§ 11.5 a.m.
§ Mr. Ernest G. Perry (Battersea, South)
I beg to move,That this House, recognising the contribution made by the insurance industry in providing long-term savings and security for millions of policy holders, appreciates the efforts of the field and managerial staffs in building up confidence in the industry; and calls upon the Government to be cautious and prudent before it compels policy holders to contribute their savings in subsidising insurance companies that have by their own action forfeited the confidence of the insurance industry.I hope that you, Mr. Deputy Speaker, will convey to Mr. Speaker my pleasure at being able to move this motion. It must have been with assistance from Divine Providence or the Great Architect of the Universe that he chose No. 105 from the hat and selected my name. I thank him for that.
Today, Friday, is a quiet day, especially after the hectic week we have had, with the great strain upon Members and upon the Chair. We appreciate the efforts of the Chair—of Mr. Speaker and of his deputies—in maintaining the order that was maintained.
§ Mr. Deputy Speaker (Sir Myer Galpern)
I am obliged, encouraged and comforted by what the hon. Member has said.
§ Mr. Deputy Speaker
Order. The hon. Gentleman could go on in that vein until four o'clock, if he wished, but it would not affect matters.
§ Mr. Perry
Now that we have reached the quiet backwaters of a Friday morning we are at ease and we can discuss matters which are of importance to the people.
There have been suggestions that some sort of scheme should be introduced to compensate people who lose money when they invest in insurance companies or in finance companies. We are concerned with the solvency of the industry as a whole. I want to refer to the whole procedure of the insurance industry to demonstrate to the House and to people outside the stability and security of that industry.
Criticisms have recently been made of certain companies. This is to be expected when people who put sums of money into a company expect to get a quick return. When they do not get that return, or if the company goes into liquidation, they complain to their Members of Parliament and ask for legislation to be introduced.
In the past this has not applied to life insurance. It has applied in the main to accident insurance and motor insurance. From the 1930s to the 1960s and 1970s there have been failures in motor insurance.
It is possible that some hon. Members are not cognisant of the terms used in insurance, because they are confusing to the layman. There are a number of branches of insurance. There is the accident branch, the motor branch, the life branch and the marine branch. Those branches cover the whole gamut of the insurance field. I want to deal with two areas of insurance which are important to the millions of policy holders in insurance companies. Friendly societies such as the Liverpool Victoria, Cooperative, Refuge, Prudential and Pearl conduct savings for millions of policy holders.
One of the great attractions of life insurance is the tax concession on premiums. I do not deny that. The tax concession is of great benefit to policy holders. However, people do not realise that it dates back for more than 100 years. It was Gladstone, when he was Chancellor of the Exchequer, who introduced the tax concession for life insurance in 1852 because even in those days the Tory and Liberal Governments 1964 realised that the money which people put into insurance was one of the country's greatest assets. Today, 120 years afterwards, it is recognised that the income tax concession on life insurance premiums is a great fillip to savings.
I turn to the question of the industrial branch of insurance. At least 20 reputable companies and friendly societies conduct this form of insurance. Their agents call at people's homes, convince them of the necessity of a policy and sell it in their parlour, front room or kitchen. Someone may sell an industrial life policy to a client, and the next thing he knows he is selling OB and motor insurance to the children when they grow up. It is to the credit of the agents and the companies that they can look back and realise that, to a certain extent, they have been instrumental in helping families to protect themselves against an unforeseen occurrence.
There has not been a great deal of legislation on life insurance. An Act was passed in 1911 which protected policy holders and made it compulsory for companies to issue regulations and to print them on premium books. The insurance business was the first for which an ombudsman was appointed. In 1923 the industrial assurance commissioner was appointed. If any industrial life insurance policy holder felt that he had a grievance or complaint he could have his case taken up by the commissioner. If he was not satisfied with the treatment he had received from the company or friendly society in question, he could ask the commissioner to adjudicate in the matter. The insurance companies and the then Government accepted the proposal for the appointment of an ombudsman with open arms because it was a very good idea. A policy holder could appeal to him to redress what he thought was a wrong.
The growth of the life insurance business has been phenomenal since 1900. There has been an increase year by year in the amount of premiums collected. The business has afforded a fair standard of living to the people employed in it. It has built up the commercial and industrial enterprises of this country because usually every pound collected by an insurance company is invested in industry or commerce to provide a surplus for 1965 distribution to policy holders. This is the important point about insurance. Not only does it protect policy holders and give a fillip to savings but it provides the necessary oil—wealth and money—to keep industry and commerce going. The insurance business has been the prime provider of funds for our large commercial and industrial undertakings.
I have mentioned the question of industrial life cover. I have in my possession policies which were taken out in the early part of the century—penny-a-week policies which people took out on their children, or threepenny a week policies taken on on husbands or wives. Some of them lapsed because people could not continue to pay the premiums. They have become free policies. It is interesting to consider the sums assured under policies, the premiums paid, how long they have been in force and what the payment will be when the person whose life has been assured dies. Indeed, sometimes a policy may not be paid until 60 years after it was made a free policy. Policy holders were protected by free policies and lapsed policies because they would have something to come later.
My introduction to insurance was in 1933 when I became a full-time insurance agent with the Co-operative Insurance Society. Times were not too good then and I had to put down £80 to purchase a book, which cost £200. That was quite a lot of money in 1933. when 1½ million to 2 million people were unemployed. The insurance business was my main source of employment until I became a Member.
My first experience of the failure of an insurance company was in the 1930's. It was a motor insurance company, as usual, called the North and South, which went bankrupt. People who had policies with this company came to those of us who were trying to sell motor insurance in order to obtain compulsory third party cover. We pointed out as long ago as 1930 that before one insured a motor car one should make sure that the company was reputable. This situation has been going on for 40 years, but still people are caught.
One of the great merits of the insurance business is the way in which it has been able to adapt itself. I recall how, in 1939, before I went into the Army, the 1966 insurance companies introduced for people special policies in which there was a special clause to the effect that if a person died as a result of an air raid compensation would be paid. Insurance companies have always been able to operate in such a way that whatever the circumstances they are able to offer people some benefit. That is one of the great traditions of the insurance business. The insurance companies co-operated with the Government in the scheme under which compensation was paid for air raid damage.
When I left the Army I started work again in insurance since I liked the business. I sought the freedom of the streets to sell insurance "on the door knocker" and to do business with ordinary people. I am glad I went back to insurance because those were sunshine days for the business. Many people left the Army and went into insurance work. So many millions of people had money to spare that it was money for jam. We could sell insurance easily. Those were fine days, and I look back to them with pleasure, unlike today where we as Members of Parliament are struggling for an increase but cannot obtain one.
In the years after the war the insurance companies rendered great service to tenants of houses who had been given the opportunity to purchase their homes. I did a lot of such business. The insurance companies advanced money to sitting tenants for the purchase of their houses. Many tenants received advances of £500 or £1,000 from insurance companies. They are grateful to the insurance business which provided capital for house purchase.
We used to worry about the business, because in 1948, with the introduction of the scheme of national health insurance, the Government took from the agents the old national health insurance cards. In the old days insurance agents transacted that business and paid out the benefit, for which they received roughly one shilling per card every six months. If an agent had a few hundred such clients he did nicely. When the Government took over the scheme, compensation was paid to the agent. Nevertheless we thought that the scheme would prove a set-back for the insurance business. However, it had the reverse effect. Any new Government scheme provides a fillip to the insurance 1967 business, because it makes people insurance conscious. Any Government measure along these lines is an incentive for the insurance industry to do better.
Since 1946 we have seen the development of the brokerage side of the business. A large number of insurance brokers have been operating since the early 1950s, and there is a tendency for their numbers to grow. People do not realise how vast is the insurance industry. The present assets of the life offices, insurance companies and friendly societies amount to £25,000 million, and the figure may be slightly higher because of the return of income. That forms the bulwark of the savings of ordinary British people. Every household contributes to those enormous assets.
I have seen changes in insurance. In the past when we sold insurance we used to advertise the fact that people received bonuses on their policies. The insurance business provides a good service, since 90 per cent. of the surplus, which is now about £1,500 million, is returned to policy holders in bonuses, while less than 5 per cent. of that amount goes to shareholders. I do not think any other industry can claim a record like that. The large, traditional insurance companies such as the Prudential Assurance Co. Ltd., the Pearl Assurance Co. Ltd., the Refuge Assurance Co. Ltd. and the Britannic Assurance Co. Ltd., return between 90 per cent. and 95 per cent. of their surpluses to their policy holders. No other commercial undertaking does that. We call those reversionary bonuses.
What have the insurance companies been doing since 1964 in view of the rising capital values of their assets? After they revalued their assets they introduced the terminal bonus, which was paid on the maturity of a policy and which often exceeded the amount paid out in reversionary bonuses. If a person took out a £1,000 policy 20 years ago, after obtaining the life cover and the tax concession, he receives approximately £2,900. That is how insurance companies dispose of their surpluses. What could be fairer than that?
I wish to quote a letter from a constituent who came to the House last week, and left a petition with the policeman, asking him to hand it to me. I 1968 wrote to my constituent asking him why he did not lobby me as I should have liked to see him since the petition concerned Alma Terrace, which is near Wandsworth Prison, where it is proposed to construct a car park. The residents of the area are protesting about the matter. The letter reads:Thank you for your letter regarding the Petition I handed into the House of Commons on 26th February 1975. I apologise for not staying and obtaining a green card. I had no knowledge of this. I would like to have had the privileve of meeting you, after knowing you for so many years. In our early days of marriage you were our insurance man in 1940.That demonstrates the link between policy holders and insurance men. I had not seen this man since then, but he remembered me because I transacted some business for him. He was glad of that. Now I can look him in the face and he is glad to know me. That is the insurance business. We build up a family connection and 30 or 40 years afterwards the clients are glad. Hon. Members may think that I am eulogising the insurance business. However, it is about time it had some praise.
§ Mr. Deputy Speaker (Sir Myer Galpern)
The hon. Member is making such an impression on the Chair that I am almost willing to suspend the sitting so that he can sell some insurance.
§ Mr. Deputy Speaker
If the hon. Member continues I shall probably allow him to do something about my insurance policy.
§ Mr. Perry
Over 250,000 full-time staff are employed in the insurance offices, of whom 60,000 work out of doors, collect money and sell insurance. I pay tribute to those people who spend their lives selling insurance. Most full-time officers and managerial staff started as agents and worked their way up. They do a first-class job. No attention should be paid to the criticism which is sometimes levied at the insurance business, since at least 95 per cent. of the policy holders are satisfied with the service they receive.
1969 The thanks of this House are due to the staff for the wonderful work they do. Ninety-five per cent. of the households in this country are visited by people offering life insurance. The phenomenal increase in life insurance has to be seen to be believed. In 1974, although money was tight and the building societies suffered a decrease of 24 per cent. in the amount of investment, the life insurance offices had an increase of 22 per cent. This means that the policy holders recognise the value, the security and stability which the insurance industry offers to them. As a former insurance man, I strongly recommend people to place their money with insurance companies, because that is where their money is safe.
Investment income in insurance companies last year was nearly £1,500 million, and 95 per cent. of this went to policy holders, but not only in the form of bonuses. It went to provide a considerable amount of money to pay the pensions of many people, and that is very important. The more money the industry can supply to pay pensions to people who have paid into pension schemes, the more money that people receive in pensions when they retire, the less we shall have to pay out in social security. Any Government, be it Labour or Tory, should try to make sure that everybody is covered by an adequate pension scheme in order to reduce the amount of money paid out in social insurance and supplementary benefit. It is satisfactory to the country and to the recipient. The insurance companies are the custodians of the life savings of millions of people, and we should bear that fact in mind when we consider legislation the purpose of which is to take away any part of this money in order to subsidise somebody else.
Unfortunately, in the 1950s and 1960s there were some unpleasant experiences in the business because of motor insurance. Various companies went bankrupt. It did not matter how great was the effort made by full-time agents in trying to persuade people that before they took out a motor insurance they should consider carefully what they were getting in return. Some people were caught three times. There were those who dealt first with Fire Auto and Marine and then transferred to Vehicle and General. Some people dealt with a company because they could get a policy £5 cheaper— 1970 and they lost the lot. I always tell people when they are considering buying an insurance policy that they should look into it very carefully, and that if they are promised too much they should become suspicious immediately. We do not offer the moon in the industry. We offer a fair return if people keep to the contract. That is the basis of insurance.
Anyone who wants to make a lot of money quickly should not buy income bonds or similar bonds such as one sees advertised. Anybody who considers taking £2,000 out of a building society and putting it into a property bond or an income bond because of the tax concession or high rate of interest offered should be very careful, because he is liable to be caught.
I should like to comment on one motor insurance company connected with a gentleman whose name was Mr. Savundra, the head of Fire Auto and Marine. I remember seeing advertisements and articles in the newspapers about this company. The articles were written principally by motoring correspondents extolling Mr. Savundra's new idea for conducting motor insurance. He was going to have a computer installed, and, as a result, motor insurance would be revolutionised. The motoring journalists were very enthusiastic. They thought it was a wonderful idea, and they extolled it to the skies. No doubt, at the time they were drinking gins and tonic at some cocktail party.
People who had insured with Fire Auto and Marine lost their money. It was nonsense to believe that the installation of a computer would affect the ratio of motoring accidents. After all, it is the number of accidents on the roads which affects motor insurance. The insurance companies transacting motor insurance business have made no money since the war. They may have made a surplus now and again, but usually they have been in the red because of the increase in the number of motor accidents and the enormous amounts of compensation awarded by the courts to people who have suffered various incapacities, such as the inability to indulge in sex. Thousands of pounds in compensation have been awarded for that sort of misfortune. Some of us lose this potency in the natural course of 1971 events as we get older, but we do not get any compensation for it.
§ The Under-Secretary of State for Trade (Mr. Clinton Davis)
No doubt the hon. Gentleman, with the expert salesmanship that he has offered to the House, could devise an insurance policy which would cover that contingency.
§ Mr. Perry
I assure my hon. Friend that people have been looking for this for many years and nobody has come up with it yet. I do not think that I shall be able to do it.
I like the tone of this debate. My reason for raising this matter is the possibility of the introduction of legislation to try to remedy various faults in the industry. The people most concerned are in the industry itself. Whenever something has gone wrong, it is the industry which has made proposals and submitted ideas to the appropriate Government Department in order to try to sort out these difficulties. One of the most unpleasant aspects of this branch of motor insurance was the Vehicle and General affair. Incidentally, when I was an insurance agent I was in competition with Vehicle and General. To me that company was suspect, as indeed it was to any insurance agent who knew anything about insurance. Vehicle and General was suspect before 1964 because it was offering benefits which were not commensurate with the premium charged.
We who appreciated that even the companies which were charging much higher premiums were losing money knew that in the long run Vehicle and General would fail. That company adopted a policy of buying out insurance brokers. Vehicle and General bought out Andrew and Booth, one of the biggest insurance brokers in the country. Andrew and Booth specifically sold Vehicle and General insurance policies. A broker—and 90 per cent. of them are reliable, honest and trustworthy—will tailor a person's needs to the policy. A broker will provide facts and figures and will make a selection for a client although the client makes the final choice.
This is where the broking industry came unstuck, when insurance companies were buying up brokerage businesses. In 1972 my opinion, this was not right and it should have been stopped. Since then, legislation has been introduced and I believe that this practice has now been stopped.
The people I am concerned for today are all those who work in the industry and those who work in and manage the traditional life offices. I want to see them protected. I want them to know that the House of Commons has an interest in preserving their identity as it is now, and we thank them for the valuable, and wonderful work which they have done in the past.
The businesses which these people run have been examined—I think that that is the correct word—by merchant banks and finance houses wanting to see whether the assets of this or that small insurance company could be taken over. I recall reading in the Evening Standard a little time ago—I have not looked out the cutting, but if I am challenged I am quite prepared to find it—what I regarded as a disturbing piece of news. On the financial page, in 1973, the Evening Standard said that the Pearl Assurance Company stood in danger of being taken over by Slater Walker—that Slater Walker was trying to buy Pearl shares and take over its assets.
That sort of development is serious. I do not know what the capital of the Pearl Assurance Company is. It is an old and reputable company, and I do not suppose that its original capital was much more than £50,000 or £100,000, but its assets now stand at well over £600 million.
What must be remembered is that any one who takes a majority shareholding and thereafter controls an insurance company not only takes over control of the shares but takes control of—in this case—£600 million assets. This is where I want the Minister and his Department to be very wary. I want his officials to keep their eyes and ears open, watching developments of that kind all along the line.
Those who want to take over insurance companies are not interested in the policy holders, as present insurance companies are. They are interested in diversifying and doing all sorts of things—asset stripping and so on, realising what capital advantage they can get out of it.
1973 Another development which I deplore is the movement away from traditional insurance into investment in property bonds or income bonds linked with life assurance, the idea being to get the best of both worlds—a high rate of interest and at the same time the advantage of the tax concession because of the life assurance element.
§ Mr. Tim Renton (Mid-Sussex)
I am following the hon. Gentleman's comments with great interest. I note what he says about diversification into property bonds and so on. Will he agree that, although this development has been abused in the last two or three years, diversification into linked bonds, property bonds and so on, can provide a better hedge against inflation for the investor in a life company than can be provided by, for example, putting the funds into gilt edged? To that extent, does it not provide a better security for the investor than straight investment in gilt edged?
§ Mr. Perry
The hon. Gentleman makes a good point, and I welcome his intervention. I am not saying that all moves into property bonds or income bonds are wrong. All I am saying is that there are certain aspects which need close examination. I do not doubt that reputable companies—I know that some are in fact doing so—have their funds hedged all along the line and everything is secure. But there are people on the fringe of the industry who are prepared to take advantage of this sort of thing in an effort to make a quick killing.
§ Mr. Ioan Evans (Aberdare)
We must try to distinguish between the traditional insurance company which gives with-profits moneys back to its policy holders and the more speculative insurance organisations which have grown up in which some benefits may go to the policy holders but in which the shareholders derive great benefit.
§ Mr. Perry
I can see force in what is said on both sides. All I am urging is that we be careful about how the funds are used, and the purposes for which they are used, doing our best to ensure that there is no filching. That is the basis of my complaint. I do not doubt that property bonds and income bonds can sometimes give people better security than can be got in another way.
1974 I am concerned about the motive of those who are introducing these new schemes. If it is the traditional life offices doing it, I am 100 per cent. behind them because I know of their record in this sort of business for over 100 years. If, on the other hand, if it is some fly-by-night seeking to make a fortune overnight—we have seen such cases recently—we must be diligent in watching how we allow that sort of thing to be done.
As I see it, insurance is the buttress against unforeseen circumstances. When that is departed from, it becomes a gamble. That is where I differ with many colleagues I know well in the insurance industry.
§ Mr. Clinton Davis
I ask my hon. Friend to bear in mind that, very early during the life of the present Government, the Chancellor of the Exchequer took urgent action to deal with some of the abuses to which he has been referring.
§ Mr. Perry
That is true. The Government have tried but, no matter what regulations are introduced, there will always be somebody who gets round them. To be fair, I agree that the Act introduced by the previous Government in 1973 was an attempt to do the same along certain lines, and many of its provisions were good. Nevertheless, there were people who looked for a way round, and I am afraid that it is extremely difficult to make the regulations watertight.
My time is running on—[HON. MEMBERS: "Hear, hear."] I do not like the way that was said.
§ Mr. Deputy Speaker
I gather that the hon. Member was looking for his place in his notes, and I remind him that he was dealing with unforeseen circumstances. I wonder whether he would deal with foreseen circumstances and help the Chair to effect a policy against points of order.
§ Mr. Perry
I should not like to underwrite a policy of that kind, Mr. Deputy Speaker.
I come now to a new facet of the insurance situation. In the past 12 months, seven or eight small life assurane companies have been in trouble. It is to the credit of the traditional insurance industry—I refer here to the Life Offices' Association, the British Insurance 1975 Association, the OB offices and all concerned—that it has stepped in and, where the trouble has been due to unforeseen circumstances, the industry itself has put an umbrella around those in trouble, protecting the companies and taking over the insurance interests of their policy holders so that people's money has been saved. That is the way in which the traditional insurance offices have given valuable protection during the past 12 months.
Nevertheless, there comes a time when the insurance world does not feel able to give that protection in respect of a particular company, and I shall refer to a company now, the latest one, Nation Life.
Here, my mind goes back to days before the war when I came into contact with that small industrial insurance company, as it was then. It was not a great competitor but I knew of it before the war. I am concerned that hon. Members should not confuse the Nation Life Insurance Company with the Nationwide Building Society. There is no relationship whatever between them. The Nationwide Building Society, one of our biggest building societies, is highly reputable, and its financial transactions are conducted with the highest propriety. Let there be no confusion between Nation Life and the Nationwide Building Society.
Nation Life offered concessions and terms which bore no relation to the true facts of the case. I have a constituent who told me that he put £2,000 into it. He took his £2,000 out of a building society and bought a Nation Life bond. He was promised that at any time he could have 95 per cent. cash surrender. Anybody who has been in the insurance business knows perfectly well that in the initial stages, in the first year or two, the costs are very high. This is when the procuration fee has to be paid, when the commission has to be paid, when the overriding commission has to be paid and other forms of costs are incurred. One can be virtually certain that if a £2,000 property bond or income bond is taken out, by the time the money actually gets into the coffers of the insurance company it may be as little as £1,500 or even less.
1976 To offer 95 per cent. cash surrender immediately is just not possible, as any respectable insurance salesman or broker knows. To offer a high rate of interest—say 12 per cent.—and a tax concession is a catch. I know that a large number of hon. Members have signed a motion initiated by the hon. Member—I might almost call him my hon. Friend since I have known him for so many years—for Croydon, North-West (Mr. Taylor). It is a respectable motion. But on an issue like this we cannot be guided by the people who have been caught and we cannot expect someone else to bail them out. I have not added my name to that motion because I am dubious about this sort of compensation.
This firm was taken over by the Stern group of companies. I have a cutting from the Daily Express, and I am sorry that the Daily Express correspondent is not in the Press Gallery. The Daily Express carried out an inquiry and on Monday, 25th November 1974 it published it. It states:Can you rely on your insurance broker?The article deals with Nation Life. It was my original intention to read it out this morning but I shall not do so since I wish to give other hon. Members the opportunity to make their contributions.
The article explains, however, that Nation Life selected five of the biggest brokers to specialise in and sell their bonds. One other big broker complained because he had been excluded and he wanted to get in on the act. It was agreed to take him on. All sorts of things happened in the selling of Nation Life income and property bonds. There were holiday weekends in Rome, cases of whisky, help with advertising costs, extra commission and even crude cash bonuses. This whole affair smelt like the North-East—like Poulson. I am quite confident that the Corporation of Insurance Brokers and the Association of Insurance Brokers will treat this matter with great care and try to eradicate the sort of practices in the brokerage business.
We know that the traditional offices which have business with brokers pay only a flat-rate commission, the same to everyone. Special commissions were offered to brokers to sell these property and income bonds, however, and so the brokers 1977 went to town. They earned quite a lot of money. Unsuspecting people who expected something for nothing paid up. There is no such thing as something for nothing in this world. In insurance one pays for what one gets, and one gets what one pays for. This is one of the strengths of the insurance industry. I commend to hon. Members the article in the Daily Express.
I have here a copy of the application form to join the Association of Insurance Brokers. No doubt the Corporation of Insurance Brokers has a form that is much the same. It consists of two pages of questions. The association is very particular about who it takes on as members. Insurance broking is like estate agency and certain other service industries. There is no compulsion upon those selling insurance to join a professional organisation. At some time there will have to be legislation to ensure that those engaged in both these branches of business must be members of a society to which they can be made responsible. The form issued by the association is a searching and inquiring document which delves into an applicant's personal details.
I was delighted to see that the patron of the association is the right hon. Member for Taunton (Mr. du Cann). No doubt in his sphere of activity he is a specialist. I am quite certain that the right hon. Gentleman, in that capacity, would not fail to condemn the malpractices that exist in insurance broking. I was quite certain that the corporation and the association would not be parties to those activities.
The scheme of compensation for bailing out companies which fall on hard times or which cannot meet their obligations represents the crux of the current situation. I understand that legislation is proposed for some future date on this subject. All the insurance staffs—the field staffs, the managerial staffs and the executive staffs—are opposed to this sort of scheme. Here I speak on behalf of the trade unions as well as the life offices and everyone else. I have received representations from the Co-operative Insurance Society's agents and their USDAW branch on this matter. I have with me a leaflet issued on the subject. I had intended to read it, but 1978 because of time I have changed my mind. It asks me to do what I can to stop this pernicious scheme.
Is it right, as I say in my motion, that policy holders, some paying as little as 5p a week and others as much as £50 a week, should have a small proportion of their contribution earmarked to compensate some other investor who wanted to enjoy a gamble and came unstuck? The policy holders have been cautious and prudent about where they place their money, and I urge the Minister and the Secretary of State to be most careful before they introduce legislation to use other people's money to subsidise those who bought a pig in a poke.
I have been a Member of Parliament for 10 years and I have sold insurance for more than 30 years. I am sure that the officials of the Department who formulated the scheme have never knocked on a door to sell insurance. In spite of my experience, I have never been consulted about this matter. I have probably knocked on more doors than anyone else in the House. Surely departmental officials who are formulating these schemes must ask the Minister whether there is anyone in the House of Commons who has had experience of selling insurance. I do not complain that I have not been consulted. It might take up too much of my time if I were. But we must remember that hon. Members have engaged in every sort of business and industry, and if the Government cannot consult them and seek the benefit of their advice in a case like this we are coming to a bad end.
The CIS agents knock on doors to collect money. They do not relish the prospect of having to tell people that they cannot pay out what was promised because someone else has had to be bailed out. What a prime prospect that is for canvassers. I feel sorry for them.
The industry is the lifeblood of this country. Policy holders' money goes into the coffers of an insurance company, which jealously guards it and looks after it, and hands it back to the policy holders when their policies mature, or to their dependants on death. It is wrong to think of taking money away from the policy holders under an Act to subsidise somebody who wanted a gamble.
1979 My hon. Friend Minister should think twice before introducing a scheme. He should not introduce it without proper consultation with all the people in the industry and with hon. Members who know something about it. I pay tribute to all the staffs of the insurance companies, the Life Offices' Association and the British Insurance Association.
People are leaving school at 16 or 17 without knowing how to handle money. They have received no education on insurance, which is our greatest national asset. I have here a kit which the Life Offices' Association sends to schools to teach students aged 14 and above how to handle money and what the insurance industry is all about. My right hon. Friend the Secretary of State for Education and Science should have a look at one of these kits. He should realise the valuable contribution made by the life offices in education of this kind. Children should be taught how to handle money for the time when they leave school. I hope that my right hon. Friend will have consultations about extending the curriculum to include education on money, insurance, commerce and everything else connected with the country's prosperity and survival.
I believe that I have kept in order by speaking for less than an hour. I hope that I have not bored the House. The subject is so important that people should know about it. They should know that through the insurance industry, solvent and steadfast, they can rely on their money and assets being put to good use for the country. If the insurance industry survives, the country will survive.
Even if the House does not do so, I thank the Life Offices' Association and all those connected with the industry very much for the wonderful contribution they have made to the country's stability.
§ 12.3 p.m.
§ Mr. R. A. McCrindle (Brentwood and Ongar)
My first agreeable task is to congratulate the hon. Member for Battersea, South (Mr. Perry). He has done a great service in bringing the motion before the House. To be able to get away with a speech lasting just under an hour and still find an attentive House at the end of that period is a tribute to the sort of person he is and to the way in which he moved the motion.
1980 I can well understand the hon. Gentleman's success when he was an insurance agent. I am not sure whether it was the pleasantness of his approach or the fact that he was prepared to speak and to go on speaking until the prospective customer had capitulated that made him as successful and rich as he appeared to imply he was. I congratulate him warmly on the service he has done.
I declare an interest in the subject. I am now associated with a life assurance company, and I have spent all my adult life in the world of assurance. It is for that reason that I especially welcome the opportunity to say a few words. I promise you, Mr. Deputy Speaker, that while I shall hope to cover a fair amount of ground, I shall do it in slightly less than 58 minutes.
It is timely that we should have the debate today, because there are suggestions in the Press and elsewhere that British insurance has changed its whole approach and character. The implication is that the reliability of British insurance has gone and that it is no longer a most effective form of saving or providing for a pension or family protection. We should send out a clear message that this is simply and demonstrably not so, that British insurance remains at least as effective a means of saving as any other method available to the public, that it is as secure a means of saving as any available and that it is as effective a means of providing for old age and as efficient a way of encouraging thrift as any other method. That is as true today as it has ever been.
Why is there a cloud hanging over the insurance world? Insurance company failures, which have affected less than 1 per cent. of policy holders, have nevertheless succeeded in cracking the solid surface of security and dependability. People who saw life assurance as, in the words of the advertisement, "strong stuff" are now beginning to wonder. It is part of my purpose to convince people that by and large there is no need to wonder about the continuing stability and security provided by British insurance. It remains as strong and reliable as ever. It is a most effective means for the small man to accumulate capital, to provide for his family in the case of early death 1981 and to contribute to his own pension provision.
It is constructive to inquire why the failures which have done so much damage to the image of British insurance took place. The reasons are twofold. First, there has been the tendency for new companies to compete against their long-established competitors by offering overgenerous terms which in retrospect can be seen to have been totally unjustified. It would probably have been wise never to have offered them to the public. Secondly, many of the smaller companies have tended to invest heavily in commercial property.
There is no reason why that should not be done. I do not go along with the hon. Gentleman in his blanket condemnation of property bonds. If he looks at the methods used by the traditional companies for investing in the interests of their policy holders, he will find that investment in commercial property is by no means excluded. Why was it that some life assurance companies, by investing in commercial property, fell into such difficulties? It was because the amount of their investment in commercial property was very large. Sometimes almost the whole of their investment was in this area. It was no doubt very tempting for them to do so, because there can be no doubt that investment in commercial property showed very considerable appreciation at that time.
Quite bluntly, the bubble burst and there was no reserve for those companies to turn to. The people who suffered were the policy holders who had placed their money and their faith in the smaller, newer insurance companies. Can it happen again? It is not impossible, but if the regulations which the Department of Trade has within its ambit to issue reach their optimum, as provided for by the Insurance Companies Amendment Act 1973, the chances of its happening again would be considerably reduced.
That is a message that I want to send out from the House and I hope that the Secretary of State will endorse it. It will bring some comfort to the millions who are concerned about the stability of insurance companies. If the regulations available to the Government are fully applied, the chances of these failures 1982 being repeated will be substantially reduced.
It was the build-up of public pressure from the time of the Vehicle and General collapse and through the subsequent failures that obliged the previous Conservative Government to take action in the shape of the 1973 Act. The Department of Trade now has such a measure of control over the activities of insurance companies that certainly no further Government control, for example, to the point of public ownership, is required. It is necessary only for the Department of Trade to issue instructions as to what assets held by an insurance company are acceptable.
In the past insurance companies have appeared to be much more viable than they really were because assets that were admissible have turned out to be hardly tangible. Therefore, giving the Department of Trade the ability to decide what are assets should considerably assist.
The Department of Trade has the authority to indicate the maximum volume of business that can be undertaken by a company. If it appears that a company is engaging in far too wide a range of business for its own good health, the Department has authority and power to intervene. The Department has the freedom to decide which investments held by an insurance company are secure and acceptable. Although the Department would be wise to use this power with great care and circumspection, the fact of the power will add to the security felt by British policyholders.
The Department also has authority to demand a quarterly or half-yearly return by insurance companies about which it might entertain doubts. There is now a much more active involvement in the operation of the insurance business by the Department, and that is a welcome development.
The insurance industry has a part to play in restoring confidence. The British Insurance Association and the Life Offices' Association have to restore a feeling of security and, in the process, to restore some of their own reputation, which tends to have been worn away a little by the events of the past few years.
1983 Although the Department of Trade must continue to play the most important rôle, close co-operation should exist between the Department and the industry. An early-warning system giving notice of suspicion or difficulty to the Department of Trade would be of value. It is unwise in the extreme to criticise the industry, especially the professional bodies within it, for the failure of companies during the past few years. In nearly all cases British insurance companies have come to the rescue of policy holders who have found their policies suddenly virtually worthless. We should pay tribute to the rescue operation mounted by the British insurance companies.
The exception is Nation Life. The hon. Member for Battersea, South spent a few minutes discussing this company and I should like to do the same. I associate myself with his remarks about the lack of wisdom of those hon. Members who have tabled and supported an early-day motion implying that, first, retrospective legislation would be acceptable in a case such as this and, secondly, that there should be a move to take money from the solid companies and give it to those companies that have proved to be not so solid.
That motion is ill conceived. I joined the hon. Member for Battersea, South in refraining from adding my name to it. When we are under pressure from constituents who have suffered in, for instance, the Nation Life debacle, it is the easiest thing in the world to add our names to a motion to relieve the pressure upon us. Those hon. Members who have done so have been ill advised.
There is no doubt that special circumstances attend Nation Life. Those circumstances have made it difficult for the Life Offices' Association to be as active in a rescue operation as it has been about other companies. Almost overnight the value of Nation Life was reduced substantially, because a large part of its assets was concentrated in one property development.
Although I cannot recall the exact figure, one day it was thought that that development's value was £7 million but it was discovered the following day, on 1984 valuation by a reputable firm, to be £3 million. That is an argument in favour of greater care being taken in the amount of commercial property investment undertaken by companies, and it proves that the companies that have tended to go under have done so largely because of their concentration on commercial property investment.
Nation Life also offered a high income bond. Guaranteed income bonds are no doubt attractive, especially to the person on the point of retirement who has accumulated from one source or another a lump sum, although generally not a large sum. He would be looking for a method of investing that money for the maximum return to increase his comfort in retirement. The guaranteed income bond has great attractions for many in that category. Many small people were undoubtedly induced to part with their life savings in return for greater comfort during retirement. It is a sad reflection that they are among those who write to Members of Parliament almost daily, not only complaining but concerned about their future.
The industry genuinely desires to help wherever possible in these circumstances. The Government have expressed their concern and I have suggested that the Government and the industry jointly should try to avoid the retrospective legislation we all fear.
The Life Offices' Association and the Government should jointly guarantee that if the liquidator says that the percentage of investment to be returned to the investor is, say, 70, they would make it up to, say, 85 per cent. of the original investment. I have put this suggestion to the Minister at Question Time, but he did not then find it possible to accept it. I hope that the right hon. Gentleman will say a little more about it today, and I stress that I am asking him to restrict the total returned to 85 per cent.
Why should that be? It is because somehow, in as dramatic a way as possible, we must do the best we can to bail these people out of acute difficulty. We must also tell others who might at some time in future be attracted to similar investments that there is no automatic way of protecting their money in all circumstances. Such an attempt would go a 1985 large part of the way to triggering off the thought in people's minds as to whether they were entirely wise to make investments of that kind, whether the return that they were being offered was not too good to be true and, finally, whether they as potential investors were not guilty of a tiny bit of greed in trying to get, as the hon. Member for Battersea, South said, something for nothing.
I turn now to the whole question of legislation on the insurance industry. I am conscious that the Government undertook in the Gracious Speech to introduce legislation of this kind, but I join the hon. Gentleman in questioning whether it is necessary in the light of developing circumstances.
I believe that the cumbersome business of legislation could be avoided if the Government were prepared again to negotiate with the industry on what I will call a post-failure fund. I suggest that instead of a levy on policy holders, which would deprive companies of the freedom to invest money on behalf of those who entrust it to them, there should be an agreement between the insurance companies and the Government that in the event of a failure—and only in such an event—the insurance companies should be prepared to come to the rescue up to, say, 90 per cent. or 95 per cent. of the total investment lost. That would not require legislation and would not take up the time of this House during a period when the parliamentary timetable is already clogged. I believe that it would allow the Department of Trade to continue to have that close association with the industry which has not always characterised its activities in the past but which, in the light of recent events, is extremely important.
I ask the Minister to think again whether legislation of this type is necessary or desirable. I accept the point about there being no retrospective aspect. However, I wonder whether legislation requiring some policy holders' money to be taken from sound companies to cater for the possibility at some time in future of a not so sound company having to be bailed out is fair and is the right method to deal with an admittedly difficult problem. Therefore I believe that, with Department of Trade supervision and the Life Officers' Association conscious of its 1986 responsibility, this matter could be overcome without legislation.
Having in the past practised as an insurance broker, I feel obliged to spend a few minutes on the vexed question of the rôle of brokers in the marketing of insurance in 1975 and, to some extent, the rôle they played in the Nation Life situation. Brokers must have some sympathy extended to them because they are not always able to obtain information relative to a company which would enable them to know whether recommending that company was the best thing to do. Indeed, insurance companies have not always been prepared to take broking organisations into their confidence regarding their investment policies. I ask the industry to think carefully whether closer association between brokers and insurance companies might be in the best interests of the insuring public.
In recent months I have frequently asked myself whether there is a case for the compulsory registration of insurance brokers. I have wondered whether, notwithstanding the existence of excellent bodies like the Corporation of Insurance Brokers, the Federation of Insurance Brokers and the Association of Insurance Brokers, there should be a compulsory register requiring brokers to comply with certain minimum standards so that, just as under the Insurance Companies Amendment Act 1973 the public may have some feeling of security in dealing with an insurance company, they may have the same feeling of assurance in dealing with insurance brokers. I have come to no particular conclusion, but I believe that is a subject to which this House will probably be obliged to return from time to time until the whole of the marketing of insurance arrangements in this country has been clarified.
Again, there is the whole question of commissions payable to brokers. There are many who would say that the Nation Life or similar situations would never have occurred had it not been that Nation Life attracted or bought its business by offering over-the-odds commission to certain brokers. I think that it is going too far to say that the Nation Life situation would not have arisen had that not been the position, but there can be no doubt that business is often attracted to companies which are not always the 1987 best for the client's need simply by paying above-the-odds insurance commissions. As a proponent and defender of free enterprise in insurance, and believing that the free enterprise British insurance business has much to boast about, I wonder whether, under the Department of Trade's regulations, there might on some future occasion be an argument for putting a ceiling on the commission that a company is able to offer in an attempt to buy business.
I end by repeating that public confidence in the British insurance industry must be restored. The business as a whole must again be seen as a solid and secure haven for the savings of the ordinary individual, as the best protection to take care of domestic disasters and as one of the most effective ways of providing or supplementing pension arrangements. In short, we must prove yet again that British insurance really is strong stuff.
§ 12.28 p.m.
§ Mr. David Weitzman (Hackney, North and Stoke Newington)
My hon. Friend the Member for Battersea, South (Mr. Perry) has raised an important subject in calling attention to the insurance industry. In no uncertain way he has atoned for his long imposed silence as a former Whip, and I congratulate him on a sustained effort.
My hon. Friend certainly sang the praises of the insurance companies, although he added a good deal about their abuses. It is right to recognise the contributions made by the insurance industry in providing long-term savings and security for millions of policy holders. We certainly ought to do all that we can to build up confidence in the industry. Perhaps the most important measure to achieve is to see that insurance companies are properly run, that the directors and managers are fit and proper persons, and that the funds are properly protected. The stringent controls imposed by the Insurance Companies Amendment Act 1973 regarding the entry of companies into the industry did a good deal in that direction.
The Insurance Companies Act of 1974, with certain exceptions, consolidated the provisions of the Insurance Companies Acts 1958 to 1973, and they set out a code of laws governing insurance com- 1988 panies, the persons permitted to carry on such business and the conduct of that business. Nevertheless, there is still much to be done. Therefore I was glad to see included in the Queen's Speech a promise to introduce legislation to provide additional protection for policy holders. I understand that this will be done in the near future and that the Government have proposals for a compulsory insurance scheme to give further security to millions of people who have insurance policies.
One of the matters to be dealt with in this scheme is that third party claims will be met fully where insurance is compulsory. It is with regard to this that I wish particularly to speak, because in my view the present position is unsatisfactory.
Hon. Members will know that the Preamble to the Road Traffic Act 1930 describes it, inter alia, asAn Act … to make provision for the protection of third parties against risks arising out of the use of motor vehicles".The provisions of that Act did not quite live up to the terms of the Preamble because, if the driver was not covered by a policy of insurance or it had been voided for some reason, or if the car had been used by someone not permitted to drive under the policy, the driver, although negligent, might be impecunious and the victim could not recover damages.
The Cassels Committee was set up and, as a result of its recommendations, an agreement was made on 17th July 1946 between the Minister of Transport and an incorporated company, the Motor Insurance Bureau, that bureau being created at the instance of insurers transactinng compulsory motor insurance. The clear intention was that, if a victim could not get compensation from a negligent motorist, he would get it from the bureau. But conditions were laid down. The liability of the bureau did not extend to compensation for personal damage resulting from the use of a vehicle where the offending driver could not be traced. It is true that sometimes an ex gratia payment was made.
I raised the matter of the defects in the obligations of the bureau on 5th March 1965. I was concerned then about the case of a Miss Adams, a young girl of 16 terribly injured, who obtained a judgment of £15,000 against an unidentified motor cyclist who could not be 1989 traced. The bureau would not pay her, although I am glad to say that following the debate it made an ex gratia payment of £10,000.
The Parliamentary Secretary to the Minister of Transport said at the time that the Government recognised a responsibility for giving relief to the victims of accidents and establishing an obligation for relieving their hardship. Discussions with the bureau took place, and there followed a new agreement with the bureau dated 2Ist April 1969. Under this agreement, the bureau agreed, subject to certain conditions, to pay compensation where the accident had occurred because of a hit-and-run driver—a driver who could not be traced.
Today, I am concerned to refer to the case of a young man, Malcolm Davis, a constituent of my right hon. Friend the Chief Whip, whom I am glad to see here. In mentioning this case I have my right hon. Friend's consent and approval.
This young man, now 22 years of age, was a passenger in a car driven by a Mr. Michael Riley. Mr. Riley, the driver, lost control and drove into a wall. As a result, Davis suffered very severe injuries including permanent brain damage and recurring fits of epilepsy. A judgment was obtained against Michael Riley for a total of more than £22,000.
The car was insured by Michael Riley's father, Mr. Charles Riley, in 1964. The company was the Automobile and General Insurance Co. Ltd., a subsidiary of the Vehicle and General Group. On 29th December 1970, the company declared the policy held by Mr. Riley void from its inception. It did so upon the grounds that Mr. Charles Riley had incorrectly filled in the proposal form on 20th June 1964 by stating that he was the holder of a provisional licence when in fact the licence was issued only on 1st July 1964, and that he said that he was the owner, whereas the vehicle was registered in the name of his son, Michael Riley.
In fact, the car was purchased by Mr. Charles Riley. The proposal form was filled in by Michael, the son, and it made it clear that he, Michael, would drive the car, because the first cover showed that, whilst Michael drove it, it was subject 1990 to £25 excess. There was a minor accident in 1968, and the company paid.
When the accident to Davis occurred, Michael Riley inadvertently in answer to a question stated that he was the owner of the car. The insurance had continued for six years without question. The premiums were paid right through the period. But the insurance company repudiated on the grounds that I have stated. Clearly there were minor inaccuracies, yet in law the insurance company was entitled to repudiate.
After the collapse of Vehicle and General, hon. Members will know that the British Insurance Association undertook to satisfy claims against Vehicle and General where a valid policy existed. But in view of the repudiation, the association would not pay.
Now this young man, married with two small children, is ruined for life. He cannot work. He depends on social security. He has a judgment for more than £22,000 and an order that the defendant pay £12.50 per month. He has not had a penny piece because even those payments of £12.50 per month must first go towards the costs in the action to the Legal Aid Fund.
My right hon. Friend the Chief Whip took up the case, and I know that he did all that he could to help this poor boy. He wrote to the chairman of the British Insurance Association. I tried in my small way to help from a legal point of view. But nothing could be done to assist in this case.
Despite all the praise for the insurance business by my hon. Friend the Member for Battersea, South, which in many ways is rightly deserved, I regard this case as a blot upon the conduct of insurance companies. In my view, it is an illustration of how the law is very heavily weighted in favour of insurance companies.
The concept of full disclosures are difficult to understand, especially for a layman who fills up and signs a proposal form without advice; or it may be filled up by the agent. It seems to me that in the absence of any attempt to mislead, as was the case here, there should not be a right to repudiate.
In the consideration of these matters by the Government, I hope that attention 1991 will be paid to cases of this kind. It is wrong that a young man should—
§ The Parliamentary Secretary to the Treasury (Mr. Robert Mellish)
With your permission, Mr. Deputy Speaker, I should like it on record that Mr. Davis and I are deeply indebted to my hon. and learned Friend for the enormous legal work that he did and tried to do—unfortunately, to date, to no effect. He described the case accurately. I know that my hon. Friend the Under-Secretary of State for Trade is listening. If there is anything that he can do, I plead for something to be done. Mr. Davis is a victim of grave injustice. But again I thank my hon. and learned Friend for his enormous comradeship and for all the work that he did. He did it the moment that he was asked and, I may say, without any fee.
§ Mr. Weitzman
I am grateful to my hon. Friend for that comment. I only hope that something can be done to assist in this case. I ask the House to recognise that it is wrong that a young man should, through no fault of his own but because of the negligence of another, be condemned to a life of incapacity and illness and not be able to recover a penny-piece by way of compensation.
There are many things in the agreement with the Motor Insurance Bureau which should be looked into. Under it, for example, damages for loss of expectation of life are not recoverable. If the victim receives wages from his employer, whether or not upon an undertaking to repay them, he is not deemed to have sustained loss. There is no appeal to the court; loss of property is not covered; nor are accidents off the highway. The victim often has to go cap in hand to the bureau to seek some measure of relief.
I urge upon the Government that payment of compensation should not depend on the terms of an agreement with the bureau. The position should be put upon a proper legal basis.
I am grateful to my hon. Friend the Member for Battersea, South for giving me this opportunity to raise these points. I congratulate him again on his long, sustained and excellent presentation of the motion.
§ 12.42 p.m.
§ Mr. Roger Moate (Faversham)
I endorse the remarks of the hon. and learned Member for Hackney, North and Stoke Newington (Mr. Weitzman) in congratulating the hon. Member for Battersea, South (Mr. Perry) on introducing the motion. I congratulate the hon. Gentleman on the sheer down-to-earth, commonsense way in which the motion is phrased. It is an excellent use of Private Members' time to bring forward such motions to clarify some of the important issues which are under current discussion in regard to insurance protection.
I hope that the hon. and learned Gentleman will forgive me for not taking up the particular matter he raised. Obviously it is a sad and complex matter and I do not think he would expect me to respond on that point.
I have two major points to make. First, I wish to urge the Government to use whatever power and influence they have on the question of the Nation Life liquidation. I hope that they will speed up the liquidation if that is at all possible. I hope they will ensure that there is an early payment to Nation Life policy holders and bond holders and an improvement in the flow of information to those people who so often are unaware of their expectations in the process of the liquidation.
The second point I wish to raise concerns the question of the proposed guarantee fund. I urge the Government to think again before introducing the type of scheme which they now have in mind, which in effect is a tax on insurance to compel the prudent to bail out the imprudent and could work to the disadvantage of everybody.
§ Mr. Clinton Davis
If the hon. Gentleman intends to develop those remarks, perhaps he will help the House in defining the distinction between what is prudent and what is imprudent, and between what is safe now and what is potentially unsafe. Those matters go to the heart of the problem.
§ Mr. Moate
I appreciate what the Minister said. The whole essence of Government intervention in regulations is to attempt to lay down criteria to defend the public, because it is hard for ordinary 1993 members of the public to distinguish between prudent and imprudent action. I do not fail to recognise the importance of Government involvement in insurance regulations. I believe that it is important to keep the National Life problem and the proposed guarantee fund totally separate, because they are quite separate issues. The one obvious reason for their being separate is the fact that the Government have clearly stated that there is no question of backdating the guarantee fund to cover Nation Life. That being so, it would be misleading to Nation Life policy holders and would do them no favour whatever to rush into a guarantee scheme. Indeed, it could be to the disadvantage of the whole of British insurance and to policy holders in other classes of insurance.
I regret that the early-day motion on this subject which has been signed by many of my colleagues confuses the issue, and I am sorry that they have not shown the same awareness and understanding of insurance as did the hon. Member for Battersea, South when moving the motion.
Therefore, my first concern is the situation in regard to Nation Life. If the guarantee fund is not available to help policy holders, what prospect is there for that large number of people who, through no fault of their own, will lose vital life savings? I believe that the explanation of the situation should be put on record for policy holders and bond holders as to how they will fare.
The impression has been given that many people stand to lose all. On the other hand rumour has it, although I have not seen official statistics, that the resources which are available to the liquidator at present, or which are likely to be available before long, would allow dividends to the policy holders to the tune of 50 per cent. immediately, and ultimately perhaps rising to 75 per cent. or thereabouts. I do not want to raise false hopes, but it seems that a high percentage benefit would be available at some stage or other.
It is important to ensure that the people who have lost money are informed about what is going on. In liquidations of this nature the poor policy holder and bond holder is often kept in the dark, perhaps unnecessarily so. The 1994 processes of liquidation are long, painful and difficult. I hope that the Department of Trade has sufficient power and influence to speed up the process of liquidation in this case. I do not know the extent of the Department's power and influence over a liquidator in these difficult circumstances, but if there is good will and there is power to speed matters, I am sure that the Minister will exercise it.
§ Mr. Clinton Davis
I should make clear to the hon. Gentleman that the liquidator is answerable to the court, not to the Department of Trade as such. Therefore, it would not be appropriate for the Department of Trade to intervene in the process of a winding-up. Indeed it would be wholly inappropriate.
§ Mr. Moate
I fully appreciate the legal complexities of all liquidations. We now have the liquidation of a life company which is an even more complex and difficult matter. I hope that we shall soon be able to look at the whole question of the liquidation process, which I believe to be unsatisfactory. The process often takes many years and at the end of it so often only the liquidator covers his expenses and very little is returned to the creditors. That is not a slur on the liquidator; it is one of the facts of life.
In the case of Nation Life, will the policy holders face the prospect of litigation lasting many years? The damage inflicted on British insurance at home and abroad as well as to many policy holders would be great. Let us find some way to bring influence to bear, whether in the form of action by the British insurance industry to contribute to a scheme or to some other arrangement or by seeking to take short cuts within the legal process. I hope that the Government will do all they can to alleviate the distress.
My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) suggested that there could be a system of contribution whereby other companies could make a contribution and could bring a settlement up to a reasonably high percentage of the figure lost by policy holders. I believe that some arrangement could be arrived at under which assistance could be given by some other companies through the liquidator to try to produce an early settlement.
1995 I should like to make one other point about the irrelevance of the proposed guarantee fund to Nation Life policy holders.
The Department of Trade hand-out of 29th October reads:Claims on both life and non-life policies would be met to the extent of at least 90 per cent. although there might be exceptions for certain over-generous benefits provided on some life assurance policies.I would have thought that that type of exception would have applied to this circumstance. Even if there were such a fund in existence today, it is probable that the fund would not be expected to meet more than 70 per cent. to 75 per cent. of the total losses. That is pure speculation, but I think that hon. Members will follow what I am saying. It is possible that amounts of that kind will be forthcoming from the liquidation in any event.
§ Mr. Clinton Davis
The point is that Nation Life did not comprise in its dealing only the over-generous policies. It had a percentage of perfectly ordinary assurance. That, of course, would be covered by the scheme. It is necessary to differentiate between the two.
§ Mr. Moate
I am grateful to the Minister. He will understand that one of the problems that hon. Members face is that their own constituents have suffered losses. We read Press reports of what is going on but we do not have full information about the position facing the liquidator.
As I understand it, there is no problem as regards ordinary policy holders. It seems that the problem relates to the bond holders. The more information we can receive, the better. Perhaps I should have declared my interest as an insurance broker at an earlier stage. However, I do not think that interest affects the points I am endeavouring to make.
My last point regarding Nation Life relates to rescue operations. It is only fair to pay tribute to the insurance industry for the number of rescue operations in which it has successfully engaged over the past few years. Many of those operations have gone unnoticed or have been forgotten. None the less the industry has engaged in extensive rescue operations, without which we would be facing a far greater crisis.
1996 People will say "Why should not the industry step in to save Nation Life?" We must accept that there is a limit to the number of times that life companies can use the funds of the shareholders or the funds of their policy holders, in the case of mutual companies, as it is sometimes suggested, to bail out other companies that have failed. Of course, it can be argued that it is a commercial investment on their part to protect their goodwill and that of the insurance world by using funds for that purpose. However, I do not think it is right to expect companies to imperil their position by bailing out other companies that have pursued irresponsible policies which have been commercially competitive to the detriment of the existing companies. When companies are faced with the uncertainty of property valuations, as is the case with Nation Life, there must be a limit. Companies are reluctant to intervene and to commit their own resources in those circumstances.
It would be helpful, as my hon. Friend the Member for Brentwood and Ongar was saying, if there could be a post-collapse fund and some guidelines laid down to assist the companies that wished to intervene. That could go a long way towards solving the problem.
Next, I turn to the guarantee fund. I do not think there is any objection in principle to the idea of compensation funds. We are used to them on the Stock Exchange and in Lloyd's. The legal profession has a compensation fund of some description. However, there is a fundamental difference between those arrangements and a compensation fund between competing commercial companies. The Stock Exchange, Lloyd's and the legal profession operate in a corporate identity under, as it were, club rules. The legal profession is not engaged in commercial competition in the same way as the insurance companies.
It is the freedom to operate competitively which has given British insurance its strength and which has enabled it to serve Britain so well, as the hon. Member for Battersea, South described. That freedom has enabled it to become one of our greatest international financial institutions. To inhibit that commercial freedom is a very different proposition. That is what we might be doing by imposing a 1997 guarantee fund in the way that is proposed. It is like asking a large company to bail out one of its competitors which has failed. It is rather like asking Fiat and Volkswagen, in true Common Market spirit, to bail out British Leyland.
I accept that in discussing insurance we are not talking about ordinary commercial arrangements. We have long accepted that rules apply to insurance which do not apply to ordinary commercial competition. For hundreds of years we have had insurance company legislation. The insurance world accepts the need for close regulation and scrutiny from the Department of Trade.
That brings me to the concept of scrutiny and control. When we look back over the history of insurance company policies I do not think that the Government can escape responsibility. Admittedly the 1973 Act has been on the statute book only a short time. We should take time to develop the appropriate regulations permitted under that Act which would apply to the various aspects of insurance company control. Nevertheless, if the Department of Trade accepts responsibility for scrutinising the affairs of the insurance companies, it cannot escape some of the blame for certain matters having developed.
The lesson we must draw is that the Department of Trade did not have—I hope it has it now—the sophisticated mechanism to act fast enough in the circumstances of the time. That applies particularly to property bonds and to surrender values. These matters became self-evident, but they all happened very quickly. It is clear that successive Governments cannot escape responsibility. Seldom can any industry, particularly one concerned with savings, have operated in such difficult circumstances.
§ Mr. Clinton Davis
I must intervene again at this point. The obloquy that the hon. Gentleman is seeking to heap on the Department of Trade—maybe he is seeking to do so in a qualified way—is unfair. I suggest that under the 1973 and 1974 legislation, which was agreed legislation, it was understood that there was to be a package of regulations. Parts of that package have already been introduced, but there is a full package remaining to be introduced. Is the hon. 1998 Gentleman seriously suggesting that the regulations, which are inordinately complex, could have been produced out of the drawer, so to speak, at a moment's notice? Does he not realise that the regulations need the most careful scrutiny and consideration by the industry and the Department?
§ Mr. Moate
I think I was rather fairer than the Minister has suggested. I said that the Act was introduced only in 1973 and that the regulations were complex and would take time to develop. I was criticising not the officials who are conducting the scrutinies but Government. I am not referring to the Minister or his Government, because the previous Conservative administration accepted powers and responsibilities under the 1973 Act. Those of us who played a part in that legislation criticised the fact that so much of it was to depend on regulations to be devised at a later stage.
I am saying that on insurance matters Governments accept a responsibility of close scrutiny. They have immensely wide powers of control. They can control the kind of premiums that are written by many companies. They can direct hundreds of millions of pounds worth of assets into trust funds. However, at the moment we do not seem to have the mechanism to operate sensitive and sophisticated control on what is happening within the industry. I hope that the Department will develop such a mechanism and that it will have the staff and the resources to do so. I hope that the Government will be able to exercise proper scrutiny, thus reducing the need for a guarantee fund.
The corollary is that the guarantee fund could reduce the need for the Department to operate proper scrutiny. I am sure that that was not the Government's intention. None the less, it could be argued that we will become unpopular because of the Nation Life collapse. I have been accused of unfairly criticising the Department, and I accept that civil servants have not enjoyed this process. It could be argued that the purpose of the guarantee fund was to protect not policy holders but politicians and civil servants from unpopularity. It must not be allowed to reduce the importance of scrutiny which is the real security which can be offered to policy holders.
1999 The collapse of the stock market in the last year, rising inflation, the rise and fall of property values, and partial collapse of the secondary banking system and massively rising interest rates made it particularly difficult for the insurance business to operate. The Government cannot escape from their responsibility. We should be grateful that the problems have been contained to the extent that they have.
I do not say categorically that there should not be a fund. Perhaps there should be one. If so, I should prefer it to be a post-collapse arrangement. The policy holder would be as well off then as he would be if the company had been propped up earlier by a fund levied on policy holders. We should bear that in mind when we consider putting an automatic levy on all policy holders. Why should the man in an industrial accident and sickness scheme, or a man with an endowment life policy on which he is paying premiums which contribute to profits and who is already paying more than other policy holders, or a motorist who insures with a safe company as against the motorist who is willing to take the risk of going elsewhere for the sake of saving a few pounds, pay a flat tax across the board to help one or two companies which might be taking risks or which might be speculating if the Department permits them to do so and to compensate people for the actions of the imprudent? That would encourage irresponsible underwriting.
If one of the problems has been that overgenerous benefits have been offered by certain life offices in the last year or two, is not a guarantee fund likely to encourage companies, perhaps new companies, to offer overgenerous benefits again? It will certainly not discourage that. It could operate to the disadvantage of many people. Perhaps the Minister will tell us whether it is proposed that pension schemes should contribute to such a fund. If not, why should pension arrangements for the self-employed pay the tax?
There are all sorts of complexities, but basically the fund is unnecessary. The matter could be dealt with in another way. The fund will mean that motorists, householders and other policy holders will carry the can for the imprudent.
2000 I hope that the Minister will place a very high premium on the possible introduction of a voluntary scheme. There is no need for the early introduction of legislation. The legislative programme is crowded. It would be far better if further negotiations were conducted so that perhaps next year a voluntary scheme could be introduced, even without the need for legislation. I accept that the Government's proposal is not motivated by ideological considerations. We are seeking a practical way of helping policy holders and of ensuring that British insurance retains the reputation for security which it has enjoyed and which has been the foundation of its success at home and abroad.
I hope that the Minister will consider the possibility of going slow on this proposal and of making more effective the controls within the Department and bringing about co-operation between the Government and the British Insurance Association and the Life Offices' Association to devise a workable scheme at the same time as endeavouring to find a way of helping people who have already suffered and to whom a guarantee fund offers no hope.
§ 1.5 p.m.
§ Mr. Ted Graham (Edmonton)
I am grateful for the opportunity of making a contribution to the debate. I, too, begin by offering my warm congratulations to my hon. Friend the Member for Battersea, South (Mr. Perry). He is entitled to our warm regards on at least three counts. First, he has introduced in a most timely way a subject which is of great relevance not only to an honourable industry which has served the nation well but to a great many people. Comments made today will be of value to all the individuals concerned in this subject.
Secondly, we are deeply grateful to my hon. Friend the Member for Battersea, South for demonstrating in his inimitable way his deep personal knowledge of insurance. In other contexts, we would say that my hon. Friend speaks from the shop floor. In this context, he speaks from the doorstep. He told us of the number of doors which had been opened to him. I presume that a similar number had been closed in his face.
2001 Thirdly, we should congratulate my hon. Friend the Member for Battersea, South because he has allowed those of us with some generalised knowledge to share his concern at the sense of disappointment and apprehension and sometimes frustration felt by people involved in insurance. He spoke of the feeling of frustration of insurance workers. He mentioned the genuine, hard-working members of management in insurance. He mentioned the consumers—the policy holders. He drew attention to the problems of the Government. I believe that the purpose of the motion is warmly to congratulate the Government on their concern for the policy holder and for the insurance business.
The problems of the Nation Life policy holders have properly been separated from the Government's proposals to protect policy holders in general. I welcome the constructive suggestions of the hon. Members for Brentwood and Ongar (Mr. McCrindle) and Faversham (Mr. Moate). They recognise that it is not easy to find solutions, particularly for the Nation Life policy holders. Hon. Members have made the relevant point that people have had their fingers burned. However the remedy may be applied, some injury will be suffered by Nation Life policy holders. I hope that the Department will consider how we can bridge the gap between the amount which comes from the liquidation and the amount it is felt prudent to pay back to them.
There are a number of villains, knaves and fools, and some who are greedy and some who are grasping, on both sides of the fence—those who wish to be insured and those who offer the insurance. In my studies, and in considering the nature of contract, two phrases of Latin derivation stick in my mind: uberrima fides—the utmost good faith, which clearly must be established—and caveat emptor—let the buyer beware. Both tags are relevant in an insurance debate.
There is no doubt that there has been great public disquiet at the comparative ease with which it has appeared that unsuspecting, gullible, naïve or greedy people can be taken for a ride by highly suspect organisations operating deliberately, wantonly and recklessly on a high risk basis with other people's money. 2002 That is a clear case of the reckless taking the feckless for a ride. Today we are considering how we can prevent the feckless from being taken for a ride by those who choose to be reckless with other people's money.
Every speaker in this debate will be able to say, "One of my constituents wrote to me and said". I say that, too. One of my constituents wrote to me with regard to Nation Life. This is a matter of some delicacy and I use the most general terms. My constituent said that the funds were invested in guaranteed bonds because it was thought that bonds were "safe". I shall deal later with the responsibilities of people who have large sums to invest. However, my constituent said:In discussing with the broker, he strongly recommended Nation Life as he knew them as a very good firm. However, accepting that this sort of thing was his job, and as he gave us his advice with confidence, we took it.In a great many instances the individual relies on the broker because he believes that the broker knows more about the business.
I wrote to the broker without any allegations, asking him to furnish me with one or two background facts. The broker made some telling points:The fact of the matter is that in the final analysis your constituents made their own selection, and it was only on our recommendation that they did not put the whole amount into Nation Life. The final choice in these matters always rests with the client. Whilst we have made our usual investigations into the standing of Nation Life, you will no doubt appreciate that at that time the company was trading normally and that there was nothing suspicious against them.Brokers are only human. They have a job to do, and they make their inquiries. The broker wrote:Finally, we would point out that we did not receive any commission from Nation Life prior to their collapse, and of course we are not likely to receive it now.There are risks even for the broker. I do not berate the broker, nor do I say that my constituent was wrong in seeking advice of that kind.
This debate is timely because the Government, realising that something needs to be done, have proposed legislation. 2003 The words of the motion arecalls upon the Government to be cautious and prudent before …I draw the attention of the Minister to the word "before". The Department and the Minister are open to advice at this stage on how best to protect those whom we believe need protecting. Here I refer to the policy holders and the good name of the insurance business.
The Government scheme has been referred to, as has the central fund and the 1 per cent. levy raised on all premium income of insurance companies. The figure could well be less than 1 per cent., since 1 per cent. of that income would total £25 million per year. That is a colossal sum to pay in anticipation of a need. The money will be used to assist rescue operations and to meet liquidation claims. I appreciate that the money will not be used only for rescue operations. Life and non-life claims will have to be met, but there may well be a cutback in respect of circumstances such as the Nation Life collapse.
This debate provides us with the opportunity to challenge some of the premises on which the scheme is based. The levy is a means of taxing millions of low-income policy holders of traditional insurance companies. Under the scheme there will be no possibility for such policy holders to receive benefit. The benefit will be enjoyed by the wealthier persons who have chosen to place their business with the most speculative fringe insurance companies. It is wrong that those people who have carefully chosen where to invest their money should have their return inhibited because they favoured security, besides profitability and solvency. Their return will be inhibited because they will pay for their own policies and also for other people's imprudence. I do not wish to exaggerate the fact that this is the nub of the question. However, it must be explained.
The scheme can be challenged even though it gives further security to millions of policy holders. Traditionally, life insurance business is on a with-profits basis. If the investment position of those companies deteriorates, the profits of the policy are automatically reduced. During the past year the with-profit element has been drastically scaled down. Prudent and well-managed firms have always done 2004 that when times were bad. It is a form of built-in insurance. I fail to see, except in the most catastrophic circumstances, why those firms should be better insured under the scheme. In the event of catastrophic circumstances no scheme will be sufficient to protect policy holders. I think that it is morally wrong that the prudent should pay for the others.
If the scheme proceeds, the traditional companies will be entitled to give the facts to their policy holders. They may say that the return to policy holders is smaller because they have had to pay for the additional insurance to protect the other companies.
It is proper to draw the attention of the Minister to the observations of some of those involved in the business. The Financial Times of 4th March 1975 carried a report from the Scottish Mutual Assurance Society, the Chairman of which, Mr. Ballantyne, said:I have accepted the situation that in modern conditions a greater degree of control by the Government is justified to maintain high standards in the industry and to protect policy holders from the activities of operators whose sole aim is the short-term maximisation of shareholders' profitsand who aresomewhat more recent in origin or unconventional in character—a nice way to sum up the danger to the industry. He goes on to say:The past year has seen the failure of several relatively small life assurance companies, none of which could have been seriously regarded as established, or even recognisable, members of the insurance industry … By the terms of this Scheme—that is, the Government's scheme—all authorised insurers will be required to guarantee the terms of each other's contracts. In its application to life assurance, the Scheme is completely objectionable.… It will also have a disastrous effect on the insurance market in that there will be no reason for a broker or prospective policy holder to look for anything but the highest commission and the cheapest premium".If someone who is eminently respectable in the business has formed that view and he is wrong, it is the duty of the Department to explain why he is wrong. If it is based upon experience and it is right, the Government must look again at the scheme.
I offer the observations of Mr. Fisher, the Secretary and principal official of the 2005 Liverpool Victoria Friendly Society, and Secretary of the Association of Friendly Societies, who spoke at a dinner in November and who was reported in the West London Observer as follows:The man in the street thought of life assurance as a contract paid for by regular premiums. For the ordinary wage or salary earner a large, single premium, life assurance was a practical impossibility.… Now companies in difficulties have offered various forms of 'guaranteed bonds' or 'guaranteed income bonds', usually for a single premium and incorporating unrealistically high guaranteed surrender payments.… It ought to have been evident to most investors of this class that the high returns could not have been achieved without a degree of risk. Who should pay for this risk? … Adequate regulation, properly enforced, will provide the security that the Department and the industry are understandably seeking".I should like to be as helpful as I can to the Department because I appreciate its dilemma based upon a genuine desire to protect the consumer but faced with the problems of being fair to all concerned. Some of the remedies have already been mentioned. We ought to be able to nail as quickly as possible companies which deal in making reckless claims and which follow wild investment policies. We ought to be able to activate regulations which are in train from the 1973 Act, or take additional powers in order to ensure that this does not happen. If the powers are ample now, they ought to be activated quickly.
We ought to be able to issue cease and desist orders of one kind or another upon businesses which are clearly shown to be acting in a way which will get them into trouble. I echo the words of the hon. Member for Faversham who said that one of the problems is the inability to act speedily on liquidation. We ought to be able to get settlements much earlier than now of matters that go into liquidation. I know there are problems, but we ought to be able to get that done.
We have had a very useful debate. We have demonstrated that we are concerned more with prevention than with cure. We do not want the events of the last few years to happen again. We do not want innocent people paying more for their insurance than they need. We ought to be able to insist that policies containing terms which are reckless shall not be issued unless approved by the actuary. We ought to be able to ensure that the 2006 actuary is enabled much more quickly in the future than now to have the right to find out what a company is doing. We ought to be able to give the actuary power to stop a switch in the funds of the company from what appear to be reasonable investments to very dangerous and high risk investments. We ought to be able to make it impossible for blatantly unsound and irresponsible investment policies and outrageously high interest rates to be a feature of the insurance business.
My comments are made in the full knowledge that there is a genuine attempt by the Department to find a solution to a very difficult problem. I admit that the name of the game is insurance. We cannot eliminate risk 100 per cent. in a game where the name is insurance. We cannot eliminate risk 100 per cent., but we are entitled to try to get as near as we can to eliminating the risk for responsible consumers so that responsible businesses are able to continue to serve the nation in the future as well as they have done in the past.
§ 1.26 p.m.
§ Mr. Robert Taylor (Croydon, North-West)
I too congratulate the hon. Member for Battersea, South (Mr. Perry) on enabling the House to discuss the insurance industry. He was particularly kind when he said that he and I had been personal friends for a number of years. It is true that this goes back nearly 20 years to the time when I was first adopted to fight the adjoining constituency of Battersea, North and he was then a leading member of the old Battersea Borough Council. In all those years I never realised that beneath the cheerful Socialist façade a very real Tory heart was beating. Certainly much of the hon. Gentleman's speech today expressed admirable Tory principles with which most of us on this side of the House are in full agreement.
Several hon. Members, including the hon. Member for Battersea, South have referred to the early-day motion on Nation Life which appears in my name and the names of 140 other Members from different parties. It is, therefore, only natural that I should try to explain what might be thought the paradoxical situation that I, as a sponsor of that 2007 motion, find myself very much in agreement with the sentiments which have been expressed.
I think I can convince the House that this is not as paradoxical as it might appear. It must be right that the efficient firms have no responsibility for the inefficient. There is no reason at all why au efficient insurance firm should take on the obligations created by inefficient firms. Similarly, the prudent man who takes out his insurance should not find himself saddled with additional costs in order to look after the interests of those who imprudently take out policies such as those described by the hon. Member for Battersea, South.
In his motion the hon. Member has asked the House to be cautious in contemplating any proposed legislation. But the time for caution was before the Gracious Speech. In the Gracious Speech there is a specific statement thatLegislation will be introduced to provide additional protection for policy holders of insurance companies.…If that is the case, the chain of events must start. First, our insurance companies, which have always been very jealous of their reputation by rescuing insurance companies which have run into trouble, see when they look into the future that this moral obligation will be taken away from them because the State will take it over and do it for them. Therefore, from the very moment of the pledge in the Gracious Speech that legislation would be introduced, it must necessarily follow that the approach of the other insurance companies will be elected in some way. Therefore, I maintain that by that statement the policy holders and the investors in Nation Life are placed at a greater disadvantage than was the case before, albeit that the liquidation occurred before the date when that statement was made.
§ Mr. McCrindle
Had that been the Government's intention, would it not have been reasonable to expect reference in that part of the Gracious Speech to an intention that the legislation when introduced would, subject to the will of the House, be made retrospective so as to apply to Nation Life policy holders?
§ Mr. Taylor
My hon. Friend had misunderstood the point. Prior to that state- 2008 ment in the Gracious Speech, all insurance companies recognised that they had a moral obligation to protect the good name of the British insurance industry by looking after companies which ran into trouble, but from the moment when that statement appeared the moral obligation went, because they are all in future to be protected and the moral obligation to protect is no longer necessary. I submit that that is a perfectly logical view of the matter, and it is the reason why Nation Life policy holders feel aggrieved at the situation now confronting them.
If caution at this stage is too late, there is a further reason why my early day motion should be supported. A precedent has since been set in that Court Line holidaymakers are to be covered by retrospective legislation in the form of the Air Travel Reserve Fund Bill.
There is a ploy often adopted in the House of asking a Minister when he will visit a certain place or constituency. I have never indulged in it, but I should be pleased if the Minister who is to reply to today's debate came to my constituency in Croydon, because I could take him to two constituents living in adjoining roads, one of whom is very content because the money she laid out for her Court Line holiday which failed last year will be refunded while the other is in desperate financial straits because she has not been so favourably treated after her husband's death. The husband came to see me on 1st August last year. He told me, first, that he had not long to live and, second, that his life savings were in Nation Life. He died in August, and his widow is today in extremely difficult circumstances. Yet she knows that two roads away a would-be holidaymaker has been enabled by retrospective legislation to look forward with confidence to the repayment of any moneys which she spent on a holiday which went sour last year.
If that is our order of priority, to bring in retrospective legislation for holidaymakers who suffer through a bankruptcy but not to do so for those whose life savings vanish because of a bankruptcy, the priority is all wrong.
When I discussed this matter with the Minister this week, he suggested that there was a difference because people arranging holidays abroad which involve air travel believe that the Civil Aviation 2009 Authority is a Government agency and that it has some magical control over holidays by air.
In my view, the Government's responsibility for life assurance companies is far more clearly established. Although there has been some reference in the debate to brokers who inadvertently advised people to insure through Nation Life, what matters more is the long-held belief that life assurance companies and those connected therewith are supervised by the Department of Trade.
I have here a letter from the City Editor of the Daily Telegraph, dated 20th April 1971, to a man who has been caught in the Nation Life collapse. It says:Various insurance Acts, in addition to the Board of Trade as watchdog, make it virtually impossible, short of fraud, for any life company to run into troubles similar to those which have afflicted the car insurance sector in recent years".Many investors in Nation Life believed that they were backing an insurance company which had Department of Trade supervision. That was a genuine belief on their part, but they were misled.
§ Mr. Clinton Davis
I beg the hon. Gentleman's pardon. I did not quite catch what he was quoting. Is it alleged to be a Government document, or something issued by or on behalf of the private insurance companies?
§ Mr. Taylor
No. I apologise if I did not make it clear. It is a letter from the City Editor of the Daily Telegraph to someone who wrote to him for advice. If the Minister does not find that particularly convincing, I refer him to a letter dated 19th August 1974 from the Secretary of State for Trade, in which he said:In September 1973 Departmental action was taken to insulate Nation Life's affairs from those of the property and finance group in which it was a member.That is a straightforward statement, and it implies that there was Department of Trade supervision, albeit too late. Nevertheless the Department of Trade had the opportunity to supervise at that time, and many of those who put their money into that company did so in the belief that the Department had some control over its affairs. If it has not been timely, if it has been ineffective, there is in my view far greater reason for helping those whose 2010 life savings have vanished than there is for helping those whose holidays have been subject to bankruptcy troubles.
My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) said that we ought to have an early warning system. If the Department was giving instructions to Nation Life in 1973, the early warning system surely was already there, because steps were being taken to put matters right. Those steps were unsuccessful, so I do not think that that is an alternative to dealing with the matter by bringing Nation Life into any fund which is created.
In principle, however, I am totally opposed to any funds. I am opposed to a fund for air travel and I am opposed to a fund for the insurance industry—this is where I agree with the hon. Member for Battersea, South—but, in view of the statement in the Gracious Speech to which I have referred, circumstances have changed and it is too late to consider the principle, since the principle is established in the Gracious Speech and has been made clear.
Again, on the subject of Nation Life—which has been mentioned in every speech so far—I wish to add that, from the investigations and work which I have been doing, I thoroughly support the observation of the hon. Member for Battersea, South that this company had not been run along the lines and according to the standards of the majority of British insurance companies. I fully support all his criticism, and I agree that the statement in the Daily Express which he quoted was a clear reminder of the way the company had operated.
That being so, I should like to see a Department of Trade inquiry into the way that company's affairs were conducted. I understand—I have no proof, but many people believe this to be true—that there is a Department of Trade minute stating that the executive director was not empowered to take decisions on property transactions in excess of £250,000, but he went ahead and in fact concluded the transaction in Bournemouth which brought about the present disastrous state of affairs. If that is correct—it can readily be substantiated—he was acting ultra vires, and there may be another source of compensation for those affected by the liquidation.
2011 There has been no difference of opinion between any of us who have spoken in the debate save on the specific question whether, if a fund is created, Nation Life should be included. We have all voiced our opinion that we do not consider that a fund is really necessary, and certainly that there should be no penalty on those who are efficient and those who are prudent. I hope that the Minister will accept that message from those of us who have bothered to attend the House today. None the less, in view of the commitment in the Gracious Speech, which has affected the attitude of all insurance houses towards companies which are in trouble at the moment, I consider that some help should be given to the unfortunate people who suffered through the collapse of Nation Life, and I strongly repudiate the comment by my hon. Friend the Member for Brentwood and Ongar that those who signed the motion did so only because of pressure from those who had written to them.
§ 1.40 p.m.
§ Mr. Ioan Evans (Aberdare)
This has been a worthwhile debate, and I join with other hon. Members in congratulating my hon. Friend the Member for Battersea, South (Mr. Perry) on raising the issue. Like other hon. Members he has been a friend to me for many years as well as a parliamentary colleague, and today he has shown his vast experience and knowledge of the insurance industry. Perhaps he was a little unfair to himself when he said that the Department was not aware of his feelings on this issue. He was present at the parliamentary trade group meeting, when I am sure that the Secretary of State noted his anxieties. The House is indebted to him for raising this subject since legislation may soon be coming.
I shall not take up the point that the hon. Member for Croydon, North-West (Mr. Taylor) was making about Nation Life, but like almost all hon. Members I share the concern felt for that company's policy holders. The main question today, however, is how to prevent such a situation arising again and how we should deal with the problem fairly, particularly from the point of view of the policy holders with the traditional societies.
2012 The debate has given rise to other interesting points, and I hope that the Department will look at the question raised by the hon. Member for Brentwood and Ongar (Mr. McCrindle) about the need to register insurance brokers and to control the amount of commission that is paid to them. There is obviously a need for consumer protecttion in this industry, as was demonstrated by my hon. and learned Friend the Member for Hackney, North and Stoke Newington (Mr. Weitzman). He was dealing with motor insurance in particular, but there is a Government rôle to be played generally here.
The hon. Member for Faversham (Mr. Moate) brought up the point that there should be a greater check of the industry by the Department. I do not agree with him that on this issue the Department should go slow. However, I would rather the Department got it right than acted too quickly.
My hon. Friend the Member for Edmonton (Mr. Graham), like myself, is connected with the co-operative movement. Many hon. Members who have spoken today are connected with the insurance industry. The co-operative movement has more than 10 million members and has its own insurance organisation, the CIS. It is owned by the members and is run on a non-profit-making basis. The profits made on the enterprise are returned to the members. As my hon. Friend the Member for Battersea, South said, there are many other mutual insurance societies like the CIS which are run not for the benefit of shareholders but for the benefit of policy holders.
As Socialists we should recognise that while the State has a function to own and control certain basic industries there are also various forms of social ownership. Perhaps enterprises which are run not for the individual shareholders but for policy holders could be developed in the future.
The hon. Member for Croydon, North-West referred to the commitment in the Queen's Speech. My right hon. Friend the Secretary of State for Trade said to the Press on 29th October:My proposals for a compulsory insurance protection scheme are designed to give further 2013 security to millions of people who have insurance polices.He went on to say:In this year's exceptionally adverse conditions the industry has done well, in co-operation with my Department, to mount a series of rescue operations. Only a few companies out of the total of about 800 have found themselves in serious difficulties. Most of their policy holders have been protected by these voluntary rescue operations which have demonstrated the strength and public spirit of the industry.We should bear my right hon. Friend's words very much in mind. There is a great deal of good will between Ministers, the Department of Trade and the industry and I hope that it will be recognised that there is need for Government action but that it must be the right sort of action if this good will is to be maintained.
It is necessary to consider the kind of insurance companies which have become insolvent in recent years and the companies that risk insolvency in the future. They are very different from the traditional life assurance companies, many of which are household names, like the CIS, the Prudential and others. They transact the great majority of their business with premiums payable annually or more frequently and on the basis that all or nearly all the company's profits are returned to policy holders in the form of bonus additions to the sum assured.
Nearly all of this money is saved by people in the low- and middle-income ranges. These are the people who give their pennies or their pounds for insurance. In the traditional company the basic sum assured is low in relation to the premium, and when the policy has been in force for some years the bonus additions will often be as much as or greater than the basic sum assured.
The position of London Indemnity and similar companies is very different. These companies mushroomed a few years ago by offering various forms of guaranteed income bonds. In their simplest form these bonds provide that in return for a single payment of, say, £10,000 from the policy holder the insurance compnay would undertake to repay £20,000 ten years later. Owing to a sizeable tax loophole, which as the Under-Secretary pointed out was closed in last year's Budget, an insurance company was able 2014 to offer a high return. It did not have to pay income tax or corporation tax on the income it obtained from investing the premiums received from policy holders.
Nation Life, London Indemnity and similar companies paid a high rate of commission to insurance brokers and other intermediaries. They all issued these guaranteed bonds with no profit participation by policy holders, so that if investment conditions had remained more favourable the profits on the business, which could have been substantial, would have gone entirely to a small band of shareholders who had put very little into the business. There are, therefore, the two different types of insurance organisation, and we must not produce a scheme which groups them together.
I am grateful for the consideration given to this matter by Ministers because a number of representations have been made about it by hon. Members. There remains, however, a fear that a proposal might emerge which would be regarded simply as a means of taxing millions of low-income policy holders in the traditional insurance companies for the benefit of usually much wealthier persons who have chosen to insure in the more speculative fringe.
Hon. Members have quoted from correspondence they have received from their constituents. I shall not follow that example, but I should like to quote from two letters that I have received. One was from the British Insurance Association, which has serious reservations about the method that may be used for rescues. The association recalls that the Minister's Press notice issued on 29th October 1974 said:Funds would also he available to assist rescues of companies where this was preferable as a means of protecting policy holders. Shareholders would not be protected.The association then comments:The industry believes that:1) This option, if included in legislation, could not be operated selectively and under pressure from public and/or politicians would inevitably mean that 100 per cent. rescues would become automatic.
§ Mr. Clinton Davis
The hon. Gentleman may have noticed that there has been no automatic rescue of Nation Life, notwithstanding a great deal of political pressure.
§ Mr. Evans
I have already said that we have the problem of Nation Life before us, and I know that we have undertaken to do something about it. We are now talking about developing legislation for the future.
The British Insurance Association also says:Thus, instead of companies going into liquidation or a receivership, the money of individual policy holders generally would inevitably be used to protect trade creditors, commercial and industrial policy holders who are not within either the Department's or the industry's consumer protection scheme and, perhaps, shareholders. It is not clear how the Minister proposes to put his statement that 'shareholders would not be protected' into effect.I am not saying that the eventual scheme will not deal with the problem, but that is one of the industry's anxieties. The association adds:Unfair burdens will fall on the most prudent—particularly the holders of with-profit life policies, whose security is not in danger since a period of even the most adverse economic experience can be ridden out by the reduction of bonuses.There is that distinction.
I have also received a letter from Lord Allen, the General Secretary of the Union of Shop, Distributive and Allied Workers, who has members working in the industry.
He says:Being the General Secretary of one of the largest trade unions in Great Britain, with a substantial membership within its Insurance Section, and which has previously had consultation with the Government of the day in matters affecting not only my own members but also on matters affecting insurance policy holders, I would like to express my concern at the proposals now being discussed by the Department of Trade regarding the establishment of an 'Insurance Guarantee Fund'…My Union agrees that further steps could, and should, be taken by the Government to protect policy holders, but we would suggest that this can best be done by taking steps to prevent such failures arising rather than providing a compensation fund from the industry on the proposals set out by the Department of Trade …In the interests of the many thousands of policy holders in your constituency whose benefits will be affected by the decision of the Department of Trade, I feel sure that you would like to be associated with my approaches to the Government requesting that their proposals in connection with the Guarantee Fund be postponed meantime.I said at the beginning that we welcomed the opportunity given by my hon. Friend the Member for Battersea, South 2016 to discuss publicly what many of us have been discussing privately with the Department. I have no doubt that the intentions of the Department are to protect policy holders in the future. If it wants consumer protection in the insurance industry the House will support it, but I hope that the Department will consider the representations from both sides of the House, from the industry and from the trade unions, including the one to which I have referred and the Transport and General Workers' Union. There have also been representations from the Opposition parties and trade union, labour and co-operative movements.
I hope that the Department will produce a scheme that will avoid the sorry happenings of Nation Life and other insurance organisations that have collapsed. I hope that it will not introduce a scheme that will penalise the prudent who have not sought a big return but who have tried to cover themselves against future problems by joining a respectable, traditional insurance organisation run on a non-profit basis.
The Government do not have an easy task, but I hope that they will continue their efforts to maintain the industry's goodwill and to work out a scheme to fulfil the pledge made in the Queen's Speech.
§ 1.55 p.m.
§ Mr. Michael Shersby (Uxbridge)
It gives me great pleasure to add my congratulations to those already extended to the hon. Member for Battersea, South (Mr. Perry) on making what was a notable speech and providing the House with an opportunity to discuss the contribution which the insurance industry has made to the British way of life. I wholeheartedly endorse his remarks, and I support the motion which he so ably moved.
The hon. Gentleman rightly called upon the Governmentto be cautious and prudent before it compels policy holders to contribute their savings in subsidising insurance companies that have by their own action forfeited the confidence of the insurance industry.I read the terms of his motion with great care, and I emphasise those words because it is well that we should have them firmly in mind during the remainder of the debate.
I hope that the Government will pay heed to the terms of the hon. Gentleman's 2017 motion and that the Minister will give some indication of his feelings about the remarks made during the debate. I have not heard one hon. Member speak in favour of the guarantee scheme which the Government have proposed, though I was absent earlier and so may have missed one speech in favour. Nevertheless, hon. Members have predominantly spoken against the scheme.
The Government Bill embodying the scheme has not yet been published, but we have a good idea of what will be proposed. We know that the guarantee fund will be similar in principle to the fund now being set up under the Air Travel Reserve Fund Bill which is being considered in Committee.
It seems clear that the Government intend to provide additional protection for policy holders of insurance companies, although in the past most of the policy holders of the companies found to be in serious difficulties have been protected—as the hon. Member for Battersea, South pointed out—by the voluntary rescue operations mounted by the insurance industry.
Why do the Government feel it necessary to intervene in a way which it is believed will result in policy holders insured with reputable companies having to subsidise those insured with less reputable companies, which sometimes offer attractively low premiums in order to secure business? It is clear that the Government consider that they should establish a guarantee scheme because of life assurance company failures earlier last year—notably that of Nation Life.
It is well known that discussions have taken place between the Government and some of the major insurance companies about establishing such a scheme. However, judging from the Press reports that I have read, there has not been complete agreement among the major companies, let alone between the Government and the insurance industry as a whole. It is reported that most companies were against a compulsory guarantee scheme. It seems that some of them prefer a voluntary guarantee fund, which they could run.
Other leaders in the insurance industry are clearly unhappy with the idea of an industry-based rescue fund. Their objections include the fear that such a 2018 development would ossify the structure of the industry and would underwrite and therefore encourage the operations of inefficient and reckless companies. The same objections can be said to apply to a compulsory Government scheme, for in the long run both the prudent policy holders and the cautious and reputable insurance companies would find themselves sustaining a less desirable insurance operation. Surely it is right for the House to consider whether the very existence of a Government-run guarantee scheme would encourage some prospective policy holders to believe that it no longer mattered with which insurance company they took out a policy.
Having listened to the hon. Member for Battersea, South I cannot help recalling the stress he laid upon the individual contact between the policy holder and the insurance agent. He stressed the importance for the policy holders to have regard to the company with which he was about to insure, the need for people to have personal and individual responsibility for taking decisions which finally must be theirs, not the agents' and not the brokers'.
If the proposals outlined by the Secretary of State for Trade are enacted, policy holders will no longer have to rely for good advise upon their insurance agents, brokers and other experts, but they will be able to insure with any company, safe in the knowledge that if it goes bust, the Government scheme will help them. If policy holders in over-generous, under-capitalised, mismanaged or fraudulently run insurance companies are to be bailed out by the rest of the industry, it will cease to matter which company the individual policy holder chooses.
Is that what we want? Do we want to remove the need for the individual policy holder to make that choice? Is there not a danger that the introduction of a compulsory Government guarantee scheme could be a charter for dubious insurance companies? This is a question that would inevitably be raised if there were an over-hasty response by the Government to what we all sincerely recognise to be a serious problem, that of the failed or failing insurance companies. The Government scheme may also have the effect of antagonising the bulk of the insurance industry—not to mention its policy holders—which 2019 would be asked to condone in others activities that it would never countenance for itself.
What is the alternative to providing the necessary protection? The answer lies in the provisions of the Insurance Companies (Amendment) Act 1973 and the regulations which accompany it and which will accompany it. The Minister will recall that on 20th December 1974 I asked him in a Written Question when he proposed to lay before the House regulations arising from the Insurance Companies (Amendment) Act 1973. His reply, in column 743 of the Official Report, made it clear that he would shortly make and lay before the House regulations for the valuation of assets and that several other sets of regulations would soon follow.
The Minister has been as good as his word. The Insurance Companies (Valuation of Assets) Regulations were laid on 10th January this year. The Employers Liability (Compulsory Insurance) Amendment Regulations were laid on 28th February. This shows quite clearly that some additional flesh is being put on to the 1973 Act, which has since been consolidated in the Insurance Companies Act 1974. Is this not a better course to follow than to introduce yet another scheme for bailing out one section of the community at the expense of another?
The House must also consider whether the Government's guarantee scheme would affect the insurance industry's whole investment freedom. In my view, a Government scheme is unnecessary and its introduction might result in many prospective policy holders thinking that it did not matter which insurance company they chose. But it does matter and it should always continue to matter.
The hon. Member for Battersea, South is right to urge the Government to be cautious. I hope that his wise words have made an impression on the Minister and his right hon. Friend the Secretary of State and that they will be cautious and take into account what has been said today about a Government guarantee fund before giving effect to such a scheme.
§ 2.6 p.m.
§ Mrs. Millie Miller (Ilford, North)
Hon. Members have gone to great lengths 2020 to congratulate my hon. Friend for Battersea, South (Mr. Perry) on the able way in which he has presented the subject. I add my congratulations.
The debate has been dominated by hon. Members who have a direct interest in the insurance organisations and associations. With the exception of my hon. and learned Friend the Member for Hackney, North and Stoke Newington (Mr. Weitzman), all hon. Members have proclaimed their interests in these organisations.
§ Mrs. Miller
In that case I, too, must declare my interest. I am one of those on whose door colleagues of my hon. Friend must have knocked over the years. I was fascinated by his historical references to the days of Disraeli.
§ Mrs. Miller
I have conducted some research which shows that in the early part of the nineteenth century in a small town in Italy excavations took place which disclosed that in AD 136 a working men's burial college was founded to make funeral grants to the appointed heirs of each of the members. They laid down a system to appropriate the fees, in a precise and orderly fashion. We are today talking about its modern equivalent.
Of course it is necessary that the Government should be prudent and that savers should be prudent. Not only savers in insurance companies are enjoined to be prudent. My hon. Friend the Member for Edmonton (Mr. Graham) mentioned the phrase "caveat emptor", used in almost all transactions in which anyone gives his money to someone else.
This is an area in which many people have suffered due to the collapse of insurance companies in recent years. Hon. Members have either read or referred to letters from their constituents. There can be few hon. Members who have not had approaches from constituents, either about motor insurance or Nation Life. Undoubtedly many have suffered seriously as a result of investing in that company and others that have unwisely speculated.
2021 The cause of the collapse of Nation Life was the greed and speculation which was part of the climate of the time, which gave birth to speculative insurance by the public. We understand the problem of brokers trying to advise clients in such a climate and their difficulty in getting information on which to base advice. That is an interesting sidelight on the subject of disclosure of information.
In other areas the House is to discuss the necessity for franker disclosure of financial information in industry. A writer on the subject of the insurance industry referred to the far-reaching influence of insurance on the community. My hon. Friend the Member for Battersea, South, boosting the status of insurance, said that it was the country's greatest asset. I cannot go quite as far as that, although I appreciate that substantial savings accumulate in the funds of a wide range of insurance companies in this country. But those savings are based entirely on the view of the people who invest that insurance will bestow security upon them. If they cannot be assured of security as a result of investment, whether of £1 or many pounds, the whole basis of trust between the industry and policy holders, who, in the reputable companies, are shareholders, will be destroyed.
It is worying, as one hon. Member said, how many people on the verge of retirement investment their retirement prospects in something that proves to be completely worthless. For that reason, even whilst enjoining prudence on the Government, we must not overlook the need to be aware of the requirement of protection for policy holders.
§ Mr. Terence Higgins (Worthing)
The hon. Lady referred to investing in something which proves to be completely worthless. I was not clear in what context she was making that remark. Will she clarify it?
§ Mrs. Miller
Yes. I am talking about people investing in companies which do not invest prudently on their behalf but speculate with savings entrusted to them for investment in long-term securities. I am specifically referring to speculation with policy holders' money.
For some years I was involved in the study of the consumer credit industry as a member of the Crowther Committee. 2022 Legislation covering the studies which were made at that time is now on the statute book. The discussions which have taken place today are akin to those which took place concerning hire-purchase trading, credit card holders, and the man who appears on the doorstep with a check trading transaction. It is interesting that the industry concerned—the Finance Houses Association Ltd. and the major institutions concerned with giving credit—was anxious for the Government to improve and increase the protection that was available to the people who were being advanced credit. Some of the same points were made about the need for prudence. These points were taken up in the Crowther Committee's Report which suggested that credit should not be advanced to those who could not justify the test of credit-worthiness. In recent years, in much the same way, there may have been many instances where assurance was offered to people who were not in a position in the long term to maintain the outgoings involved.
It would be wrong to pass from this subject without referring to some of the problems which beset the ordinary person taking out an insurance policy. For example, in the last few months many families have been in financial difficulties and some have had to go back to insurance companies and ask to surrender policies which they took out in good faith but found themselves unable to maintain. We need to look at the whole question of the surrender values of insurance policies. I admit that, as my hon. Friend the Member for Battersea, South pointed out, a good deal of cost goes into the initial transaction. Nevertheless, this cannot entirely justify the quite puny repayments which are made to people who find that they need to terminate policies on which they have embarked.
§ Mr. Tim Renton
I thought that I heard the hon. Lady refer to the quite puny repayments which are made to people who find that they have to surrender their policies in mid-term.
§ Mr. Renton
Will the hon. Lady elaborate on that point? Until recent months the life companies have maintained their surrender values very well. In many cases they have tended to reflect the amount of the premiums paid in.
§ Mrs. Miller
I am going on a personal experience which my son had with a company called Welfare Insurance.
§ Mrs. Miller
That company was recommended to him by a broker. My hon. Friend may again say "Oh well", but we have already heard about the problems encountered by the public in getting advice because there is no independent source of advice. My son went to a company which, when he felt that he would not get a good return on the kind of long-term investment with which he was concerned, offered some quite laughable amount for the surrender of his policy.
Only this morning, on a radio programme covering many of the problems of the insurance industry, another policy holder with that same company mentioned that he was offered a few pounds only in recompense for nine years' investment of several hundred pounds.
§ Mrs. Miller
That may be, but I feel bound, on behalf of the public, who are not aware of all the intricacies of the industry—
§ Mrs. Miller
—to point out that in that case the onus may be on the British Insurance Association to provide advice and guidance to the public who may be misled by bad advice or flamboyant advertising into thinking that they are getting a fair deal when they are not. If the public are being misled into mistaking certain types of companies for the insurance companies that my hon. Friend has been lauding today, the onus must be on the industry to disclaim these other institutions as being companies on which the public should not depend.
The Government have a serious responsibility to consider the problem be- 2024 fore us. I think that they should bear in mind the potential need for some compulsory form of protection—an insurance of insurance. The difficulties experienced by many people and the heartache which has been caused justify the Government in looking into this matter very seriously. The companies, their staffs and management, may be doing as well as they can—indeed, they have a creditable record of investment of savings—but, as we are bringing in consumer protection to ensure the greatest possible service to the individual in other areas, I suggest that this large area of financial concern to this country should not be omitted.
The many points which hon. Members have made about how the Government could help to boost the insurance industry should not be overlooked. However, in many areas—holiday travel, advertising standards and various matters which involve voluntary agreements between people within their own industries—they have not always succeeded so well that we can afford to accept that they will provide the complete protection that we all believe is needed.
Since the insurance industry itself has been involved in discussions with the Government, to the extent that it is talking about percentages which could potentially come out of its funds in order to provide this protection, the insurance business may not be as convinced as would appear from many speeches to which we have listened today that it would not be prepared to enter into a scheme which would help. This is a matter of give and take on both sides.
I do not see any indication that the Government will take punitive action against those institutions which do not deserve punishment. However, there is a very strong case for them to accept the responsibility which the general public believe they have to look into this matter carefully so that people may feel, as the majority have felt over years, that their savings are safe when they are put into this kind of fund which, in the majority of cases, is to insure them not for life but for death.
§ 2.20 p.m.
§ Mr. Tim Renton (Mid-Sussex)
I listened with care and interest to the 2025 comments of the hon. Member for Ilford, North (Mrs. Miller). I think that the hon. Lady must be careful, when she refers to puny surrender values, to draw a distinction between the old-established life offices and the relatively small number of newly-established secondary insurance companies which have got into trouble in the past 14 months. Indeed, the probability is that if they had not done so we should not have been having this debate today. The hon. Lady should also remember that in all but two cases these new companies were taken over by older-established companies, and she must draw a distinction between them and the long-established life offices which until recent months have never made any cut in their surrender values.
That was a point made by the hon. Member for Battersea, South (Mr. Perry) in his intervention just now and in his opening remarks. In adding my congratulations to those of other hon. Members, I want particularly to commend the hon. Gentleman for the commonsense way in which he approached the insurance business. What distinguished his remarks most was the tone running through his speech that during the years when he was knocking on doors and selling insurance policies—I am sure with great success—he was concerned about the reliability of the company whose policies he was offering and he put over to any potential client the thought that there was a greater element of risk in taking out a policy when going for a higher annual return than in looking for a lower return from an older-established company. This should be a hallmark of the insurance business in a market economy. It is a business in which there is a degree of risk. Different returns are offered, and the customer who takes a given policy must be made aware of this both by the insurance company and by the broker involved. I detect this commonsense note in the hon. Gentleman's opening remarks.
The hon. Gentleman also said that the life offices were the bulwark of British savings. That is a very important remark to remember. Not only do they attract a great volume of savings, but the composite insurance companies play a part in the life of virtually every adult in the country. We all go to them for fire 2026 insurance, accident insurance, burglary insurance and car insurance.
The past year just ended has been a traumatic one for the insurance business. It has seen its assets—the savings of its customers—fall dramatically, be they invested in equity shares, in property and in gilt-edged stock. It is remarkable that, against that background, more insurance companies did not get into trouble and that so many have come out of the year with reasonably satisfactory balance sheets. One reason for this is the added surveillance of the insurance business now given by the Department of Trade as a result of the additional regulations to which various of my hon. Friends have referred.
I have some criticisms of the older-established life offices. The way in which they explain their policies to customers is often not sufficiently clear. Which ordinary individual knows the difference between a reversionary bonus and a terminal bonus? If reversionary bonuses are kept up throughout the years, it should be explained that the terminal bonus may be cut at any time. Recently some of the older-established life offices, have had to cut their surrender values substantially. This came as a shock to people who had never experienced such a cut before. It could have been done more gradually and with better warning that if the stock market and the gilt-edged market continued to fall, such cuts in surrender values were likely.
Against the tremendous economic difficulties of 1974, which were reflected in the problems of the insurance business, the fact remains that during that year the bigger brethren came regularly to the rescue of their smaller brethren. Only two of the smaller companies went into liquidation and, starting from the early months of the year, a constant safety net was put under some of the weaker brethren by the bigger and better established companies. This is a good example of what an industry can and should do voluntarily, without Government control.
In the process, the people who really suffered in the small insurance companies which were taken over were the shareholders. They got nothing back. I do not mind that a bit. I accept that anyone who invests as an equity shareholder in a small insurance company 2027 which gets into trouble and is taken over should get back none of his capital. I shall return to that point in a moment.
The important feature was that the policy holders in the smaller insurance companies which were taken over voluntarily by their bigger brethren were protected. The exceptions were London Indemnity and Nation Life. We have heard a great deal about Nation Life already, and I do not intend to go further into that sad tale other than to say that I realise that confidence in the insurance business is indivisible and that if a company gets into trouble there will always be questions asked about the other companies. That is an important reason why other companies should not be allowed to get into such difficulties in the future.
We all realise from letters from and talks with our constituents the tragedy of individual policy holders in Nation Life. This was referred to movingly by my hon. Friend the Member for Croydon, North-West (Mr. Taylor). We all know of the great difficulties into which individuals were plunged who expected a certain annual income regularly from Nation Life only to find quite suddenly that it was not available. There were others who were hoping to use their policies for the payment of school fees. Suddenly they found that the money was not forthcoming, and they had to withdraw their children from the schools of their choice. That again represented a family tragedy.
In these surroundings, it is perhaps commonplace to us that any individual who has a policy in a failed insurance company is potentially an alienated voter. In much the same way, a holidaymaker who finds that the company with which he was to travel has gone into liquidation is also an alienated voter, as the Secretary of State for Industry had realised.
But against that background, is it necessary for there to be a Government-run compulsory compensation scheme? I have no doubt that the answer is "No". There are a number of fairly specific and clearcut reasons. If the Government were to introduce such a State scheme, inevitably in due course they would have to 2028 dictate the terms of the insurance policies offered to the public because they would be responsible for the success or liabilities of the companies. Therefore, the Government would have to vet, check and, in due course, originate the insurance policies offered. A situation would develop when insurance was little more than a public utility, with the existing industry acting as broker for public policies.
If the Government scheme were to offer 100 per cent. rescue, it would do nothing to discourage imprudent management in the newer companies or reckless purchasing of policies by individuals who would feel that a company's background did not matter. They will take the attitude "If the company gets into trouble, the Government will bail us out". The old principle of cavaet emptor which I am sure the hon. Member for Battersea, South (Mr. Perry) used when he was selling policies, even if he did not use those precise Latin words, would go out of the window because there would be the knowledge that the Government were 100 per cent. behind the policy. This could encourage individuals to go for higher benefits and lowest possible premiums without paying any regard to the inherent stability of the company offering the policy.
My third point against the Government scheme lies in the question, from where is the money for the Government fund to come? The figure of 1 per cent. of premium income, has been mentioned, which would produce about £25 million a year for the fund. Is the money to come from existing policy holders who have taken out a policy with a prudent, old-fashioned company and who have forgone the higher rate of return in favour of greater security? If it is to come from those policy holders, and if that is the Government's intention, those people will be penalised. I wonder who would run such a fund and how the money would be invested. If after a number of years it consists of £75 million or £100 million, would the benefits of that fund flow back to existing policy holders?
The fourth point against a 100 per cent. rescue Government compulsory fund is that eventually it would have the effect of bailing out the private shareholder of the company that gets into trouble. If the Government nurse through a 100 per 2029 cent. rescue of an ailing insurance company, the people who will benefit the most ultimately will not be the policy holders but the equity shareholders in the company.
I am certain instead that the answer lies in a comprehensive compensation scheme run by the industry itself. That scheme should offer something less than total cover, let us say a 80 or 90 per cent. guarantee, so that individuals in buying policies will still be made to think about the inherent viability of the company in which they were buying a policy because there will be left an element of risk.
For the scheme to work the companies should be allowed when in trouble to go into liquidation before they are taken over by the industry. Only in that way can the equity shareholders be got out rather than protected, and only in that way will the maximum amount of money be made available for policy holders. The fund which is to run the compensation scheme should essentially be available after a company has got into trouble when the industry sees how much money is needed. It would be operated by the industry but would be subject to close Department of Trade regulations.
There are problems involved even in the suggestion of a scheme run by the industry. All insurance companies must belong to the scheme, and it will be difficult to bring in newcomers. The tests may be so stringent that many people would be put off trying to write insurance business. There may be less innovation in the industry than has happened in the past because of strictures attached to the scheme. Those are two sacrifices which I would accept in bringing about a comprehensive insurance scheme run by the industry.
I agree with the hon. Member for Battersea, South that there should be a further tightening of the activities of insurance brokers. The hon. Gentleman said that in the good old days when he sold insurance it was money for jam. Perhaps he got carried away by the thought of the good old days before he came to the House. The fact is that 75 per cent. of insurance brokers belong to the Federation, the Association or the Corporation of Insurance Brokers. The difficulty lies in regulating the 25 per 2030 cent. who do not belong to any of them. They are companies which may be feckless in pushing insurance policies which show a higher rate of return but which are not properly calculated on an actuarial basis. It is those policies which attract a higher commission rate. I accept, therefore, that the regulations controlling insurance brokers should be tightened and I accept the point made by my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) that there should be a compulsory registration scheme for insurance brokers which would be vetted by the Department of Trade.
In conclusion, I wish to declare an interest although it is very much at one remove. I am a member of Lloyd's and I have a great respect for the part which Lloyd's has played internationally in developing the reputation of Britain in the insurance world. In this debate, and in legislation which will come before us in the months ahead, the reputation of the British insurance industry is something which the Department of Trade should bear in mind. If the Government feel it necessary to step in to underwrite the industry altogether, it will have an effect on the reputation of that industry internationally. It is an industry that brings Britain a great deal of invisible income. Some 15 per cent. of life business and 70 per cent. of general insurance business written in this country come from abroad. It would be a great pity if some of that business were lost because a question mark was attached to the inherent viability of our insurance industry. The strongest points in insurance in comparison with other savings media are security and stability. The hon. Member for Battersea, South reminded us of the fact that British insurance, despite the great problems of the last year or so, has kept its reputation overall as a savings medium.
§ 2.40 p.m.
§ Mr. Edwin Wainwright (Dearne Valley)
I listened intently to the hon. Member for Mid-Sussex (Mr. Renton). I thought that he was coming down rather harshly on the policy holders. We must ensure that we do not encourage a person who is by nature a gambler and who wants to set up an insurance company. If such a person does not 2031 succeed, the rest of the insurance industry should not have to bail him out.
Further, we must consider how insurance business is obtained. My hon. Friend the Member for Battersea, South (Mr. Perry) gave us an indication of how business was obtained in the insurance industry at a time when things were far from good. I wonder what he would do today if he went into homes with the kind of attitude that he indicated he is capable of adopting. What would happen if, by using that approach, he encouraged elderly people to put their money into a particular insurance company? It is obvious that the insurance companies train people to get business. Unfortunately they do not always take into account the effect that agents can have upon the persons from whom they seek business.
Over the past few weeks I think that al hon. Members will have had certain cases brought to their attention which indicate what is happening within the insurance industry. I want to say a few words about the Capital Life Assurance Society Ltd. Two years ago last November one of my constituents took out a double policy which meant that he had to pay £8 a month. He was a single man at that time, and he may have thought that he would be single for the rest of his life. In the meantime he has married. He found out that £8 a month was too big a burden to continue, so he decided to surrender his policy. By that stage he had paid £192. He received a letter from the company saying that £4.61 would be the value of his surrendered policy. He thought that it was to be £4.61 per month so he accepted the society's offer. When he received the cheque for £4.61, he nearly threw it on the fire.
We can talk until we are blue in the face about the first two years' costs of any policy being very heavy because of overheads and other matters, but unless the policy holder knows that that is the position it is possible that he will be taken for a ride.
§ Mr. Ernest G. Perry
May I point out what the ordinary insurance branch office would do in such circumstances? If a person takes out a policy for £8 a month and marries and then finds that 2032 he cannot meet that commitment, he can get the premium reduced to a much smaller amount. The monthly commitment could be tailored down to 50p a month. That is a traditional response by life assurance companies.
§ Mr. Wainwright
I do not think that was offered in the case to which I have referred, but I am not certain. There is a long story involved. I shall not go into the matter in great detail because of the time. The young man wanted to buy a suite of furniture and he thought that the money would be useful. At the time he took out the policy he was hoping that in 20 years' time he would be able to draw out what he had paid in plus a degree of interest.
Whatever the Government do, they must ensure that relevant information is printed on insurance policies in larger type than is now used. An insurance agent should ensure that a policy holder knows that greater danger is involved if he surrenders within a certain time. In the case I have mentioned, I understand that the local agent took out a similar policy which he also surrendered. My constituent is wondering how much the agent will be offered for the surrender of his policy. Evidently the agent did not know the exact position, because he informed my constituent that he would be able to claim back the total amount of money paid in if he left it in for two years. That example should give the Government some idea of what should be embodied in any legislation that is introduced.
The affairs of National Life represent the crux of the matter, but what is perhaps even more important is that we should try to make certain that no such thing occurs again. This is where we must consider the responsibility of the insurance industry. It has quite happily been rescuing insurance companies which have fallen by the wayside, but the problem is that the necessary information is not always travelling backwards and forwards between the Government, the British Insurance Association and the individual companies. That is necessary if we are to prevent another Nation Life incident. The original Nation Life affair would not have arisen had there been a better understanding between the British Insurance Association and the Government.
2033 I have had several letters from constituents who were involved in Nation Life. People who have experience on the Stock Exchange talk glibly about the effect that a Nation Life incident can have on policy holders. They say that they deserve what happens if they do not adopt a reasonable and rational approach to the investment of their money. It must be realised, however, that we are talking about people who know nothing at all about the Stock Exchange and nothing about equity shares. Anyone who dabbles in equity shares on the Stock Exchange knows full well that if he loses he has to stand his own losses. I would find myself unwilling to go so far as to help out people who dabbled on the Stock Exchange.
I turn to the example of one of my constituents, a single woman. She saw a flamboyant advertisement in a newspaper about Nation Life. She decided to invest practically the whole of her savings in that company. She thought that she would be looking after her future and that when she retired she would have a little capital on which to live. She is now worried to death because she fears that she will obtain virtually nothing in return.
The people who run that kind of insurance business seem to get away with it. If we allow policy holders to be almost twisted out of the money they have invested, we shall be allowing the kind of thing that has happened in the motor insurance industry. I remember seeing a photograph in one of the daily papers of a young man aged 26 who had been running a car insurance company before it went broke. He was reported as saying to his wife "I am sorry, darling, we look like having to give up one of our Rolls-Royces". The standard of life of that individual was not going to suffer, but the standard of life of the unfortunate policy holders was to be gravely affected.
If we allow that sort of thing to happen in the insurance industry, we shall ruin people in their entirety and allow great misery to be inflicted. A much greater responsibility rests on the industry than it appreciates. The Government must ensure by legislation that such incidents are prevented. It is disgusting that people can live at a very high standard from gambling with other people's money.
§ Mr. Tim Renton
Is not the point that has emerged in this interesting debate that all hon. Members accept that the Government have a major responsibility for supervising the industry? The only issue is how the responsibility is to be exercised.
§ Mr. Wainwright
I agree, but something else upsets me from time to time. When private enterprise fails, Conservative hon. Members often ask that it be helped out. We must not stultify initiative and enterprise, but we must not allow the opportunity to continue to arise in which people can set up any form of business and gamble not only with their own money but with money they have attracted from others.
I repeat that the Government must take action to prevent such people from so operating. These people are not dealing with people's money rationally. They take grave risks and live at a very high standard themselves whilst those from whom they have attracted the money can be subjected to misery for the rest of their lives. I wonder whether all hon. Members appreciate what it means to a person when his capital—say a few thousand pounds—is taken from him and he knows that he must exist on supplementary benefit. We must not allow flamboyant advertising in the Press, nor must we encourage irresponsible people.
I hope that in bringing forward legislation the Department of Trade will pay attention to what has been said in this interesting debate. We must seek to look after the welfare of policy holders. I tend to agree that we must not seek to institute a system under which the entire sum would be returned to policy holders, otherwise we might encourage irresponsible people to enter the insurance business. However, we must seek to ensure that some returns are made to people who have lost their money.
What we said in the Queen's Speech has been interpreted by the public to mean that insurance companies will have the backing of the Government. When people made their investments they did not seek to get something for nothing. They did not even seek tremendous returns. They made their investments because they thought that the investments 2035 were safe and secure. There will be tremendous criticism of any legislation that the Government introduce if it does not safeguard these unfortunate people.
§ Mr. Shersby
The hon. Gentleman raised an interesting point about flamboyant advertisements in the Press. He referred to one of his constituents who had been misled by such an advertisement. Does he suggest that one method of supervision which might be considered by the Government is a form of control over the type of advertisements that appear in newspapers, rather like the control of advertisements that appear on television?
§ Mr. Wainwright
That would be possible, but it is a delicate situation. It would be difficult to lay down criteria for this kind of advertising. If any new insurance company advertised benefits far greater than it could reasonably be expected to pay, the industry itself should pass on the information to the Department of Trade so that the matter could be dealt with.
§ 2.56 p.m.
§ Mr. Terence Higgins (Worthing)
I join in the congratulations which have been extended to the hon. Member for Battersea, South (Mr. Perry) on his good luck in the Ballot and on the wording and content of his motion.
The motion is timely. This could best be described as a Green Paper debate. I have long been in favour of Green Papers as a means of discussing legislation. In this area we have not had a Green Paper, but today we have had an opportunity of considering in detail the very difficult balance which needs to be struck in the regulation or control of the insurance industry.
I hope that the Minister will treat the debate in that spirit, because with two possible exceptions—both of those were half-hearted—there has been no support for a comprehensive guarantee scheme. Therefore, this is not in any way a party matter. We are all trying to do what is best for our constituents.
I suppose that everyone who has spoken should have declared an interest, because I doubt whether any one of us is totally uninsured. This is a matter of great concern in the country at large as 2036 well as in the House. We are therefore grateful to the hon. Gentleman for raising it.
I notice that the hon. Gentleman joined the Labour Party three years before I was born. He has not turned out to be too bad a risk for those who sold him insurance, and I hope that it will be many years before anyone has reason to benefit under the policies he took out.
The motion raises three different issues—first, the question of savings; secondly, the question of those who work in the industry; and, thirdly, the question of what should be done about future legislation.
The question of savings is a matter of tremendous importance nationally and in fighting the battle against inflation. The dilemma is that, although savings help to fight the battle against inflation and are a substitute for taxation—that is a matter which should not be forgotten—the effects of inflation deter people from saving, perhaps least in the area to which the hon. Gentleman referred, namely, through insurance policies, particularly life insurance policies.
I should like to give a statistic from the life assurance data. The hon. Member for Battersea, South said that £25,000 million was invested in insurance. No doubt that figure is more up to date than the figure which I have, which is for 1973. Life insurance accumulated savings amounted in 1973 to £20,200 million compared with £16,500 million in building societies and £10,400 million in national savings. That clearly indicates the great importance of savings, particularly through life insurance. I therefore join the hon. Gentleman in stressing the economic importance of the subject we are discussing to the welfare of a country.
I stress also the investment difficulties which the industry has been facing. I do not wish to be partisan, but it is clear that a number of recent measures have had an effect on the Stock Exchange. For example, the capital transfer tax—and I do not wish to say anything which might lead to the uproar that we have had this week—will have an effect on the Stock Exchange. It will affect people who have invested in life policies. Therefore, the effect is far more widespread and relates to people other than those we would regard as wealthy.
2037 The insurance industry has been going through a very difficult period. The hon. Member for Battersea, South referred to the tax concession introduced by Mr. Gladstone—perhaps one of his better innovations. Some of the more recent innovations have not been in the interests of the industry or of those who hold insurance polices. They have led to a reduction in the insurance companies' asset backing. As the hon. Lady the Member for Ilford, North (Mrs. Miller) said, there have been reductions in surrender values, but it is important to emphasise that they have reflected what has been happening in money markets generally.
I make those points because it is right to put the debate in the context of the overall economic situation and to stress the importance of the insurance industry to the economy as well as to people who take out policies.
I wish to emphasise the industry's virtues. Hon. Members have rightly commented on areas of criticism, and particularly on Nation Life, but we should not give the impression that all we are talking about is the failure of one or two companies. The vast majority of them perform a tremendously important public service. The danger is that comment is made on the bad news rather than on the good news.
Secondly, the hon. Member for Battersea, South raised the question of the staff employed in the industry. He said that there are about 250,000 of them, about 60,000 "on the knocker", as he put it. Clearly, in providing funds and encouraging people to undertake prudent investments, they do an important public service.
However, the point made by the hon. Member for Aberdare (Mr. Evans) is important. He quoted from a letter from Lord Allen and raised the question whether the trade unions which operate in insurance and employees would be in favour of a comprehensive guarantee scheme of the sort which the Government seem to have in mind. We should treat this as a Green Paper and nonpartisan debate, and I hope that the Minister will bear in mind that not only those on the managerial side but those on the trade union side of the industry 2038 are concerned about what is proposed. Nothing could be more bipartisan than that.
The Minister is in danger perhaps of finding himself isolated. If because of the debate and representations he has received he feels that some other solution to that which he appears to have in mind is preferable, we should not regard it as a loss of face or a party defeat. We want to find the right solution. As has been said, we should be anxious to find the right solution rather than a quick solution. If more consultation and discussion is needed, that is the approach which we should adopt.
Yesterday, when the Under-Secretary of State was speaking about the holiday industry, I was somewhat horrified to hear him say that he did not think that caveat emptor had much relevance today. I do not want to see a situation in which every person buying any product or receiving any service is protected by State funds. There is much to be said for the doctrine of caveat emptor although we have rightly moved a long way in the direction of consumer protection. It is important to have the right balance. This is the crux of the matter, because it was said that there had been no transformation in the insurance industry of the kind which the publicity suggested. The vast bulk of insurance business provides an important public service but it still operates as in the past.
Because of recent unhappy events there is understandable concern, especially since human problems are involved. However, we must strike a balance. How can we achieve adequate protection without undermining the firm base on which the industry has long rested? We must be fair to everyone in attempting to achieve that. The danger is that we might adopt the wrong approach.
The hon. Member for Ilford, North, who is an expert in this matter, referred to the question of consumer protection in credit transactions. I agree. Her point could be better met by improved regulation and scrutiny by the Department of Trade than by underwriting in the last analysis but not preventing an unfortunate occurrence in the first place. The hon. Lady's points related more to regulations than to a guarantee fund.
2039 On the question of the protection of policy holders, we must ask ourselves the crucial question, which policy holders? There is some danger in the scheme which the Government seem to have in mind that the majority of policy holders will be penalised to protect a small minority of policy holders. That small minority should be protected by regulation and perhaps by voluntary arrangement. The Government scheme is in danger of falling into the trap which I mentioned.
§ Mr. Edwin Wainwright
Does the hon. Member agree that this is not merely a question of looking after Nation Life, although I hope that the Government will do something about it? We are searching to prevent that kind of event happening again, so that in future we shall not have to call on Government funds to pay policy holders.
§ Mr. Higgins
I agree. That is the point I sought to make. It ought to be possible to take considerable steps forward as regards regulation.
Among the points raised as causing concern was the question of guaranteed surrender values and income. This difficult matter is related to the matching of the company's liabilities and assets through time. It is clear that the guarantee element has not made it possible for matching to be effectively carried through. There is concern about that question, about commission rates and about the advice received by people taking up policies.
The hon. Member for Battersea, South laid considerable stress on the advice which may be obtained from those seeking to sell policies. All hon. Members receive letters saying "I took the advice of my broker, my bank manager and my solicitor, but still it went wrong". It is true that people have a problem in deciding where to go for advice. There is, therefore, clearly a case for effective regulation.
It is worth spending a moment or two in considering the action which the Government have been taking. There is no doubt, as the Under-Secretary will perhaps tell us, that the Government have already laid a number of orders and statutory instruments, including Statutory Instrument No. 2064 of 1973 on 2040 the identification of long-term assets and liabilities, and another one on the methods of valuation. I understand also that there are to be further orders relating to the frequency of returns and the up-to-dateness of returns which are made.
I imagine that those orders are coming. There is certainly a strong case for such orders and statutory instruments for tightening up the regulations. The Minister may wish to tell us something about them. They will provide a very considerable defence against a repetition of events which have already occurred. That is an area into which we ought to go as thoroughly as possible so that the kind of disaster of which we are all aware—it has been a real disaster for many people—will be prevented in future. The effective operation of the regulations by the Department of Trade, which is very important, will provide a much greater degree of protection in the future than there has been in the past.
I turn now to another question, which in many ways is central to the debate—that is, whether there should be something additional by way of a voluntary scheme or a statutory fund of a comprehensive nature. The Life Associations and the British Insurance Association, immediately after the Gracious Speech, took a very clear attitude towards the possibility of a comprehensive fund when they said that the insurance companieswelcomed the Insurance Companies Amendment Act 1973 and remain convinced that when fully operative the Act should have the result of preventing failures.In this statement they said that there had been a number of rescue operations in the meantime by the companies concerned.
The statement continued:It must, however, be stated that the industry has always opposed any kind of all-embracing scheme.The reasons for this have been set out pretty clearly by various hon. Members in this debate, but it is perhaps worth rehearsing some of them and adding one or two more. It is quite right, as the hon. Member for Battersea, South said, that one needs to separate the general insurance side from the life assurance side. Different considerations apply. In some of the compulsory insurance schemes the protection would need to be 100 per cent.
2041 Whether the scheme is voluntary or whether there is a statutory fund, the point made by my hon. Friend the Member for Mid-Sussex (Mr. Renton) that it ought not to be 100 per cent. protection but perhaps something like 90 per cent. is very important indeed. Otherwise a number of people would get 100 per cent. protection, and that would be likely to create a situation in which management became imprudent—and I was going to say in which policy holders might become imprudent, but, of course, that is not the case. There is no such thing as an imprudent policy holder. That has a very important bearing on the subject, and I hope that even if the Minister were eventually to bring in such a scheme the cover would not go as far as 90 per cent.
There are other points, for example whether the scheme should operate before or after liquidation. My hon. Friend the Member for Mid-Sussex touched on this matter. He put forward very powerful arguments as to why a scheme should take place after liquidation rather than in advance of it. A voluntary scheme, which is what I consider we should have, if necessary, offers a much better approach than the sort of approach which the Government seem to have in mind.
Plainly, we do not want a great multitude of statutory boards of the kind which, if I may say so, the Under-Secretary of State appears to delight in advocating. We do not want a state of affairs in which almost every conceivable risk, from second-hand cars to anything one can think of, has its own statutory board and a general levy in order to compensate those who happen imprudently to buy a second-hand car, an insurance policy, a holiday or whatever it might be. That would be dangerous.
Moreover, there is the danger that if we have a statutory scheme the pressure for 100 per cent. bail-out will automatically grow. With a voluntary scheme, on the other hand, that would be less likely.
Further, if a company does not actually go into liquidation, there will be the possibility of policy holders' money being used to bail out trade creditors or commercial or industrial policy holders who have nothing to do with the part of the operation under which many prudent people—the sort of people to whom the hon. 2042 Member for Battersea, South referred—have sought to cover themselves.
§ Mr. Clinton Davis
I am trying to relate what the hon. Gentleman is saying to the voluntary rescue schemes which, fortunately, have taken effect over a fairly wide area during the past few years.
§ Mr. Higgins
I recognise that but the question is whether any particular voluntary scheme which is undertaken is a commercial proposition, and it may well be that is not to the detriment of the policy holders concerned. One would need to go into the details of any case, and I am not competent to do that because, although the Minister may have them, I naturally do not have the details.
The important point here is that with a compulsory scheme there will be a tendency for an unfair burden to fall on the most prudent, and in particular on those who are contributing most to the savings—mainly, of course, those who have taken out with-profits policies—because they will probably see some of their funds under a compulsory scheme diverted to compensate those who have taken out policies of a far less prudent sort. If a general situation of trouble arose, of course, they would probably not benefit there either, because there is usually adequate margin to cover them against any contingency. The only other possibility, I suppose, is a total economic collapse in the country as a whole, and in that event they still would not get anything.
As I understand it, therefore—perhaps the Minister will comment specifically on this—it is essential to stress that the scheme which the Government apparently have in mind would involve penalising those who were most prudent and contributed most to the savings from which, we all agree, the country greatly benefits.
A number of points regarding the Government's proposed scheme remain obscure at present. We do not know the criteria on which the Government would decide that someone ought to be rescued—or nursed, whatever the expression may be. I do not know that I want to press the Minister too hard about that because I am anxious, as I have said, on an entirely all-party basis to discourage him 2043 from going too far out on any limb which might involve him in going through with the scheme which he seems to have in mind.
All that being so, my feeling is that regulation may well be adequate in itself. However, if that is not so, there would seem to be a strong case for seeking to achieve, by further consultation if necessary, and with general agreement if possible, the sort of voluntary scheme which several of my hon. Friends have in mind. As the Minister has suggested, there remains for consideration the extent to which the industry as such should engage in what, I suppose, one might call lifeboat operations, when it is necessary to assist because there is not a formal voluntary scheme.
But even if there were a voluntary scheme, some legislation would be necessary. I offer the Minister, therefore, the loophole that he could perfectly well fulfil the terms of the passage in the Queen's Speech if he introduced legislation which would cover a voluntary scheme even though it was not precisely the scheme which he originally had in mind. I note that the passage in the Queen's Speech was not explicit about it.
A combination of regulations, which are in some ways legislation, and perhaps some minor legislation of the kind I have mentioned would fulfil the undertaking in the Queen's Speech and would meet the concern which the House feels about this matter. At the same time it would not have the extremely adverse effects which the House has agreed may well arise if a compulsory scheme were to be introduced.
I propose now to say a few words about Nation Life. A number of hon. Members have stressed particularly the effect that this trouble has had on the elderly and the retired who invested in that company. I do not wish to make a constituency point from the Dispatch Box, but I suspect that I have a higher proportion of such people than anyone else in the House. I cannot stress too strongly the great amount of human anxiety and suffering which this question involves.
I understand very well the tragic case which was mentioned by my hon. Friend the Member for Croydon, North-West (Mr. Taylor) and I am sure that we 2044 have all had letters giving details of such cases. Let there be no doubt that for many people this was a terrible tragedy. I want to take up a point which I touched on briefly in an intervention earlier during the speech by the hon. Member for Ilford, North. She tended to talk in terms of these people getting nothing. I am sure that hon. Members would not wish to add to the anxiety of those who took out Nation Life policies.
I understand from the frequent statements by the Minister that the liquidation is proceeding. I believe that there are further developments on which he may wish to inform the House and those outside who are involved in the matter, and he might say whether some partial solution might be possible. He might also say something about the timing.
The extent to which individual categories and groups are suffering depends very much on the type of policy they took out. For example, an annuity would obviously be a matter of very great importance to someone who had just retired. There has been reference to education policies, and obviously in that case timing might be difficult. It might not be so on other policies. Therefore I hope that the Minister will give us the up-to-date position and say what the timing is likely to be if he is in a position to do so. I noticed from the latest Press release issued on 28th February that it is unlikely that any distribution can be made to creditors before June 1975 at the earliest. That will cause concern to some people.
If I may express a personal view about retrospection, it is that I have always found this to be something which the House should wish to examine very profoundly. The Minister will know only too well, because we have been debating the matter upstairs for much of the week, that I believe that the legislation on the Court Line affair should not be made retrospective. I feel that the Minister concerned should have come to the House, arranged for funds to be made available from public sources to compensate those affected, and then he should have resigned. I would not think it was right for that legislation to be applied retrospectively.
There are two points which the Minister will wish to answer, first on the timing 2045 of the Government's statement about insurance protection in the Queen's Speech, and secondly about whether the bonding arrangement for the Civil Aviation Authority is comparable with the Department of Trade's responsibility for the insurance industry. My feeling is that there is very grave objection to retrospection and the House generally has taken exception to it. I hope, therefore, that the Minister will give us as clear an answer as he can because it is a matter with which we have all been involved from a constituency point of view.
My hon. Friend the Member for Mid-Sussex (Mr. Renton) raised the question of United Kingdom life assurance and United Kingdom general assurance and our balance of payments. Our debate has been a little parochial, and this is a point worth making. I understand that about 15 per cent. of the premium income of life policies comes from abroad. For general insurance the figure is 70 per cent. or more. That income is very important to the balance of payments. The premium income in Europe and Ireland of United Kingdom life offices amounted to £75 million in 1973, as against only £17 million in 1969.
§ Mr. Ernest G. Perry
Between 50 per cent. and 60 per cent. of the invisible earnings from abroad come from the insurance industry.
§ Mr. Higgins
I am sure that the hon. Gentleman is more expert in this matter and that he has the right figures. The point I am trying to make is that the reputation of British insurers and the British insurance industry is tremendously high by international standards. There is a danger that if the Government introduce a compulsory guarantee scheme, that reputation will be somewhat affected. There is a danger that if, instead of having a voluntary scheme, the Government compel the industry to have this kind of scheme and a statutory fund, those who are involved overseas will ask, "It that not a rather curious situation?" Then the degree of reliance on the industry and its reputation may be adversely affected, quite wrongly. That is an important point to be borne in mind.
I support the motion. I do not think that the Government will suffer any loss of face if they wish to have further consultations and change their mind before 2046 legislation is introduced, if it is to be introduced. If it is, I hope that it will be on the lines I have indicated rather than a compulsory, comprehensive guarantee fund, which seems objectionable to management and trade unions, and which I believe is objectionable to policy holders as well.
§ 3.27 p.m.
§ The Under-Secretary of State for Trade (Mr. Clinton Davis)
I endorse what the hon. Member for Worthing (Mr. Higgins) has just said, which has been echoed by many other hon. Members, in congratulating my hon. Friend the Member for Battersea, South (Mr. Perry) on having been fortunate enough to be able to debate this important issue, and on doing it in such an entertaining manner. I was tempted to say that he did it with great assurance, but I am sure that that would be the wrong way to put it in this debate.
My hon. Friend spoke with the background of a lifetime of service in the industry and with considerable expertise, which has been reflected in the speeches of a number of other hon. Members. He also spoke with a passionate pride in the industry which he has served so well. His refreshing, warm and humorous style must have given him an unrivalled advantage over his competitors in the selling of policies. I cannot believe that, for example, he would have produced an insurance company leaflet containing the following phrase:£1,000 at death if within five years, with the option of continuing thereafter.My hon. Friend has shown in the wording of his motion the characteristics of one who has engaged in the insurance industry, by using the words "cautious and prudent". It is wholly appropriate that they should have formed such an important part of the background to the debate.
I give my hon. Friend the assurance that my right hon. Friend the Secretary of State and I and officials in the Department of Trade have throughout been careful and prudential—that is the wrong word again, is it not?—in approaching the subject. We have had to consider many difficult problems over the past year. But throughout we have engaged in the most detailed, lengthy consultations with both sides of the industry. It 2047 should be well understood that we have not just embarked on a scheme for dogmatic reasons.
It is because we have accepted the criterion that my hon. Friend has established in the debate—and we shall go on behaving in that way—that I can accept the motion. However, I accept it with some qualifications, because I cannot accept the strictures of my hon. Friend and others about my right hon. Friend's proposals.
It must be generally agreed that we have had a helpful debate. I endorse what has been said by the hon. Member for Worthing—that it is useful to have a debate of this kind shortly before the Government's scheme is to be finally announced. The consultations to which I have referred are continuing with both sides of the industry. If we can avoid problems, that will be so much the better. The main outlines of the Government scheme, to which I shall refer in detail later, are those with which we shall proceed in the course of the next few weeks.
I, too, join the hon. Member for Worthing and my hon. Friend the Member for Battersea, South in paying a tribute to both sides of the industry. It is a stable industry, although there have been some aberrations, which we all regret. It is an industry that has deservedly won great international renown, but it would be folly to believe that a collapse of even a company such as Nation Life does not have consequential effects on international reputation. Therefore in dealing with a Government scheme, basically we are referring not so much to an issue of principle, as to the tactics of dealing with a difficult problem.
I should like to pay tribute to all those in the industry who have played a part in promoting long-term savings. The hon. Member for Battersea, South was right when he mentioned that. Life assurance is the largest single source of such savings and has funds far larger than either the building societies or National Savings. The total of life funds at the end of 1973 was £20,200 million, with premium income of almost 3,000 million. This represents the savings of millions of policy holders both at home and overseas, and they hold a wide variety of 2048 policies. The vast majority are United Kingdom policy holders.
Innovation has been mentioned. Innovation is good and should not be stultified but it should not be mistaken for an abuse of a system, and that has occurred in certain sad incidents in the past few years.
Secondly, I pay tribute to the tact that insurance represents an important factor in our invisible earnings. It contributes more than £350 million a year to the balance of payments. Finally, it is appropriate to pay a tribute to the industry for the contribution it has made and will make to financing industry.
It is evident from what has been said on both sides of the House that there are serious problems affecting the industry to which solutions must be found for the future. The most disturbing feature that we found on assuming office—I am not seeking to make a party point here—was that there was no general scheme—and there is none now—for protecting policy holders if companies collapse. The consequences are drastic. I have received correspondence from innumerable Members of Parliament enclosing the most pitiful letters. People who have invested in Nation Life and London Indemnity and General have great anxieties about the future and are worried lest they will have to live on supplementary benefit.
In one fell swoop through no fault of their own, not just rich people or people on the make, not just people who want to avoid their taxation obligations, but perfectly ordinary working-class people have put their life savings into a form of security and at a stroke have been deprived of it. They are exposed to the anxiety expressed in all those letters while awaiting the completion of the winding up process which can take an inordinate time.
It is unfair and incorrect to suggest that what has been invested suddenly becomes worthless. Even in Nation Life substantial assets will be available in the winding up. An unfortunate impression has been gained that those who had perhaps inadvisedly invested in Nation Life are denied every possible redress. That is not so, and I should like to make that plain here and now.
§ Mr. Edwin Wainwright
I am sorry if I gave the impression that there would 2049 be nothing. But if a man has invested his life savings of £2,000 and he does not know what is to happen, even if he loses £1,000 it will be a terrific loss to him.
§ Mr Davis
Of course it will be a loss, but part of the present problem is the anxiety that is being caused because people are uncertain about the future. I shall refer to Nation Life in more detail later.
I take the view that the social climate demands that the old-fashioned doctrine of caveat emptor rigorously applied must be seriously qualified. This is true in an increasing area where the consumer is vulnerable and it is the pattern of the consumer protection legislation in which both parties have heavily invested politically.
Insurance policy holders are extremely vulnerable to the difficulty of distinguishing between one kind of policy and another. Being well educated does not give one any particular benefit on that score because insurance is a complex and difficult matter. Policy holders are vulnerable when it comes to distinguishing between one insurance company and another. They are vulnerable to inexpert advice, even where it is proffered by the so-called experts. A number of brokers and agents are not all that expert. They should be far more expert than they are, and no doubt there should be more training.
People are vulnerable to the advice that may be offered for reasons unconnected with the policy holders' interests, but very much connected with the interests of those offering the advice. That point has been made by a number of hon. Members.
There is too much at stake for ordinary families to justify the Government stepping back and in future saying, "Hard luck. The law cannot help you. Caveat emptor." That is an insupportable proposition which surely would not have much currency on either side of the House.
Our immediate problem on taking office was that a number of companies—not many compared with the 800 operating in insurance—found themselves in difficulty. Those companies were essentially associated with the issue of 2050 guaranteed income bonds with guaranteed surrender values. A number of ad hoc rescues had been undertaken. I have already paid tribute to the industry for mounting those rescue operations and saving a great deal of anxiety and loss of money for many people.
When we came into office the industry, perfectly understandably, was saying that enough was enough regarding rescue operations. The industry was facing exceptional adverse conditions. Therefore, one of the first things that was done by the Chancellor was to plug the tax loophole which, during those profligate years of stewardship by the former right hon. Member for Altrincham and Sale, now Lord Barber, had encouraged the kind of policies which have been condemned in the debate. But this action, wholly justified as it was, was not able to save at least those two companies, Nation Life and London Indemnity and General. In both cases the parent companies were in difficulties and were unable to produce the additional capital which the Department of Trade considered necessary.
It is this kind of company specialising in this sort of policy which has tended to dominate people's thinking about our scheme. However, I submit that action is necessary, quite apart from those two examples of failure. It is right to have a scheme which is flexible to enable the Government to confront the problems of the future rather than those of the past.
In the circumstances which faced us, therefore, we considered that it was important immediately to take our officials' advice and to engage in the consultations to which I have referred with both sides of the insurance business in order to see whether we could have some form of scheme which was acceptable without legislation. Unfortunately, that has not proved to be the case.
Perhaps I might seize this opportunity to interrupt the flow of what I am saying since this brings me to one matter to which I am sure the House will want me to draw attention. It is to pay tribute to, the arduous efforts of people in my own Department who played a substantial part in helping rescue operations in the past, in introducing legislation under the previous Government with the support of the then Opposition, and in unceasingly working towards the improvement of the 2051 supervision of the business in the form of very complex regulations which have to be undertaken and which demand a great deal of work, patience and effort.
I come, then, to the broad outline of the scheme which we propose to introduce. First, we propose to establish a board on which insurance interests will have majority representation.
§ Mr. Higgins
The hon. Gentleman said earlier that consultations were still going on. Now he appears to be saying that he has reached a firm conclusion. I presume that both statements cannot be correct. We hope very much that the consultations are continuing and that his views on this matter are not finalised. That, surely, is the advantage of a debate on a Green Paper. The hon. Gentleman can scarcely have had time to consider his reaction to many of the points which have been made in the debate. Will he also comment on what alternatives the insurance business may have put to him?
§ Mr. Davis
I have said already that the principle is not assailable now but that we are in consultation in working out details.
As I was saying, we intend to establish a board on which insurance interests will have a majority representation. It will have an advisory function to perform so that there will be a much closer and earlier consultation with the insurance business than was the case in the past. The hon. Member for Mid-Sussex (Mr. Renton) was concerned about this. We place great importance on the ability of the business to keep a careful scrutiny of the matters affecting it in respect of which there has not been close enough liaison in the past.
The board will run two separate operations, one for life business and one for non-life business. It will be able to levy companies to a maximum of 1 per cent. of their United Kingdom premium income. The levy will be guaranteed so that it will be paid when required. That was the point made by the hon. Member for Uxbridge (Mr. Shersby). The board will be required to pay 100 per cent. of claims under compulsory insurance. If a company went into liquidation, 100 per cent. would be required. That is a specific and relatively 2052 small area in regard to the principle of the debate. The board will pay 90 per cent. of other claims save where there are over-generous policies. It will be a matter for the board in its discretion, advised independently by actuaries, to determine an issue. It will be limited to private policy holders, excluding marine and aviation business and reinsurance. It will be able to assist rescues of companies by making payments or giving guarantees where that is preferable to a liquidation.
I wish to spell out some of the circumstances in which this matter might be important. It can be more expedient and cheaper to avoid the very heavy expenses of a liquidation, including a liquidator's fees. It may be best for the reputation of the industry that this should be done. But the safeguards which we want to spell out are clear indeed. The rescue power must not be used to protect shareholders or the management of a company that is in trouble. The board should be placed under no obligation by new legislation to arrange rescues. Use of the power should be at the board's discretion. The majority of the board's members should be appointed from the insurance industry. That is an important safeguard. If workable formulations can be found, the board might be put under an express prohibition against rescuing business entered into irresponsibly.
I think I have gone a long way towards meeting the criticisms of the scheme which have been expressed during the debate. Perhaps the most important feature of the matter is that, for the reasons I have stated, the policy holders will be placed in a much less invidious position than they are at present. Their rights in the liquidation will be transferred to the board and they will not have to wait indefinitely for the sort of payment which those unfortunate people in Nation Life are yearning for at present.
These are formidable reasons. It is important that we should make plain that suggestions about so-called irresistible political pressures on the board to make it conform to a rescue in every operation are very wide of the mark. Indeed, the Nation Life situation has already exemplified that factor.
2053 In regard to the early-day motion on Nation Life, tabled by the hon. Member for Croydon North-West (Mr. Taylor) and others, the implication is that announcement of our scheme has impaired the possibility of a rescue operation being undertaken by Nation Life. There is not a scintilla of evidence to support that conclusion. Indeed, in regard to London Indemnity there is a rescue operation which has now been placed before the courts and our scheme has not impaired that. Therefore, that was a wholly bogus point.
The levy which we impose would have this advantage that it would be able to spread the burden far more equitably and more wisely than has been the case in the past where one has had a voluntary rescue scheme. It would not concentrate rescues on a few "willing horses" as has been the position in the past.
What is the view of the insurance industry? Initially it objected in principle to our idea but substantially thereafter it has acceded to the whole principle of our scheme. It would substantially qualify the doctrine of caveat emptor. It goes all along the line with us except on two areas of disagreement. First, it says that it wants the bureau to be non-statutory. Its scheme would require legislation, but it wants the bureau to be non-statutory and based on the most complex agreements between the industry and the Secretary of State, terminable at one year's notice. I suggest that anyone taking out life insurance in those circumstances would have no guarantee scheme that would be enduring. The position would be open at the end of each year. I cannot accept that that is the right way of approaching the matter.
§ Mr. Davis
The position would have to be reviewed at the end of each year. That is the effect of the BIA's proposals. It disagrees with us on the point that I have been making about its option to intervene to avert a liquidation. I believe that there are compelling reasons to have flexibility and not to adopt too rigid a posture. The board should be enabled, within the wide safeguards that I have 2054 already referred to, to take action where in its wisdom and discretion it considers it appropriate to do so.
Why do we include the mutuals in this scheme? We say that their policy holders must also be protected. A mutual failed in the 1960s. We think that it is right that they should contribute to the fund by way of the levy. It has been argued that we are assisting irresponsible companies. The hon. Member for Uxbridge said that we were providing a charter for dubious insurance companies. I respectfully suggest that that is wholly incorrect. The shareholders will lose their money and the management will fall. We are providing only a 90 per cent. scheme. We are not providing 100 per cent. except in the area to which I have already referred, which is qualified. The Motor Insurers' Bureau, which has been in existence for some 30 years, has never had the effect of giving irresponsible companies certain advantages. I agree that it is in a much narrower area of business.
Many hon. Members have asked whether supervision is not the answer. It is certainly part of the answer. Supervision and the provisions of our scheme are complementary and not mutually exclusive. Under the 1973 legislation the supervision of insurance companies was enormously improved. The supervision continues to improve. We now have to be satisfied that the controllers, directors and managers are fit and proper persons. We are about to lay regulations to require the approval of the Department of Trade on the appointment of a new managing director or chief executives so that the acquisition of voting control of an insurance company or the fitness of the persons concerned may be considered.
Further, our powers to intervene, if there is a risk of a company becoming insolvent, are used much more frequently. Formal notices requiring the restriction of 41 companies were issued in 1974 as against 11 in 1973. There is an increasing body of regulations, and we have introduced a good many already. We have a whole range of regulations, with which I have not time to deal now, which will be introduced before the end of the year. They will cover such matters as advertising and changes in the control of insurance companies.
2055 Those are matters of the greatest importance but none of them can be made foolproof. That is the point that was made by my hon. Friend the Member for Battersea, South. It is a fact that people try to find their way around the regulations. However elegantly worded a regulation may be, however sophisticated a regulation may be, there is always the risk of people finding their way through. That is why we say it is important to have an improved scheme that can go ahead in conjunction with the supervision of the industry.
We have a great deal of sympathy with those involved. Many of them have suffered personal tragedies as a result. The industry has not been willing to mount a rescue operation, but it is unfair to ask the industry to deal with this position in retrospect, because actuarial calculations have already been made.
We have said that we cannot include Nation Life. A comparison has been made with Court Line. The situation is totally different. With Court Line there was a sophisticated system of bonding in operation through the CAA and people believed that this gave them a very large measure of guarantee. This matter is being debated elsewhere, and I will not prolong the argument at this time. I say merely that there is a distinct difference.
After all, there is supervision of companies. There is supervision of consumer protection. However, we do not say, except in the case of the CAA, that that degree of supervision means that an indemnity can be offered to the creditors of the ordinary private company or other organisation concerned. There is a great distinction between this case and the bonding system operated by the CAA.
There has been criticism of the part played by brokers. I do not believe that the majority of brokers can justly be criticised. We have been engaged in discussions to see whether in this very complex area it is possible to define clearly what is a broker. Our minds are by no means closed to the possibility of introducing legislation. I have taken into account the points made by a number of hon. Members, and the same applies to the position of compulsory registration.
A point has been taken about surrender values. I do not think that my 2056 hon. Friend the Member for Ilford, North (Mrs. Miller), who raised the point in an excellent speech, made a good point. An early surrender can constitute what is in effect a breach of the insurance contract. Therefore, early surrenders must not be encouraged. Over-generous surrender values are also wholly wrong. That is why some of the companies which have been in trouble during the course of the past have got into such difficulties. If early surrenders were to be encouraged, the whole pattern of investment for insurance companies would have to be distorted.
This has been a wide-ranging and interesting debate on a subject that has in the past been rarely ventilated. We shall shortly have an even fuller opportunity of debating the matter again when our Bill comes before the House. Although the principle of our scheme must remain inviolate, we are, as I have indicated, continuing consultations with the industry on its details.
The Government have been extremely cautious and prudent in their relations with the industry. I think that the relationship is a good one. Certainly we have our differences. We have our differences with the CIS, with one of the unions and with the industry, but I do not believe them to be of such a fundamental character that our scheme will be placed in jeopardy, because the industry has now accepted the principle of the scheme.
I believe that the industry is desperately concerned to ensure that the consumer—the policy holder—is not exposed to the terrifying risks that occurred in 1973 and 1974 and in years long before that.
I am convinced that in that spirit my hon. Friend, if he had an opportunity, which I gather that he may not now have, would have been happy to withdraw the motion, if I had been wanting to challenge it, but that has not been the purpose of my remarks. I have been anxious to indicate to the House the Government's bona fides and the care and scrutiny with which we have approached the matter. I am convinced that in that light we shall go on to produce a scheme which will meet with the approval of the vast—
§ It being Four o'clock, the debate stood adjourned.