. The additional protection needed, particularly by the unsophisticated public, would be best provided by the appointment of an active, energetic, commonsensible Insurance Commissioner, with a small, energetic, commonsensible staff, who would be entrusted with the task of looking after the interests of consumers in the field of linked life assurance.I cannot necessarily confirm that argument, because I could not claim to know enough to assess it. However, the Minister will have to give better reasons why he has not chosen to adopt the method of a commissioner to safeguard the interests of the public, with whom necessarily the policy holder would have a more intimate relationship than is the case between a member of the public and Parliament.
Finally, the Bill raises much wider issues than the Minister appeared to recognise in his opening speech. I shall not go into those issues, because it would be inappropriate, even on a wide Second Reading debate. But if the Government now find it necessary to take sweeping powers of this kind to protect policy holders, why is it that other classes of people in industry are less well protected? Why should not such sweeping powers be taken to protect workers in industry generally, in firms threatened with redundancy? Why should not powers be taken widely to deal with issues that arise in business where the national interest is involved? Without emphasising the current case of Lonrho, why should it be that the Minister is able to intervene if he thinks that the policy holder of a particular motor insurance company is adversely affected but is unable to intervene in cases where the national interest or the interests of workers may be involved?
135 The Bill is a watershed of Himalayan proportions. The precedents created in the Bill will be of great value to an incoming Labour Government, to be studied, examined, extended and used more widely. For this reason I hope the House will feel able to give the Bill a Second Reading.
§ 7.46 p.m.
§ Mr. R. A. McCrindle (Billericay)
I am reluctant to follow the right hon. Member for Bristol, South-East (Mr. Benn) into the matters on which he started to touch at the end of his speech. I follow him, however, in agreeing upon all he said about the very wide-ranging nature of the powers that the Bill gives to the Department of Trade and Industry.
As I listened to the right hon. Gentleman, however, I wondered whether he was entirely right to criticise the Government, as I thought he was criticising them, for having taken these sweeping powers. Perhaps he was saying that the Government were not admitting that they are wide-ranging powers. I accept that they are wide-ranging powers. It was necessary to have the wide-ranging powers that are embodied in the Bill. I should have thought it a sufficient justification to say that, where it can be proved in the public interest that private industry requires to be policed in some way, as the Bill undoubtedly allows the insurance industry to be policed, the policing should not be for strictly doctrinaire reasons. If the right hon. Gentleman and I have any measure of agreement, however, it is on the fact that these are wide-ranging powers and that they are necessary.
I am prepared to welcome the Bill and the powers that it introduces. I have been involved in the insurance industry for over 20 years. For a great part of that period the majority of British insurance has been synonymous with security and integrity, and 95 per cent. of the British insurance industry could still rightly claim that security and integrity continue to be its watchwords. However, the failures of the past few years, culminating in the Vehicle and General debacle, have raised strong doubts in the public mind as to whether the trust that has been extended over the years to British insurance companies is still justified.
136 The Vehicle and General failure was the culmination of several failures over many years. Without trying to make a party political point of it, it is fair to say that many of these failures took place at times when the Labour Party was in power. But the Vehicle and General failure was large enough to have a dramatic impact beyond any preceding failure. It forced the Government, as it would have forced any Government, to examine the conduct of companies and to see whether the powers of the Government to intervene and to regulate the conduct of the insurance business were sufficient.
It is fair to say that it surely cannot be said that previous Governments had no powers to intervene in past insurance company failures. In retrospect I suggest that several Governments, of both major parties, had perhaps an imperfect understanding of insurance companies' operations. They also had a fear of acting in case by their action they compounded the difficulties which they sometimes suspected. Therefore, Governments of both political complexions have held back. I wonder whether this holding back has been partly due to the inexperience of those in the Department of Trade and Industry and whether their number has been inadequate. Whatever else may be said, even before the introduction of this Bill that at least has been taken care of and the number of inspectors in the Department has already been increased.
The Bill is a recognition that the public undoubtedly require protection from some of the sharks who undoubtedly have been running the motor insurance companies in recent years. I believe, however, that it is also a recognition of the fact that the Government wish the public to go on benefiting from competitive private enterprise. With regard to the ability of British insurance companies to keep down premiums in past years, it must be pointed out that in comparison with countries overseas British motor insurance is still inexpensive. I contend that that is one of the benefits we derive through having a competitive private enterprise system in motor insurance.
Labour Members in challenging our system put forward the panacea of complete or partial public ownership. I suggest that nationalisation of motor insurance would mean, first, that the overall cost to a motorist would be more than it 137 is at present; and, secondly, that those who would benefit would be the substandard drivers and, therefore, the average motorist inevitably would pay more for his motor insurance.
§ Mr. Ray Carter (Birmingham, Northfield)
As regards the comparison of premiums between the United Kingdom and other countries, is not the hon. Gentleman aware that the principal reason for what he has said, is the fact that British drivers are recognised to be—this can be proved statistically—among the safest in the world, and that the cars of British owners do not get damaged to the same extent as cars in other countries?
§ Mr. McCrindle
I would not contest that, and I am delighted that I gave way to the hon. Gentleman to allow him to make the point. But I am sure he would not contend that that is the only reason why the British motorist pays less for motor insurance. If I concede the hon. Member's point, I am sure he will concede mine, namely, that part of the reason is the competition between insurance companies. I accept that sometimes competition has been carried too far, with results which we are now discussing. I contend that at its best British motor insurance is the least expensive of many Western European countries, and I hope that the hon. Gentleman will concede this.
I believe that, following the V & G affair, the Government are right, to come down on the side of freedom, competition, publicity and accountability. I believe that that is what the Bill is all about.
The Bill is on the right lines since it gives extensive powers to the Department of Trade and Industry. The right hon. Member for Bristol, South-East said he hoped that the powers would be used effectively. I hope that they will be used reasonably, because the Bill gives the Department very wide powers.
I wish to express some little concern about the dependence which the Bill places on future regulations the contents of which we cannot at this stage know. I hope that when the regulations are introduced there will be a reasonable recognition of the fact that the great majority of British insurers have nothing to fear from compliance with the regulations. Equally, however, they do not require any 138 undue intervention in their day-to-day activities by the sort of powers to which the Bill could lead if introduced in a malevolent way.
I wish to make one or two observations on points arising from the Bill. My first point relates to investment. A large part of the Bill concentrates on the protection of life funds. It is right to give the Government of the day power to intervene as provided in the Bill, but I wish to express fears—and my fears are reinforced having listened to the remarks of the right hon. Member for Bristol, South-East—about the danger that a future Government might require investment in a certain direction. I hope that long before we ever have a Labour Government—if indeed we ever have such a Government—the way in which the powers are used by the present Government will blaze the trail so that it will be more difficult for a future Government to intervene in the way in which I fear might happen.
I turn to the subject of solvency. The British Insurance Association has a point when it says that the power of the Secretary of State to alter the margin of solvency required by giving no more than three months' notice could compound the difficulty which such a step would be aimed at solving. I hope that when my hon. Friend the Under-Secretary of State replies to the debate he will give his reasons why the Government feel that so short a period is required.
I should like to say a word or two about life insurance. There is no doubt that there is a major need to protect life policy holders. It might well be that the V & G affair would be as nothing compared with the outcry which would follow the failure of a major life insurance company. I found the Scott Committee's report a little disappointing and rather inadequate. I suggest to my hon. Friend that some Government amendments could be tabled in Committee to go beyond the confines of the Bill as now drafted. In retrospect, I feel that the Government were wrong to draw the terms of reference of the Scott Committee so narrowly.
As one who has had long experience in life insurance, I do not see the difference between unit-linked or property-linked policies on the one hand and conventional with-profit endowments on the 139 other hand. I believe that if the Government wish to give protection to life policy holders from defalcation by insurance companies, it should apply to life funds of all kinds and not simply to those tied to equity or property.
I regard some of the Scott Committee's recommendations as valuable—for example, the cooling-off period following a sale is something which most honourable companies will welcome. Such companies will want the persons to whom a policy is proposed to be sold to be given sufficient time before closing the deal to enable him to change his mind. If a new clause is introduced in Committee on this topic, I shall welcome it.
Clause 41 gives the Government power to intervene on the form of advertisements by insurance companies. I read with interest the Scott Committee's comments on the rules which it would like to see introduced on such matters as graphs in brochures and advertisements. Although this may seem a tiny point, I must stress that there is no doubt that the opportunity to mislead in graphs set out in brochures and advertisements is considerable. I suggest to the Government that an amendment to Clause 41 might be desirable in this respect.
On a much wider plane, perhaps the Department of Trade and Industry should have a specialist staff composed of people with experience of life assurance. I have been struck by the approach of its Insurance Department in assuming that all classes of insurance are the same. There are many separate types of life assurance which require to be taken care of, so much so that, although I cannot go quite as far as Miss Roberts did in her minority report about the justification for the appointment of an insurance commissioner, I believe that my hon. Friend the Under-Secretary would do well to consider the possibility of having a specialist staff in his Department composed of people who are knowledgeable in life assurance, possibly with powers to monitor life assurance developments. This is a very fast-moving business. One has only to compare the average life assurance policy today with that being sold in 1963 to see what a dramatic transformation there has been. With 140 respect to the Department of Trade and Industry, sometimes I wonder whether its Insurance Department's staff is capable of keeping up with the many competitive developments taking place, in the interests of policy holders.
I suggest, too, that there is a strong argument for powers being taken in Committee to control selling methods. If my hon. Friend the Under-Secretary cares to look at any of our weekend national newspapers he will find any number of advertisements placed in them by insurance brokers. Here I speak with an interest as an active insurance broker. Many of those advertisements give highly misleading impressions of the likely results of investing money through those firms.
I should welcome additional powers to control activities of this kind. As to whether it is sufficient to relate them to Clause 41, I am open to persuasion. But certainly the Government should give fresh consideration to many aspects of the life assurance business following the publication of the Scott Committee's report.
I give a warm general welcome to the Bill. It is very much to the credit of the Government that, having taken the line which the right hon. Member for Bristol, South-East was inclined to ridicule, they are now disposed to accept that, when the public interest demands, private enterprise should continue to operate, but that reserve powers should be held to make it more accountable to the public. Freedom with publicity should be the watchword. I believe that it is in that context that the Bill has been introduced. I for one support it.
§ 8.4 p.m.
§ Mr. Ray Carter (Birmingham, Northfield)
First, I apologise in advance because I shall have to leave almost as soon as I have spoken. I mean no disrespect. I shall, of course, read the report of the full debate when it is published in HANSARD.
The Bill stems directly from a number of factors, the principal one being, I suppose, the collapse of the Vehicle and General Insurance Company when more than a million motorists lost their cover. I have never believed that the public fully understood the enormity of that collapse. It may be that the scope of the 141 Bill gives some indication of the Government's knowledge of what that collapse meant to the motoring public. With the collapse of the company, 10 per cent. of our motorists lost their cover.
Then we had the findings of the tribunal inquiry into the V and G collapse, which found fault with almost everyone with whom it came in contact.
A third factor is the growing foreign participation in the British insurance market. It has grown over the years. Very often those foreign interests do not go about their business in quite the way that we do.
Then there is the topic touched upon by the hon. Member for Billericay (Mr. McCrindle), which is what was held to be the possibility of a collapse of a life company at about the time of the Vehicle and General collapse some two years ago. That would have provoked even stiffer measures than we have in this Bill. We are very lucky, given the inflation that we have seen in the past two or three years, to have escaped completely the collapse of a life company.
All these questions have been posed, and the Bill is the Government's answer. The Opposition support it entirely. I do not believe that it goes anywhere near far enough. However, before explaining why I hold that view, perhaps I might look at the Government's record in insurance and their attitudes to it over the past 2½ years, and compare the Bill with the Government's philosophy at the beginning of their period in office. It will be recalled that 2½ years ago the solution to all our problems lay in the philosophy of competition, the law of the market place and so on.
My right hon. Friend the Member for Bristol, South-East (Mr. Benn) has quoted the very famous letter on the subject. I shall have to requote it. It bears requoting. The Under-Secretary wrote it to me. Since first coming to this House, I have received a great many letters from Ministers most of which contained very little that I wanted to preserve. However, I shall always keep two letters. One was from the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), once again, funnily enough, associated with the Vehicle and General collapse. The second one was from the present Under-Secretary—
§ The Under-Secretary of State for Trade and Industry (Mr. Anthony Grant)
This was nothing to do with me.
§ Mr. Carter
I am pleased to repeat what I have said on other occasions. The hon. Gentleman reminded me on Friday in the course of an Adjournment debate that I had absolved him from complicity or involvement in the collapse of V & G. However, I know he will accept responsibility for the letter to which I have just referred.
The opening words stem from a statement by the then Secretary of State for Employment. I had raised the possibility of a collapse of an insurance company. It was a premonition which came true.
The hon. Gentleman wrote:Where there is competition there is the most effective means of safeguarding the consumer and the less it is interfered with the better … I remain of the view that the motor insurance market is competitive.That represents an enormous turn-round for this Government, especially for the hon. Gentleman, and I wonder whether he will tell us that that is now an operative statement.
§ Mr. Anthony Grant
Perhaps I ought to intervene now. The hon. Gentleman has said that he will be leaving very soon. I think it would have been fairer if he had said that what prompted his communication to my Department was not the collapse of a company but his complaint that premiums were going too high. In my reply I was pointing out that if we did what the hon. Gentleman wanted, which was to lower premiums artificially, that would probably precipitate a collapse.
§ Mr. Carter
At the time I suggested to the Board of Trade that an intention by the major motor insurance companies to raise their premiums indicated that their pressures on the smaller companies would be much greater. Therefore. I went on with statistics that I had obtained from research to prove—at least I thought I was proving—that there was the possibility of collapses taking place in such circumstances. Indeed, there was not just the one collapse there were a number.
I should like to go on to deal with the Bill—[Interruption.] Hon. Members may not like it when statements from the past come back to haunt them. There might 143 be one or two others later. Hon. Gentlemen must sharpen up the way that they approach the affairs of their Front Bench. Unfortunately, the Press does not spend overmuch time dealing with them. It would rather look to the Opposition Front Bench and the Labour Party for what we propose.
I assure the Treasury Bench that in matters of motor insurance we would act far more rigorously to protect policy holders than is being attempted in the Bill. More stringent controls are necessary, principally because, as the Minister admitted in opening the debate, the law compels the citizen to insure in many areas. With the passing of the Social Security Bill, this compulsion is increased even more. Not only does one need motor insurance and a whole variety of other insurances, but, by law, one now needs to be a member of an authorised pension scheme or to participate in a reserve scheme. So we are not dealing with a free market. By no stretch of the imagination is it free from the consumer's point of view. It is a tied and compelling market.
We need further controls to deal with the possibility of a collapse of the proportions of the V and G type. There is no doubt that the Bill does not ensure that that kind of thing will not happen again.
As was pointed out by my right hon. Friend the Member for Bristol, South-East, we need for greater efficiency in the insurance industry. We need to ensure that a more optimum form of structure and management control is brought about.
The hon. Member for Billericay pointed out that we need to deal with the way that insurance is sold. Many people are conned into buying insurance that they do not need. In many cases they go to brokers who are not controlled by law and charge extortionate rates for the selling of insurance policies. There is scope for a great deal of legislation regarding the way that insurance is sold to the consuming public.
An insurance broker who sells a policy does not charge. He lives almost entirely on the commission that he receives from the life assurance companies.
§ Mr. Carter
That may be so. However, I assure the hon. Gentleman, from cases that I have handled, that brokers with whom I have come into contact charge a fee of their own.
§ Mr. McCrindle
I apologise for interrupting again. I suggest that the hon. Gentleman is confusing mortgage brokers with insurance brokers. Mortgage brokers make a charge, but insurance brokers do not because none has to be made.
§ Mr. Carter
I have dealt with cases where brokers have charged commission to clients who have obtained motor insurance from them. If the hon. Gentleman wants information on these cases I am willing to let him have it.
We should bear in mind that one-tenth of the gross national product now arises from insurance. It is probably the biggest single aspect of the GNP. It has grown in massive proportions over recent years. In my opinion, it has grown far too big. It is enormously influential. I wonder how much of the property boom—the enormous increase in house prices and land speculation in general over the past two years—has been due to insurance funds switching from one area of the economy into land, property, and so on.
No better area can be looked at to exemplify the inefficiency of certain sectors of the insurance industry than motor insurance. My right hon. Friend has already referred to the percentage of premium income that is devoted to expenses and commission. It amounts to between 30 per cent. and 45 per cent. on motor insurance. In many other instances it is far higher than that.
Motor insurance companies tell us "We are always making losses". I have examined the compiled accounts of the motor insurance companies for 1971. In that year there were reserves of £239,829,247. In that year there was a declared loss, but that was arrived at only in a book form because a certain percentage of the premium income was transferred to reserves. Subtracting the loss from the transfer to reserves results in a profit. It is the way that figures are presented that enables the motor insurance industry to say "We continually make an underwriting loss". There are enormous reserves in motor insurance. 145 In 1971 the figure was £239 million. It is probably about £300 million now.
The real beneficiaries of the profits on reserves are the shareholders. Basically, the Bill does absolutely nothing to change the structure—the real control—or to improve the basic rights of the policy holder, which, in many aspects of insurance, are to obtain a policy at the cheapest possible rate administered in the soundest possible way. Unfortunately, the insurance industry over many years has been, and continues to be, hostile to any form of intervention. Indeed, I am surprised that it has accepted so easily and readily the proposals contained in the Bill. During the passage of the Social Security Bill the week before last some hon. Members felt so guilty about the fact that the reserve scheme contributions could not be set against tax liability that they voted with the Opposition in an attempt to defeat the Government's proposals. I have no doubt that that aspect of that Bill was due substantially to the pressure of the insurance companies.
Again, we have the tremendously important fact that insurance is largely a captive market. We now have to insure against retirement. We must cover third-party risks when we drive. Indeed, one cannot get a mortgage unless one takes out insurance. There is a whole range of other forms of insurance where the law or the industry which operates that form of insurance compels. I believe that where the State compels it should seek not simply to control but to own and manage.
I believe that an incoming Labour Government will be forced to take far more stringent measures to secure the rights of policy holders over the whole range of insurance.
I end on one moral note. Insurance is concerned with misfortune or old age. Is it any longer right that a shareholder who has a stake in an insurance company should seek to make a profit out of the misfortune of another citizen? I do not believe that is right. We have said that it is wrong in many other spheres of insurance—sickness, injury, unemployment, and others. Sooner or later—I believe it will be sooner—the next Labour Government will have to turn their attention and minds to ensuring that policy holders have the same rights 146 as in so many other spheres where the State has decided to intervene.
§ 8.20 p.m.
§ Mr. Roger Moate (Faversham)
The hon. Member for Birmingham, Northfield (Mr. Carter) said that he was going to refer to the Bill. Actually he never quite made it, which is a pity, because that might have led to a few more factual statements than some of the inaccuracies and exaggerations into which he allowed himself to be tempted.
I think it is quite wrong of the hon. Member to pretend that, because he has had a letter from a Minister stating that he believes the best protection for the consumer in motor insurance premiums is competition, that somehow represents a major change in the Bill. The two things are utterly different. If the hon. Member examines the Bill he will find that there is no clause saying that we intend to control motor insurance premiums. That is totally different and he is misleading the House and the public if he puts that forward.
The right hon. Member for Bristol, South-East (Mr. Benn) was also guilty of gross exaggeration and misunderstanding of the Bill. There is no difference in the basic philosophy of this and previous insurance Bills. It has always been understood that insurance was subject to different considerations from other commercial enterprises. I do not remember the exact date, but insurance legislation dates back as far as the eighteenth century. The insurance industry and the public have always accepted that there were special considerations in introducing legislation to protect policy holders in this very special field.
The right hon. Gentleman tried to make out that the Bill represented a substantial increase in powers as compared with the 1967 Act. I do not believe that to be true. He based most of his argument on the fact that The Times had said that this was a watershed. That is an unlikely combination—The Times and the right hon. Gentleman—at the present time. But I do not think it makes the exaggeration any less untrue.
If the right hon. Gentleman examines the legislation carefully, he will find that in almost every case the powers existed under the previous Act. They have been 147 clarified and defined, and in certain respects they have been extended. But I do not think he has read the Bill very carefully if he puts this forward as a major expansion of the Government's interventionist powers. It is not like that, and I think he will realise it when this matter is studied more closely in Committee.
In particular—I believe that my interpretation is right, but I should appreciate confirmation from the Minister—the right hon. Gentleman said that Clauses 13 to 21, which give powers of control over investment and so on, were a great expansion of power over the rights of insurance companies. He said that Clause 14 allowed the Government to prescribe the investments a company could not make and would allow a future Labour Government to say that a company could not invest in South Africa.
As I understand it, however, Clauses 13 to 21 are bound by Clause 12. If the right hon. Gentleman looks at that clause, he will see that it states quite clearly thatAny power conferred … by sections 13 to 21 below shall be exercisable in relation to any insurance company …and that this only applies where it is the Secretary of State's view that… the company may be unable to meet its liabilities or, in the case of long term business, to fulfil the reasonable expectations of policyholders".Therefore, these powers can be exercised only when there are doubts about a company. This is eminently reasonable. It is based on the same philosophy as the 1967 Act.
The right hon. Gentleman also went on with what I consider to be quite irrelevant to the Bill—the usual arguments from the Labour Party about nationalisation or an extension of State participation in existing companies. If he is trying to do a disservice to this country, he can best do it by continuing to talk like that.
We have heard that the British insurance industry earns something like £400 million net a year. It is the largest single contributor to our invisible earnings. Its investment is something like £18,000 million and its overseas gross earnings are massive. Britain is the largest single 148 insurance centre in the world. This position has been created not by State backing but because it has been a free enterprise system, because the State has been enlightened, under both Conservative and Labour administrations, and has allowed the companies to remain unfettered by State interference in such things as policy wording, investment policy and so on. Other countries have succumbed to the temptation of imposing State control. That is why they have fairly small national insurance industries, whereas we have a very great one, of which we should be proud.
In some ways one does not mind the right hon. Gentleman talking as he does, because it is the sort of talk that will ensure a Conservative victory in the next election. But I hope that in the interests of responsible government he will drop some of his more exaggerated talk, because it will damage the industry.
I welcome the Bill, because it avoids the worst pitfalls and the more alarmist ideas that were going round in the post-V and G period—ideas about extending compulsory third party insurance to property damage, which is totally irrelevant to the problems we have been faced with in recent years, and ideas about having larger mutual funds between the various companies, which would have given a blank cheque to the irresponsible underwriter. It has avoided this and some of the State intervention ideas of the Labour Party. To that extent I welcome the Bill. I welcome it also in that it extends the past policy of successive Governments in insurance company legislation. It gives increased powers to monitor insurance companies, increased powers of intervention if a company is seen to be in difficulties, and certainly increased powers to prevent a company from getting into difficulties. In all these respects I think it is something that the whole insurance industry welcomes and the whole country should welcome. To that extent, it is a very sensible and helpful Bill, and I think it will have a very helpful and constructive Committee stage.
To a certain extent, however, I am disappointed by the fact that the Government have rejected, without very convincing arguments, the idea of a separate insurance commissioner or registrar. A separate agency in the City was something which I and some of my hon. Friends put 149 forward. Indeed, the right hon. Member for Birkenhead (Mr. Dell) also put this idea forward. I believe this to be important, because somehow we have to establish a continuing system of close supervision by people who can manage to keep their fingers sensitively on the pulse of commercial life in the City of London.
I am not saving that the Department of Trade and Industry is not carrying out its functions under the insurance legislation with great efficiency. I believe that it is and I take this opportunity of saying so. There were very severe criticisms when Vehicle and General collapsed. I made some of them in this House, and perhaps I should at this stage declare an interest as an insurance broker. Since that time I have heard more compliments than criticisms about the Department of Trade and Industry. Whereas people were very bitter in their comments at that time about a lack of understanding and commercial awareness, it is now said that there is great understanding of the problems that exist and a far greater comprehension of and closeness to City thinking. This is very much to the credit of those concerned.
Also, there is no doubt that the Government's recent approach to dubious insurance companies has been a positive one. A relatively large number of companies has been stopped altogether from writing insurance business. One or two new companies have not received authorisations to write insurance business. New companies have been strictly controlled, premiums watched and separate funds set up. All these things suggest to me that the DTI is now aware of its powers. That is a good thing, but it also confirms what I said earlier about the wide powers which exist under previous legislation.
Many of the things that are proposed in the Bill—more clearly, perhaps, than before—existed under the 1967 Act. The Government have been exercising those powers in much the same way under existing legislation. One could say that, if the present attitudes and policies of the Government had been followed at the time of the Vehicle and General collapse, that collapse would not have occurred. That is perhaps an argument about locking the stable door when the horse has bolted, but it clearly shows that the powers exist 150 and that this Bill does not go mach further. One could almost take that as a criticism. We cannot be complacent that this legislation will do the job 100 per cent.
As the Minister said, there is no guarantee against company failures. Just because scrutiny is much tigher, we should not imagine that some companies will not get through the loopholes. The situation in the insurance world today is changing more rapidly than ever before. It is becoming more international, more mergers are taking place, new companies from overseas are participating more in the London market and inflation is increasing premiums so rapidly that many new companies are now writing a volume of premium income, if not of policy holders, which would make the Vehicle and General rate of growth look modest.
We have had the Equity Funding example in the United States to show what a determined group can do if it is prepared to ignore the law. So we must ensure that, in future, we do not have to come back for even more stringent legislation. That is one of the reasons why I have always pressed for the appointment of an insurance commissioner in the City, backed up by professional staff, in close touch with companies and brokers and probably more familiar with the commercial facts of life.
I have some criticisms of the Bill, many of which are Committee points and can be left until then. First, there was an extensive debate in another place about the "blackball" clause, the great power of the Department to prevent a controller of an insurance company from receiving an authorisation to carry on his insurance business. In brief, I understand that, under the 1967 Act it was not necessary to give reasons for declining such authorisation to newcomers, although it was necessary to extend information to persons who were already in the industry, already controllers.
The Minister said that the argument was that new entrants had fewer rights than sitting tenants. It is interesting that that same distinction has been disallowed in regard to this Bill. Whereas there was a distinction between a 1958 Act company and a subsequently-established company, it was made clear in another place that this distinction was felt to be invalid and unjustified. I am not sure that it 151 is logical or equitable to say that, because a person has already secured his position, he should have so many more rights than a newcomer who is making an application.
It wonder whether the Government are not taking a sledgehammer to crack a nut. They have considerable powers to control a new insurance entrant. They can control his premium income, the volume of premiums and the classes of business written. If there was someone about whom they were so dubious that they dare not even say what the reasons were for not allowing him to control an insurance company, I believe that they could control him totally or even control him out of existence, if he were that dubious. I do not like these powers and I hope that we shall be able to examine them in Committee, although I appreciate that they have been exhaustively examined elsewhere.
A further major criticism of mine is that in so many clauses we do not know what we are debating, simply because we are told that the matter will be subject to regulations to be issued later. Under so many clauses—
Mr. Bruce Milan (Glasgow, Craigton)
Almost every one.
§ Mr. Moate
"Almost every one," the hon. Gentleman says—we do not know what the powers will be.
A reasonable argument which is put forward so often for regulations is that this system allows a matter to be discussed with the industry. The important thing is that it should be discussed in the House of Commons. Another reason adduced for their saying that it is subject to regulations is not because the Government are anxious to discuss it with the industry but simply that the Government do not know how to draw up the regulations. In some cases it is quite impracticable even to consider implementing such proposals.
There are a number of clauses to which we must come back in Committee, particularly Clause 41 about insurance advertisements. Hon. Members may say that it is a good thing to control exaggerated advertisements. I do not disagree with that in principle, but I am not sure that it should come into the Bill in this 152 way, because many other forms of financial advertising should perhaps be controlled and, if we are to take steps to control financial advertising, that is a major principle which should be debated on separate legislation for consumer protection. To have it in the form that "regulations may be made" with nothing stated about the purpose is undesirable.
Clause 42 states thatRegulations may be made for requiring any person who invites another person to make an offer … to furnish with the invitation such information with respect tohis insurance connections. In other words, if a company owns a broker or a broker owns a company, that information should be declared. This arose because the Vehicle and General Insurance Company owned a firm of brokers, and clients of those brokers did not know that the business was being passed to the parent company of that firm of brokers. One can see that that is undesirable, but some of our largest insurance broking institutions own companies together with a large number of underwriting interests. It will be quite impractable, with the best will in the world, to see that such information is divulged.
Although I welcome the Bill very much, I think there is immense scope for its improvement and I hope that a number of amendments will be tabled. I look forward to our having very constructive, albeit brief, debates and a constructive Committee stage.
§ 8.37 p.m.
§ Mr. Joseph Ashton (Bassetlaw)
I shall not attempt to go into the detail that the hon. Member for Faversham (Mr. Moate) did. I was glad that he mentioned one matter and said that he had an interest in it, and I was also glad that he spoke about consumer protection. Although there are 51 clauses in the Bill and I have looked at them closely, I have not found any reference to an individual consumer having the right to make a protest. That is not mentioned and may have been deliberately excluded. It seems that when there is a big crash like that of V and G, the newspapers take an interest, there is a tremendous scandal and the Department steps in, but every day of the week some little consumer is having an argument with an insurance company about what his policy covers.
153 I had a case in my constituency two years ago which made me take an interest in this subject. A lady woke up one morning and found her house had literally broken in half. She was naturally very perturbed because the house was extremely dangerous. She was not unduly worried about the money problem because she thought that the damage would be covered by her insurance through the building society. The building society said that it had nothing to do with it and she should see the insurance company. The insurance company looked at the policy and said that it would not pay out because the damage was due to a landslip. This had happened in a coalmining area, but no mining was taking place under her house. That was a pity, because in that case the National Coal Board would have assumed responsibility and would have paid cash compensation, but because the policy said "excluding landslip" she did not get a penny. She spent six months trying to fight the insurance company, owing £2,500 to the building society and lost her deposit. I took up the case with the Department of Trade and Industry, and the Department said there was nothing it could do. If it had been concerned with the Vehicle and General Insurance Company and affected 1 million householders the Department would have done something about it. In one case it could not do anything.
I did what any good Member does and put down a Question. The subject got on television and into the newspapers. I gave a few names, such as the Abbey National Building Society. There was instant pandemonium. First of all, the society said that it intended to alter its policy to cover landslip as from 1st January next. It could not back-date that to the existing policy. So I went on radio and television again and had a bit more fun, and this lady did her bit by shedding a few more tears on television. It was not doing the insurance company any good, so it came along and said that it had revised its attitude towards the case and would make an ex gratia payment. That had been going on for six months until a Member of Parliament took it up.
There must be many more cases in which a person does not know what to do or how to manipulate the media. Some poor old lady finds that a policy for which she has been paying a few coppers 154 all her life has some exclusion in it which stops her getting money. She is not in a position to take the company to court. The insurance companies can lay down their own rules and regulations. I do not see that the Bill does anything to stop this. If a Member raises something a Minister says to the companies "This practice is not good enough; it is time that it stopped". It may be that the Minister says to the insurance companies "You have to revise your policies". But he does nothing to rectify what has happened in the past. The poor policy holder is still standing there.
Someone told me after the incident I have mentioned that the insurance companies have some form of appeals committee before which an individual can object to a standard practice. If they do, no one ever tells the policy holder. The companies keep very quiet about it.
The situation about existing motor insurance policies is a national scandal and disgrace. A new development has taken place in motor insurance in the last five years as a result of the breathalyser. We have now reached the state where a man convicted of a breathalyser offence is not only punished by the courts but severely punished by the insurance companies too. Often he will be damned lucky if he can get insurance at all.
Let us consider a man driving down a road with perhaps 85 millilitres of alcohol in his blood. He may not be involved in an accident; he may be driving perfectly correctly. He is pulled up by the police, perhaps because his near number plate light is not working. The police then smell his breath. I know that this may sound hypothetical but it has happened many times. That man is convicted on a breathalyser charge. When he next has to renew his insurance he will find that his premium has risen to perhaps £100 or £150 and that there is a clause which says that the company will not pay the first £100. A double punishment is inflicted upon him. If this man has been involved in an accident and has wrapped his car round a lamppost he may find that he cannot get any insurance at all. We are reaching the point where the State says that the driver must be insured, and then it washes its hands on the matter unless something like V and G comes long. The 155 State is not interested in the administrative operations of small companies.
Nothing causes more anger among motorists than the "no blame" or "no claim" bonus and the "knock for knock" agreement with insurance companies. A man may have his car parked at the side of the road and another runs into it. If he then makes a claim thinking that it will not affect his premium, it is pointed out that it is not a "no blame" bonus but a "no claim" bonus. He has to fight the insurance company all the way. In any kind of accident it is very often 80 per cent. fault one way and 20 per cent. the other. There is nothing in the Bill about any kind of tribunal or redress for the consumer.
There is a form of nationalised motor insurance in Saskatchewan which operates very well. The rate of increase of premium is not fantastic because of nationalisation. It has already been pointed out that administrative costs of running nationalised insurance would be lower than private insurance costs because of the waste involved in competition and in the operation of small companies and so on. With this nationalised system in Saskatchewan there is an independent tribunal, rather like the independent tribunal in national insurance affairs which deals with cases such as that which can arise when a man says that he has been made redundant and his boss says that he has not. It does not cost him a penny. He goes there to have his case heard. There is no court, nobody wears a wig and there are no lawyers. A three-man tribunal deals with national insurance matters. A miner who wants to make a disability claim can go before a tribunal. The decision is made fairly, and it is acceptable to both sides.
There is nothing like that for dealing with private insurance companies. What is more, they do not want anything like that. They prefer the existing, "no blame, no claim" system under which each insurance company stands its own knocks. That is not good enough in what has been one of the most rapid growth industries in this country over the last 10 years.
The average motorist is totally dissatisfied with the present system. It is no good saying that he keeps on insuring his 156 car and, therefore, he must be satisfied with the system. The plain fact is that he has no option in the matter. I hope that when the Bill is considered line by line in Committee we shall be able to write into it some clauses which will considerably strengthen its powers.
It is a disgrace that the AA and the RAC have never tackled the problem. They have advice bureaux, but on their boards there are agents of powerful insurance companies who do not want the kind of provisions about which I have spoken written into the Bill. The voice of the motorist is a voice in the wilderness, and the sooner there is a consumer protection tribunal to help not only motorists but those with life insurance and pension scheme problems the better it will be.
If somebody has paid his contributions to a works pension scheme and then does not get the full amount to which he is entitled, he should have the right to appeal not to the Minister but to an independent assessor. I hope that we shall write that provision into the Bill in Committee.
§ 8.47 p.m.
§ Mr. Nicholas Edwards (Pembroke)
My interest as one engaged in insurance is well known to the House, but I declare it again. As a practising broker, I have some sympathy with some of the things said by the hon. Member for Bassetlaw (Mr. Ashton) about the need for some independent body to which cases of dispute may be referred.
The hon. Gentleman and two of his hon. Friends compared the cost of private insurance with the cost of running the National Insurance Scheme. When speaking about the private insurance company, the hon. Member for Birmingham, Northfield (Mr. Carter), said that the case depended on the way in which figures are presented. It seems to me that this is a case of the way in which the figures are presented, because the proponents of the argument ignore the real cost of the services provided by the Post Office or other Government Departments in selling the policies and dealing with the customers' inquiries—that is if they are qualified to deal with them.
The argument also ignores the fact that the National Insurance Scheme largely takes the form of a poll tax. It 157 involves no adjustment of premiums to risk. It ignores the cost that falls on employers in making deductions from employees' wages. It is a misleading argument.
I am sorry that the hon. Member for Northfield could not remain to continue a debate that we recently had at Lloyd's. On that occasion, when he suggested it was wrong that people should make a profit out of other people's misfortunes someone asked whether it would be the policy of the Labour Government to nationalise undertaking.
The right hon. Member for Bristol, South-East (Mr. Benn) skirted rather delicately round the question of nationalisation. We heard a passionate speech about the evils of intervention and of sweeping powers. There is a major difference between the powers in the Bill, which are an enlargement of the powers in the 1967 Act, and powers taken in many other countries, in that they do not involve direct interference in the rating and management of insurance companies themselves and the terms and conditions which they lay down.
§ Mr. Edwards
I am glad that the right hon. Gentleman intervened to make that point. It rather strengthens the point I am going on to make, which is that already in the debate the lines of political battle have been drawn between those on this side who would like to see the insurance industry continuing to operate within the traditional framework based upon freedom with publicity which has enabled it to obtain its present preeminent place in the international insurance market and those on the other side who want it to be tightly controlled or even nationalised.
On the one hand, there is the philosophy expressed with great clarity in a recent address by Mr. Peck, Deputy Secretary of the Department of Trade and Industry, at the World Insurance Conference, when he said: 158the United Kingdom have adopted what one might call a medium level of distortion of market forces—that is to say, one which we think will give the policy holder a reasonable measure of protection without so regulating the affairs of the industry as to deprive the country (including of course policy holders) of the benefit which can be provided by the play of the market—the earnings of foreign exchange, the need for innovation and for the successful introduction of new methods—and the need for an appropriate measure of competition".
§ Mr. Benn
Much greater freedom is given to civil servants to make public speeches now than used to be the case. I greatly welcome that. A speech made by a civil servant reflects the policy of the Minister whom he serves. It would not be important, nor would it he fair to the civil servant concerned, to call that speech in aid of a particular policy at any time, because the same civil servant under another administration would present another point of view. Though it is fair to quote the civil servant in aid of his Minister, it is not fair to quote the civil servant in any debate on one side of a great divide. He is a public servant saying what is the policy of the Government of the day.
§ Mr. Edwards
I was not saying that Mr. Peck was on one side of the divide or the other. I was saying that he was making a statement of the philosophy and making it at a public gathering where the speeches were fully reported in the Press.
On the other side, there are the arguments of the hon. Member for Bristol, South-East and those who want to see not only direct management interference and rating control to safeguard policy holders but also a publicly owned insurance industry, in whole or in part—as a basic necessity for the establishment of a Socialist society".Those are the words of the proposer of the motion to nationalise various undertakings at the 1971 Labour Party conference, who demanded what she calledthe biggest single step towards possible socialism in BritainWhat is at stake in considering these divergent approaches is not just the policy holders, important though their interests are. What is at stake is the £380 million which the insurance companies contributed to our overseas earnings in 1971 and which they will no 159 doubt continue to contribute if they maintain a reasonable level of freedom.
It is worth reminding the House that Article IV, Section 40(9) of the New York insurance law forbids any insurer, directly owned or controlled by a foreign Government, in whole or in part, from doing business in the State of New York. Similar prohibitions exist in 28 other States of the United States of America.
It is not only our foreign earnings that would be prejudiced if we abandoned the principle of freedom with publicity that is the basis of the Bill and replaced it with direct State ownership or control. I believe that the consumer would suffer as well. While on the one hand through State ownership he would gain security against financial collapse, the premium he would pay for that security would be very high. He would lose first the freedom of choice, and choice is perhaps one of the most fundamental of all our freedoms. It means that if someone does not like the way he is treated he can go somewhere else. It means if he cannot get what he wants from one organisation he can go to someone else who can give it, and it means that a monopoly is not free to set any rate it chooses but that there is competition, innovation and change.
However, some hon. Members on the Labour side have taken a more modest course. They merely advocate that we move towards the Continental system of direct supervision of rates and terms. Perhaps I could answer that argument with two examples of recent years. First, I do not believe that we would have seen the enormous innovations that have characterised the market in, say, liability business or the insurance of contractors' risks. Secondly, I do not believe that with that system the market would have maintained as it has in London, but nowhere else in the world, a market for the insurance of drilling rigs after the disastrous experience of the early 1950s and the 1960s.
Innovation, flexibility, competition, and worldwide dominance should not lightly be put at risk, and at the same time, the individual deserves protection against abuse. The Bill should be judged by whether it achieves these twin objectives. 160 In another place the debate concentrated upon the sanctity of natural justice, and noble Lords spent much time seeking to protect the individual manager and controller against victimisation by the State. It was right that that great principle should be thoroughly debated, but I suspect that in this House and in Committee here the debates will concentrate more on whether there is adequate protection for the policy holder. Inevitably, we are involved in making valued judgments. Our task is to judge whether the Government have the right balance between maintenance of essential freedoms and the security of the customer.
I want to turn to some specific aspects of the Bill. It has already been much improved in another place. Some hon. Members will still object to what have been called the "fit and proper persons" or blackball clauses. I believe that we are not now very far off target. Anyone with experience of the industry will know that there are individuals who should be kept out. The Government must effectively command powers to see that they are. Amendments have made sure that a change of director other than a managing director no longer requires prior approval and changes of individual directors will no longer lead to Clause 12 powers of intervention. We are back to the status quo of the 1967 Act.
I welcome acceptance by the Government of the amendment moved by my noble Friend Lord Aldington, which deleted the provision in the original Clause 3 which would have prevented the creation of new composite companies. Another notable improvement is the tightening up of Clause 6, which originally gave the Secretary of State power to require registration of any kind of agreement. Now he must be satisfied that such an agreement is likely to be undesirable in the interests of policy holders.
Having praised some of the improvement, I must now criticise. There is concern in the industry about Clause 5, which enables the Secretary of State to publish any documents deposited with him in any way that he feels appropriate, and that would include the right to publish short-term statistics or other specific information. The problem is that short-term statistics in the insurance industry 161 can be as misleading as short-term balance of payments statistics. Publication of insurance quarterly figures can do irreparable damage in the hands of financial commentators who misjudge them. The Government will say that the right to publish all information obtained is the basis of the whole strategy of freedom with publicity and that they have the power to withhold information which might be damaging. They will tell us that the information that can be asked for is to be defined in regulations, one of the many instances in the Bill when we shall have to rely on regulations yet to be published and about which we know nothing. That is clearly a matter that will have to be examined again in Committee.
More important from my point of view are the objections to Clause 11, which the Government suddenly introduced on Report in another place and which received totally inadequate debate. The clause renders void any contract for an unlimited amount except where such a contract is specifically permitted by regulations. It was introduced to fill a loophole through which one company might guarantee an associated company. My noble Friend cited the case of a life company guaranteeing an ailing associated motor company.
In a letter to the Lloyd's Insurance Brokers' Association on 16th May, the Department described the loophole in these terms:there is at present nothing in principle to prevent an insurance company undertaking without the Department's knowledge a contract or guarantee for an unspecified amount which is excessive in relation to its capacity. For example, an insurance company might be asked to guarantee a loan to, or some contingent obligation of, a non-insurance company in a group of which both are member companies. We may come to consider that the arrangement puts the insurance company's solvency in question".To meet that particular, narrow situation, the Government propose to take wide-ranging and ill-defined powers, depending on regulations as yet unknown.
My noble Friend Lord Limerick used a strange phrase in defending that clause. He said that the Department wanted industry to tell it the types of unlimited guarantee which were prima facie rather a strange thing for a company to do but were nevertheless right and proper in the ordinary course of business. The 162 phrase "which are prima facie rather a strange thing for a company to do" seems to reveal a disturbing ignorance of the market by Government.
Whether the Minister likes it or not, unlimited liability contracts have always been part of the bread and butter business of the industry, and it will be very hard by regulation to define and give permission for contracts not just in this country but in every country where the British insurance industry does business. It will be a formidable task, embracing motor insurance in at least a dozen countries—employers' liability in many parts of the world, general third-party business in almost all countries, workmen's compensation in Australia, and, perhaps most serious and difficult to define, a very large proportion of quota share in stop loss reinsurance contracts.
It is not tolerable that an underwriter operating in a world market should be put into the position of saying "I am sorry. This is good business. I would like to write it. But it does not appear in the regulations. The Minister thinks it is prima facie a strange thing to be doing. I cannot help you."
The Government feel that they have found a loophole. It should be closed by shutting a specific gate and not by taking huge restrictive and unnecessary powers. The Government have a duty to take only the specific powers they need. The House has a duty to say "No" when the Government ask for too much.
I have three things to say in conclusion. First, I do not go along with those who object to the principle of random inspections. I strongly support that principle, which will make possible a thorough look at the doubtful without creating panic, and reveal flaws where none was thought to exist. It may well act as a deterrent to practices that would otherwise be attempted.
Secondly, I welcome the Government's statement that they will add new clauses to implement Chapters 6 and 7 of the Scott Report, the first of which deals with valuations and the treatment of assets and the second with the cooling-off period and the provision of information to policy holders.
Thirdly, the effectiveness of the Bill depends more than anything else on the 163 way in which the Department implements it. In the past the Department has been woefully weak and understaffed in many respects. Now it has been strengthened. I join in paying tribute to what is generally felt to be a great improvement, though it will have to be strengthened still further. But more important than numerical strength and knowledge is the political will and practical good sense that inspires it.
The House is giving the Minister and the Department immense and unprecedented powers. Armed with those powers, they cannot evade responsibility. It is a very heavy burden that my right hon. and learned Friend is now accepting.
§ 9.5 p.m.
§ Mr. Peter Rost (Derbyshire, South-East)
I hesitate to intervene because I cannot claim to be directly involved in the insurance business as are some of my hon. Friends who have spoken. However, as a stockbroker I spent nearly all my working life helping and guiding insurance companies in their investment policies.
I regret that this legislation is necessary. I should have preferred to see the insurance industry finding a way of putting its house in order and providing its own disciplinary methods with which to control the industry. The British Insurance Association maintains that it has no power to investigate its members and that it has no real power. That is open to question, as it has the power to reject members and to expel. By adverse publicity it has a powerful force to effect some discipline on its members. Nevertheless, it appears that the industry has not found a way, or has preferred not to find a way, of correcting faults which have come to light in recent years. Therefore, the Government have had no alternative but to bring forward this legislation. Nevertheless, I regret that it has not been found possible to reach an alternative solution.
This legislation having now come forward, there are two areas which must be examined carefully. The first area is investment policies. There are several clauses which, for obvious reasons, and in order to protect the consumer over a wide range of insurance, seek to protect the Government by giving them power to 164 intervene with fairly restrictive measures. I hope that those powers, if they are to be used, will be used sensibly and not with the heavy hand which is sometimes used by Government Departments when they decide to intervene.
The insurance companies are a major force in the investment scene. They are a major contributor to our free enterprise capital markets. Through the premium funds which are invested mostly through the Stock Exchange, insurance companies are a major institutional investor and provide a large proportion of capital which the industry badly needs. Some of that capital is, of course, provided through new issues. Nevertheless, the insurance companies are a major force in helping industry through the free enterprise system to develop, thus helping the economy to grow and expand.
Therefore, I think it very important that no unreasonable restrictions should be applied to the insurance companies' investment managements, because it is through their skilful investment policies in the past and at present, through their shrewd application of premium funds and surpluses and retained profits, that the industry has grown as it has in this country. If this freedom is fettered too much, if the abilities of the investment managers of our insurance industry are restrained too much, I have no doubt that the industry as a whole will suffer; profits will not grow as they should and the industry will not be able to expand and take full advantage of the important world markets open to it.
If restrictive investment policies were to be applied, it would damage the whole economy as well as affecting the invisible earnings, which have grown at a very good rate through the shrewd investments of the insurance companies. That is the second point on which I have reservations. I hope we shall be reassured that the powers which the Government are seeking will not unduly restrict the investment policies of the insurance companies.
Thirdly, there is the possible restriction of competition in the industry. One wonders whether there is not some risk that in providing consumer protection in the Bill we are in danger of an overkill. What we must not allow to happen is the restraining and restricting of new entrants into the insurance business. 165 British insurance has grown to its present size and world dominance because it has been a free enterprise industry, with new entrants being encouraged and allowed to grow and prosper. Although we all agree that we have to have safeguards, we must ensure that competition in the industry for new companies to he allowed to enter, with due safeguards, and to be able to grow will not be unduly restrained.
Although I support the Bill and regard it as necessary, I regret that it is necessary. I would prefer the industry to have made more of an effort to put its own house in order. I hope that the Bill will not unreasonably restrict the industry, particularly its aggressive, successful and skilful investment policies, and that it will not stifle or restrict the growth of the industry by unduly restraining the development of new enterprise.
§ 9.14 p.m.
Mr. Bruce Milan (Glasgow, Craigton)
As has been made clear, the Opposition welcome the Bill. Taken as a whole, it represents another massive dose of interventionism by the Government in the economy. It follows the pattern we have become familiar with through the Industry Act, the Fair Trading Bill and the company law reform which we are to get in the next Session. The Government, elected to power on the basis that they would remove the shackles from private industry and free enterprise and allow them to get on with the job, are introducing successive measures which represent governmental power to intervene in a way which would have been almost unthinkable only five or even two year ago. Nevertheless, we welcome the Bill very much. We welcome it especially because it represents another nail in the coffin of non-interventionism by the present Government.
Why do we need regulation of the insurance industry? The first and most obvious reason is that there are literally millions of policy holders who have an interest in the way in which the industry is run. The fact is added to by the point, which has been made by a number of hon. Members, that there are certain circumstances, particularly in motor insurance, in which there are statutory requirements for insurance. In addition to that, however, there is a general en- 166 couragement to people to enter into assurance for reasons of prudence. It is generally reckoned to be a good, desirable and prudent thing for ordinary citizens to have life assurance cover. People are encouraged to insure their houses and other property. The special place of assurance as a means of saving is recognised by the many tax advantages which life assurance has in our taxation system, some of which are unjustified.
It is not unexpected, therefore, that many people feel that, when they enter into a contract of assurance or insurance, there is a certain security or safety about it which is not available to them in any other ordinary commercial transactions. They expect insurance to be absolutely safe. As we see when a major collapse of an insurance company occurs, be it V and G or any other company, many ordinary policy holders feel that they have been let down not only by the company concerned but also by the Government. People feel that in an important matter of this sort, where the whole basis of the contract ought to be safety and security, the Government have special responsibilities for seeing that policy holders are protected.
Unfortunately, the ordinary forces of competition, in which the Government apparently believed at one time, not only do not produce safety and security for the policy holder but in certain circumstances produce the very opposite, because cut-price insurance rates are in many cases a prescription for disaster. They are a prescription for disaster not only for the company but for the unfortunate people who take out policies with it.
When one adds to that the fact that in the insurance business potentially large sums of money can be attracted and are available for investment or otherwise by the insurance companies, it is not unexpected that insurance attracts not only a certain proportion of irresponsible people but also a certain number of people who are simply rogues and crooks. Therefore, our legislation has to be drafted having in mind not only those who will run their business in a perfectly honourable and responsible way but also the irresponsible elements in the industry and the literally crooked elements as well.
167 Other aspects of the insurance industry make it particularly worthy of our attention. The very large profits that some of the major companies make, as my right hon. Friend the Member for Bristol, South-East (Mr. Benn) pointed out, and the influence of the insurance companies in the stock market, in general investment, in overseas earnings and so on, are wider issues which are not raised directly by the Bill. We shall wish to return to some of them in Committee. We shall then have an opportunity of debating at greater length than we have been able to do this evening the point of view held by my right hon. and hon. Friends and myself that there is a very strong case for a larger element of public enterprise and ownership within the insurance industry, particularly in those areas where there is a statutory requirement to insure. No doubt we shall return to those points at later stages of the Bill.
If it is agreed—and I think that it is generally agreed—that there has to be regulation of the insurance industry, the question arises of what the regulatory agency should be. The hon. Member for Derbyshire, South-East (Mr. Rost) was the first speaker in the debate to mention the possibility of self-policing by the industry itself. It is remarkable that this was mentioned only by him, because at one time there was a good deal of support in the Conservative Party for the idea that the industry should manage its own affairs, just as the Take-over Panel is meant to manage certain other operations in the City. This attitude is not only wrong and inappropriate in the circumstances, but the industry has made clear that it has no wish to adopt that regulatory function. In fact it seemed to frighten the British Insurance Association when the suggestion was made to it that it might try to put its own house in order in a number of important respects.
In reading the Vehicle and General report I was impressed by the fact that when matters were coming to a crunch the British Insurance Association seemed to be more interested in impressing on the Government that it was not responsible for the losses than in doing anything else. The association did not come out of the matter very creditably. Therefore, the question of self-policing has 168 been set aside and the choice now is whether this should be done through the Government or through an outside agency.
I see arguments on both sides. In principle I am not greatly in favour of hiving off. There is much to be said for keeping many powers within Government Departments, but those powers must be used effectively. I shall come to that point a little later in my remarks.
There is a strong case for an insurance commissioner or some kind of outside body, and if, after this Bill is enacted, we find that the Department has not effectively exercised its powers under the legislation, there will be an overwhelming case for an insurance commissioner.
It is worth reminding ourselves that at the time of the 1967 legislation we were promised that things would be different, that the Department would work more effectively and all the rest of it. We are now being promised the same thing. It remains to be seen whether the Department will act more effectively.
There has been a tendency in legislation to provide for loopholes to be stopped up only after an event has caused a major scandal with very considerable losses to policy holders and others. Therefore, to some extent legislation has always been enacted with the aim of repairing damage which has been caused. We must hope that in this instance the powers sought by the Government in the Bill will prove to be adequate and will have sufficient flexibility and scope to prevent abuses arising in future. But it would be unrealistic to believe that this can be done by any Bill, and particularly by this Bill. Therefore, in principle I am not opposed to the idea that there should be very wide powers in the hands of the Department. However, I do not think that this is merely a question of adding in bits and pieces to the 1967 Act.
There are two differences in the Bill from what was enacted in the 1967 legislation. First, there are a certain number of additional powers in the Bill which were not available in the 1967 Act. Secondly, the 1967 provisions which are repeated in this Bill have been repeated with all the qualifying phrases and restraints on the use of these powers 169 removed. Therefore, the powers in the Bill are much less restrictive. In those circumstances, as the hon. Member for Faversham (Mr. Moate) said, we are entitled to know during the passage of the Bill what the Government intend to do about regulations on some of the major items covered by the Bill.
It is a feature of virtually every Bill introduced by the present Minister for Trade and Consumer Affairs that it is largely a statutory framework, leaving the details to be filled out by regulations. If we are to have government by regulation there is a very strong case for insisting that draft regulations should be available to hon. Members while the Bill is in Committee so that we have some idea of what the Government have in mind—always assuming that they know what they have in mind. On many of these matters we must be sceptical about that.
The powers are very substantial. There are powers over investment. There are powers over the kinds of business in which a company can involve itself. There are flexible powers on financial standards, including a definition of "solvency". In the light of the Vehicle and General case, I welcome them and believe them to be right, but again they need filling out in detail in Committee. Then there are powers about fit and proper persons which gave rise to controversy in the other place, where the Government made certain changes in the Bill's provisions. No doubt this is a matter we shall discuss at considerable length in Committee.
I simply make the point that, while I am mindful that we should not do anything in legislation which represents an injustice against an individual, and while in principle we ought always to provide that an individual should not only know the charges against him but have adequate opportunity to answer them, I see this as an extremely difficult area in which to operate. If we approach it with absolute standards of justice, though I am not sure that there is any such thing in any event, we are likely to miss the realities of the situation and produce a weakness in the powers which ultimately we may have cause to regret. That is my general approach. This, however, is a matter which we shall want to discuss at length in Committee. I shall approach it with an open mind.
170 The reforms concerned with long-term funds, especially life funds, are very much to be welcomed. In the case of long-term insurance there are a number of points that we shall want to probe in Committee. However, the Bill's provisions in this respect represent a considerable improvement on what we have at present.
I also welcome the powers for routine investigations of insurance companies. It came out vividly in the Vehicle and General case that an inhibiting factor in the Department was the feeling of civil servants that the investigatory powers were so special that they had to be used only in circumstances of such extreme suspicion that inevitably they brought about the collapse of the company concerned. If there is concern about a company, it should be possible to investigate it without necessarily bringing catastrophe in its wake. If we are to get to that situation, there must be investigations in circumstances where there is no suspicion at all but where it is simply a matter of the routine operation of the legislation by the Department.
There are a number of aspects of the present situation that we shall want to explore in Committee. I mention only one or two now. We shall want to look at the management expenses of different classes of insurance, especially in composite companies, and at the allocations between one part and the others. We shall want to give special consideration to that where there are holding and subsidiary companies involved, because this is a fruitful area for abuse at present.
We shall want to look at the recommendation of the Scott Committee for a cooling-off period.
Then there are the misleading advertisements and graphs giving forecasts of projections, where the selling point is to say "If the same happens during the next 10 or 20 years as has happened over the previous period"—that period being one which suits the advertiser—"there will be marvellous opportunities for you." Some of these forecasts and projections go on for 10 to 20 years, but the vast majority of people who take up these policies have policies which subsist in practice for less than 10 years. Therefore, many of the projections are completely false. We shall want to look at all these matters in Committee.
171 We shall want to look at the rôle not only of agents but of brokers. We shall want to look at the question whether we shall be introducing in a statutory way the principle of standard cover, which would obviate some of the difficulties that my hon. Friend the Member for Bassetlaw (Mr. Ashton) described so graphically in his constituency case. There are many other matters, some of great importance and others rather detailed, which we shall want to pursue in Committee.
I mention some of these matters to make the point that, although the Bill is apparently comprehensive and includes wide powers, it by no means covers everything of interest or importance in insurance. Therefore, there will be considerable scope in Committee to improve the Bill even further.
It is no using having this kind of lesgislation, however admirably it may be drafted and however impeccable the Government's intentions are at the time of its drafting, unless there is a real will in the Department to use it effectively. This is a lesson, above all others, that we must learn from the Vehicle and General affair. Reading that report, one could see how the Civil Service mind works in the kind of situation with which it was faced. There is a tendency to fall over backwards to be fair to a potentially defaulting company. There is an unwillingness to bring anything to the crunch. There is a tendency to put off the final decision by sending another letter, having another meeting, making another minute, and so on. There is also a great fear that if a wrong decision is made, first, damage may be done, and, secondly, some of the damage may ultimately redound to the disadvantage of the civil servants concerned.
One can see all that happening. It is very much the way that civil servants operate. Incidentally, that is why the report was so unfair to Mr. Jardine. He was only operating within the Civil Service mode of operation, within the Civil Service ethos. The idea that he should be singled out for criticism when obviously more senior officials were, and ought to have been, responsible for what was going on—for that matter, there was also ministerial responsibility—was grossly unfair to the civil servant concerned. This simply emphasises that the Department 172 must be not only more adequately staffed in numbers but staffed by better qualified people. That means bringing in from outside large numbers of people with a different and more tough attitude towards the kind of powers that will be given in this legislation.
I welcome any suggestion that, as has happened to a limited extent, outside experts, whether they be accountants, actuaries, or others, should be brought into the Department. We need an infusion of that outside expertise if there is to be any real prospect of getting the powers in this proposed legislation adequately performed.
I repeat, we support the Bill. We support the general approach of the Bill to intervene in this important industry. We think that there are many aspects in which the intervention does not go far enough, but we hope to improve upon those matters in Committee.
§ 9.35 p.m.
§ The Under-Secretary of State for Trade and Industry (Mr. Anthony Grant)
This relatively short debate has been helpful, and there have been valuable contributions from both sides. I welcome very much the general approval which has been given to this measure on both sides of the House. We recognise, of course, that many of the matters which have been raised are Committee matters, and as the hon. Member for Glasgow, Craigton (Mr. Milian) pointed out, so much of the detailed discussion will have to await that occasion. I welcome the approach of the hon. Member, and I look forward to seeing him in Committee. I will do my best now to answer some of the points which have been made.
I am bound to say that I find the contribution of the right hon. Member for Bristol, South-East (Mr. Benn) somewhat less attractive. He described the Bill as a watershed and, with rather splendid geological or geographical connotations, as a watershed of Himalayan proportions. But the true watershed as he should understand, was the 1967 Act itself.
§ Mr. Grant
Error twice compounded: I accept that. The real watershed, as I 173 was saying, was the 1967 Act, which first gave my Department powers to intervene to forestall the failures. This Bill, and all the clauses in it to which the right hon. Gentleman referred, is in effect a follow-up of that Act, and a refinement of it. This is perfectly clear. What we have sought to do is not to have a great watershed or a revolution but, as my right hon. and learned Friend made clear, to improve upon and apply the experience gained from that statute, which was supported by this side of the House when in opposition. I think that should be put into perspective.
The main new powers, broadly speaking, which arise under this Bill are the powers of inspection in Clauses 12 and 3; the residual power in Clause 21; the important power to approve a proposed change of control, which is bottling up an important loophole, in Clauses 33 and 34; and the power to impose precautionary conditions following a change of control in Clause 12(4).
§ Mr. Grant
I will come to Clause 11 later.
Of course, the right hon. Gentleman was actually seeking to make his customary nationalisation speech. I think he was effectively demolished by my hon. Friends who have spoken. All of them made the point which we all understand and the public understands, that there is absolutely no evidence whatsoever that nationalisation of anything has ever reduced costs, improved services, or contributed anything to the wellbeing of the consumer or anyone else. The one thing, of course, that nationalisation has done is to make losses. In view of the right hon. Gentleman's strictures on the profits of some insurance companies, presumably that is why he approves of nationalisation: he wishes them to make losses.
A more serious indictment of the right hon. Gentleman's proposals—if they are proposals of his party—is the catastrophic effect they would have upon our overseas earnings. My hon. Friend the Member for Faversham (Mr. Moate), who has such wide experience of insurance, made this point absolutely clearly, and my right hon. and learned Friend said in 174 opening that of course some £360 million of foreign earnings come from our insurance industry.
It is interesting to point out that in New York State insurance legislation will not permit licences to be granted to any insurer owned or financially controlled, in whole or in part, by a foreign Government or a political sub-division of their agents. I believe that similar prohibitions exist in 28 other American States. This has to be seen against the position that British companies' premium income in the United States is about £600 million per annum. All this would be at risk if the proposal of the right hon. Gentleman were put into effect. But we are not at all certain whether it will be put into effect.
It is hard to discover the Labour Party's thinking on nationalisation. In the winter 1972–73 edition of Change, the quarterly magazine issued by the Federation of Insurance Brokers, there is an article by Mr. Terrence Pitt called "Labour and Insurance", in which he says:Since the beginning of 1972, a study group under the Chairmanship of Mr. Ian Mikardo, M.P., has been considering how banking and insurance are to be nationalised. The study group hopes to report in April, 1973"—it has not achieved that aim—in the form of a 'green paper' for discussion by the Party as a whole.He goes on:The question that the study group has been examining is not whether, but how.We do not know what will emerge from those discussions, but I profoundly hope that when the matter comes forward for discussion by the Shadow Cabinet the right hon. Member for Manchester, Cheetham (Mr. Harold Lever) will not have to leave his home again in order to bring sanity to the right hon. Member for Bristol, South-East. So much for the right hon. Member for Bristol, South-East.
The hon. Member for Birmingham, Northfield (Mr. Carter), who has taken an interest in insurance, particularly over the Vehicle and General affair, referred to a letter that I wrote, well before that episode, in reply to one of his, in the early days of this Parliament. This was also mentioned by the right hon. Member for Bristol, South-East.
175 I should like to make it clear that the letter which the hon. Member sent to my Department was complaining about increases in premiums by certain large companies, which he claimed were disadvantageous to the smaller companies. He complained particularly about the effect on the consumer and urged the Government to do something—no one knows quite what—to restrain or bring down those premiums.
I replied pointing out that the one thing that was almost certain to cause a crisis of solvency and lead to the kind of disasters which V and G demonstrated was for a Government artificially to bring down the premium. I do not resile for one moment from that letter, and I believe that what I said then is just as applicable today.
The hon. Member then sought to raise this matter before the V and G tribunal. The letter was considered by the tribunal, and anyone who reads its report will see that it was as perplexed as I have been to know precisely what the hon. Gentleman was getting at. To this day, I do not think that any of us really understands.
The right hon. Member for Bristol, South-East referred to the collapse of the Competitive Company. The Department does not accept the Parliamentary Commissioners' criticism. The prime, probably the only cause, of the collapse was the unwise capital expenditure on premises and on a computer in which the company engaged. The damage was done over only a short period of about four months, the company was under no duty to tell the Department of its intentions, and if it had its expectation would have been of substantially lower costs. It is unreasonable to suppose that this kind of development can be forestalled in every case, but the provisions of Clause 5 for more frequent returns should help a great deal.
My hon Friend the Member for Billericay (Mr. McCrindle), also bringing to the debate his personal experience and knowledge, referred to the Scott Committee's recommendation. I think that his object was to apply some of those recommendations more widely than just to linked life insurance. This possibility is not being overlooked in our consideration of the report and our consultations.
176 We shall be bringing forward, I hope in a later stage of the Bill, our conclusions in this respect.
My hon. Friend also mentioned, as did my hon. Friend the Member for Faversham, life insurance specialists in the Department. I agree entirely with them and others about the need for proper expertise inside the Department. I think I can assure the House that there has been a very considerable improvement in recent years. There is very adequate actuarial expertise provided by the Government Actuary, with whom my Department is in complete and constant touch. We shall be anxious to bring in outside expertise as much as possible, and I think we shall see a steady improvement in the Department.
My hon. Friend the Member for Faversham raised the question of hiving off and a separate agency. He and many other hon. Members have been properly appreciative of the improvement which has taken place in the DTI staff. Assuming that we get the improvement we all wish to have, it is difficult to see that a separate agency in the City could necessarily contribute much beyond what an improved staff using outside expertise could achieve. Overriding all this must be ministerial responsibility. If we preserve that, there could be a certain degree of duplication, but I am sure that we can consider this matter in future in relation to the Bill.
There was a complaint by some hon. Members that too much is left to regulations. I must point out that there are very complex and technical matters to be regulated and the regulations will be subject to the annulment procedure. Of course, there are advantages in allowing time to consider the details carefully within the broad framework of the legislation and also of permitting easier adjustments later. There are advantages in this approach which have been recognised over the years. Sometimes one gets better legislation by it than if one tries to enact the proposals in the legislation itself. In answer to the hon. Member for Craigton, although I cannot promise how much of the information will be available before the Committee and later stages, we shall do our best to be as forthcoming as possible consistent with the work we have to do.
177 In what I thought a very powerful speech, my hon. Friend the Member for Pembroke (Mr. Nicholas Edwards) raised the question of Clause 11. He has corresponded with me on this and I promise that he will get a reply. I recognise that we shall be able to pursue this matter in greater detail in Committee. It is fully recognised that a number of normal insurance contracts would be caught if they were not exempted by regulations. The clause will not come into effect until those regulations are made. There will be consultations with the industry as to what can be properly exempted. The purpose of the clause is to prohibit open-ended guarantees which are not normally within the ambit of insurance business. Clause 32 will provide guarantees to deter an evasion of the prohibition by setting the maximum at an astronomic level. We can pursue that further in detail in committee.
My hon. Friends the Members for Pembroke and Faversham referred to the debate in another place concerning the provisions for determining a "fit and proper person". As we have now presented the Bill, I think this matter commands broad support. I believe the House will generally recognise that we have done our best to respond to the criticisms which have been made about natural justice. The basic point we have reached is that for new applicants and in the case of change of control the provisions we have put forward are exactly the same as those contained in the 1967 Act.
We have provided for what might be called sitting tenants, people who are already in situ and have accepted the powerful plea made in another place that particulars should be given if they are ejected from their positions. It is one thing to deprive someone of his current way of livelihood but it is quite another to refuse entry to an industry from which the public expects the highest standards of competence and morality. To do what my hon. Friend wishes would be to put us back to the pre-1967 Act position, which I do not think would be possible.
I apologise if I have omitted many points. I can assure hon. Members that we will study all of them carefully and that there will be opportunity for debate in Committee. I believe that the public expects a high standard of protection in this complex matter. I believe that 178 it rejects the concept that there should be absolute freedom, and I do not think that my party has ever suggested that people should be left to the mercies of the sharks or the crooks. Equally I believe that the public rejects the monopoly or nationalisation proposal.
The concept of freedom with publicity represents the broad wishes of most people. This Bill represents an important step forward in consumer protection in what is a complicated but vital area. In an imperfect world it is impossible to guarantee 100 per cent. freedom from all risk if there is to be an efficient, effective and developing service to the public. The measures we are taking, built upon the experience gained after the 1967 Act, go a long way towards eliminating the unhappy failures of recent years while at the same time preserving the freedom of our insurance industry to maintain and increase its predominant position in world markets for the benefit of the British economy. Both the public and the industry can look to the future with greater confidence as a result of the Bill, which I now commend.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).