§ The Secretary of State may by order made by statutory instrument prescribe the maximum amount of commission that may be paid by an authorised insurance company to an agent or broker.".—[Mr. John Fraser.]
§ Brought up, and read the First time.
6.13 pm§ Mr. John Fraser (Norwood)I beg to move, That the clause be read a Second time.
The new clause enables the Department of Trade to have power to control the commissions which are paid on the sale of insurance policies. I am not opposed to the payment of commission to those who sell insurance. All hon. Members, I am sure, have met constituents whom they dearly wish had insured. We meet people whose homes have been flooded after a water main has burst. There may have been a burglary or a fire in their property. They have no redress because they have not effected an insurance policy. One wishes in those circumstances that someone had knocked on their door with an incentive to earn money by way of commission through selling those people a policy.
However, there are occasions when I am concerned about the distribution and rate of commissions on long-term insurance policies. There may be a point at which the method of payment of a commission and the rate of commission begin to distort the operation of a truly competitive market and could operate—I emphasise the word "could"—against the interests of the consumer, the insured person. Ideally, the purpose of competition should be to give the insured person the best possible bargain. It would be wrong if the objective of a competitive market in insurance—to give the best possible bargain to the insured—was overruled by competition to pay the greatest commission and the duty on the agent or other intermediary thereby conflicted with his personal interest in earning commission.
It might sometimes not be in the interests of the agent or the intermediary to point out the substantial commission that may be received at the beginning of a long-term policy and the consequences for the insured person. Let us assume that someone is taking out an endowment policy for 20 years and that he has a choice between two companies. Let us assume that the premium is £100 a year. One company may not pay commission, while the other does. By going to the company that pays commission, the first premium on that long-term policy could be payable as commission. The effect is that if £100 is paid, nothing is invested for the endowment in the first year. If, however, £100 is invested on a 20-year endowment with a company that pays no commission, with compound interest rates of 10 per cent.—that is not unusual in the present economic situation—it produces £647 at the end of 20 years. One bargain, therefore, involves £647. In the 723 other bargain, where £100 commission is paid, there is nothing at all for that money at the end of 20 years. That is not far-fetched.
I declare an interest as a solicitor. On first becoming a solicitor I took out a 20-year policy called an income protection policy. A well-known insurance company quoted me a premium, which was reasonable at the time, of £10 a year. I asked about the commission and the reply was, "Are you an agent?" I promptly signed up and became an agent. The first two and a half years' premiums on that policy were paid to me by the well-known insurance company. Payment of one year's premium only on a 20-year long-term policy is not entirely out of the way.
§ Mr. R. A. McCrindle (Brentwood and Ongar)Is the hon. Gentleman not just a touch behind the times? Is it not correct to say that when he effected that policy the commission was paid on the basis of the sum assured under life assurance policies? As a result of considerable pressure, not least from consumer bodies, the amount payable today is related to the premium. The situation to which the hon. Gentleman draws attention cannot happen in 1981.
§ Mr. FraserI understand that changes have taken place. It does not alter the principle, even if the commission is related to the premium. If the commission payable is equivalent to the first year's premium, it is a substantial loss to the insured as against another kind of policy. I am not suggesting that the first year's premium is the order of the day. I have recently come across long-term business where 50 per cent. of the first premium goes in commission. I do not think that that is unusual.
There is, perhaps, a duty on the intermediary to say how far that means a loss of accumulated capital at the end of the period of an endowment policy. To take an extreme example, if the first two years' premiums were payable by way of commission, the sum of £1,200 in the example that I have given would not have accumulated to the benefit of the insured peron, whereas it would have done if invested with a company that paid no commission.
There may be many arguments in the opposite direction. I am not arguing against the payment of commissions on policies, but it is conceivable that there could be a conflict of interest between the interests of the insured person and those of the intermediary. If such an acute conflict arose, or if the market was being distorted by the payment of high commissions, particularly in the early years of the policy, there might be a case for the Department of Trade having a power to intervene. I ask for no more than a power to intervene. I do not seek to interfere in the insurance market, but there is a point at which it may be necessary to intervene in the interests of consumers.
I am interested to know the Minister's views on the payment of commission. Does he believe that a prospective insured person who goes direct to a company and not through an intermediary should get a discount—a cash-and-carry arrangement? Does his Department frown upon the payment of a standard commission to agents?
Insurance companies make great play about imposing a duty of the utmost good faith on the person taking out a policy, but I am not sure that they go to a great deal of trouble to point out the commission paid on the effecting of long-term business and the financial consequences if the 724 money is not paid out in commission but is invested and accumulated over a long period. I ask for no more than a power to regulate the payment of commissions, leaving the Department of Trade to make a judgment having regard to the circumstances of each case and the state of the market.
§ Mr. McCrindleI oppose the new clause, for a variety of reasons. Far and away the most important is that controls are not desirable in a highly competitive and commercial business. I hope that my hon. Friend the Minister will forgive me if I say that although I have substantial regard for his Department, and particularly the insurance division, I am not persuaded that it is, from day to day, sufficiently in touch with the commercial pressures that permeate the insurance business to know at any given moment what should be the correct levy of commissions. In short, if the Department took the powers suggested, it would be interfering in a highly commercial business without always having or being able to have the most up-to-date information.
The hon. Member for Norwood (Mr. Fraser) conceded that intermediaries can be of great advantage to the insurance public. Unless we wish to discourage their operation we cannot allow a long lapse of time within which the intermediary becomes progressively less adequately remunerated, until he reaches the point where he cannot continue to provide the service that the public rightly expects.
The hon. Gentleman spoke darkly about the method of paying commissions, and mentioned his own experience. He said that the commission that could be received under a policy could equal more than the first full year of the premium, and in some cases two years. That was once the case, and it led to abuses. Indemnity commission was paid before it had been earned. frequently with a discouragement to provide other than a fast sales service, which obliged insurance companies to listen to consumer bodies that wished to have the situation changed. However, as I pointed out, in 1981 that is no longer possible. Commisssion on life insurance is now related to the first year's premium, so in the first year an intermediary can only receive a maximum of a percentage of the first year's premium. It is not now possible to go beyond that. The hon. Gentleman was out of date, and put too much emphasis on an abuse that no longer exists.
There are intermediaries and intermediaries. A Lloyd's broker, for example, may take upon himself the responsibility not only of collecting premiums but of annual visits to the person or firm insured, and will deal with claims as they arise. That is quite different from a part-time agent who from time to time introduces a friend to the insurance company. It would not benefit the consumer for the Department of Trade to decide which level of commission applied to which class of intermediary.
The hon. Gentleman made no reference to the present position of the Life Offices Association—and I am restricting my remarks to life assurance. That association has a maximum commission agreement. Some member companies do not like the agreement and have resigned. The scheme is not perfect, but it may be better than any operated by the Department of Trade. A trade association is at least in day-to-day touch with what is happening in the insurance market.
§ Mr. John FraserDoes the hon. Gentleman object to self-regulation? The Life Offices Association could establish a maximum rate of commission and invite the Department of Trade to turn it into a rule of law.
§ Mr. McCrindleI should prefer the new insurance ombudsman—whom I welcome—perhaps over a period of time, to become responsible for all insurance companies. The LOA can be responsible only for its own members. I should not object if that arrangement had to be underpinned by a statutory code which gave broad guidance instead of laying down specific amounts of commission.
The hon. Gentleman said that a conflict would exist when an intermediary was attracted by a higher rate of commission from company A, whereas the best bargain was likely to come from company B. I belatedly declare an interest. I am parliamentary adviser to the British Insurance Brokers Association. Insurance brokers have a statutory duty to exercise all the preference in favour of their client. If the client asks what commission the broker is being paid, he is obliged to reveal it. Those two facts together begin to provide an assurance for customers of an insurance company, agent or broker that was not there until recently.
The hon. Gentleman seemed to eulogise those insurance companies which pay no commission, implying that one was bound to get a better bargain by placing life insurance business with such a company than with one which pays commission. That simply is not so. A mass of Scottish Mutual Life offices which pay commission to intermediaries for introducing business time and again produce a return on an equal premium over an equal period better than anything that the non-commission-paying offices can produce. Those are facts, and I refer the hon. Gentleman to them.
6.30 pm
The final point with which I seek to persuade the House, whose Members seem rather thin on the ground, to listen to this learned dissertation, relates to the hon. Gentleman's reference to the utmost good faith being shown. As one who has long been associated with the industry, I entirely accept the necessity that the utmost good faith should be expressed by both the insured person and the insurance company. I would not challenge the hon. Gentleman on that for one moment. He seemed to suggest, however, that good faith need not be shown by intermediaries. I draw his attention to The Insurance Brokers (Registration) Act 1977, which imposes a clear duty, written into the statute and passed by the House, to maintain the utmost good faith in relation to both insurance companies and brokers' clients.
For all those reasons, I suggest that the new clause is unnecessary. It would lay a responsibility upon the Department of Trade, which I believe is less capable of carrying it than either the Life Offices Association or, perhaps, the insurance ombudsman. The House would therefore be well advised to reject the new clause.
§ The Under-Secretary of State for Trade (Mr. Reginald Eyre)I fully understand the concern that underlies the new clause. The worry is that high commissions pose a conflict of interest for the intermediary between his short-term financial interest and his clients' interests and that some intermediaries may be led into recommending policies because they carry high 726 commissions rather than because they meet the particular needs of a policyholder. The hon. Member for Norwood (Mr. Fraser) expressed the concern for the interests of consumers that arises in these circumstances.
This concern is not new. It was considered by the committee, chaired by Sir Hilary Scott, on property bonds and equity-linked life assurance. That committee reported in 1973. I will come back shortly to its findings, many of which are relevant to insurance generally, and not just to linked life business. Last year, the Wilson report on the functioning of financial institutions suggested that there may be a case for more formal agreements on maximum commissions payable to life insurance brokers and other intermediaries. There have also been studies in other countries—for instance, recently in Australia by the Australian Law Reform Commission.
Interest in commission in this country has been muted since the Scott report in 1973. One factor in this has been the commission agreement of companies in the Life Offices' Association and the Associated Scottish Life Offices. My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) referred to the benefits of that kind of agreement. Several companies have recently left the LOA, giving as their reason the wish not to be restricted by this agreement.
It is perhaps, in the abtract, rather curious that intermediaries such as brokers, who hold themselves out as offering disinterested advice to their clients, should be remunerated by commission paid by the insurer. But that system is a long-standing fact of life and no doubt it has taken root because on the whole the customer is well served by the industry. Probably the most radical way of cutting out the conflict between interest and duty inherent in the present system would be to prohibit all ways of remunerating a broker by an insurer and making the broker obtain his income from fees. But this would be a drastic step indeed, cutting right across traditional and well-established practices in the market.
The proposal in the new clause is rightly a more restricted one. However, it seems to me that the relevant Scott report findings are as applicable now as when the report was made in 1973. That report rejected the idea of a statutory limitation on commission payments for the following reasons:
Some life companies engage in extensive advertising, which can be expected to bring to the notice of the general public the existence of the particular policy and its basic nature: other life companies may prefer not to advertise and may expect their agents to spend longer in explaining the policy to prospective policyholders. Life companies also expect agents to undertake varying amounts of paper work connected with issuing a policy. It seems to us reasonable that life companies should, as at present, be able to pay rates of commission which may vary with the work involved in selling.In brief, I consider that the Scott report was right in pointing to the difficulties of laying down standard or even maximum rates of commission that would apply equitably in all cases. I believe this to be particularly so in the context of statutory control, which would need to be demonstrably fair to all the parties involved.The Scott report also considered disclosure to the policyholder of the amount of commission that the salesman would receive if a particular policy were purchased. The report doubted the value of this, partly because of the difficulties of putting a figure on commissions and partly because the policyholder would not be much wiser; he would need not only the figure for 727 the policy in which he was interested but the figures for other policies. I should add that since then the code of conduct for registered brokers, made under the Insurance Brokers (Registration) Act 1977, requires them to disclose—but only at the request of an individual client—the amount of commission paid by an insurer.
I would also point out that it needs to be considered whether regulation of commission, such as the proposed clause seeks to provide, would not achieve control at an excessive price to the policyholders. We should bear in mind that control risks stifling innovation and inhibiting sales.
There is a great deal to be said for leaving commissions to the market, as they are essentially a commercial matter. My hon. friend the Member for Brentwood and Ongar underlined the wisdom of this. While it is the policyholder who ultimately foots the bill on commissions, what matters to the policyholder at the end of the day is the total sum that he has to pay for his policy rather than its breakdown as between insurer and intermediary. The House may be assured that the Department is keeping a watch on the situation, in view of the various implications for the policyholder, but I am not convinced of the case for statutory intervention, especially in the way proposed in the clause. I therefore recommend the House to reject the new clause.
§ Mr. John FraserThere must be people in every Department who write speeches explaining why the Minister should not do anything. On this occasion, they have done particularly well. They have convinced the Minister, although they have not convinced me. I do not propose to press the matter, but I thought it right to air the subject. Reference has been made to the attitude of some insurance companies to high commissions and their decision to break away from the Life Offices Association. In the light of that, I hope that the Minister will at least keep an eye on the situation and perhaps put further proposals before the House.
§ I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.