HC Deb 12 June 1986 vol 99 cc583-92

Amendments made: No. 64, in page 25, line 33, leave out 'exempt' and insert 'appointed'.

No. 65, in page 25, line 36, leave out 'exempt' and insert 'appointed'.

No. 66, in page 26, line 7, leave out 'exempt' and insert 'appointed'.

No. 67, in page 26, line 16, leave out 'exempt' and insert 'appointed'.

No. 68, in page 26, line 27, leave out 'exempt' and insert 'appointed'. —[Mr. Howard.]

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Mr. Nelson

I beg to move amendment No. 69, in page 26, line 29, at end insert— '(5A) The regulations made for the purpose of this section shall make provision to require exempt representatives to inform any person whom they procure to enter into an investment agreement that the cost or premiums payable under each individual agreement will be the same whether that agreement be entered into through the exempt representative or any authorised person.'. The amendment seeks to extend the disclosure requirements on company representatives of insurance and life assurance agreements. In so doing, it seeks to extend the principle of equivalence, about which much has been said in Committee and prior to the introduction of the Bill.

Clause 41, which deals with exempt representatives, was the subject of a good deal of debate in Committee. It was in that debate that a number of Members, particularly Conservative Members, drew attention to their continuing concern about product bias and company bias and in particular the large number of representations that they had received from many independent intermediaries as well as others involved in the sale of life assurance agreements involving investment about the prejudicial impact of the clause and the other arrangements that were being made to try to ensure more adequate standards of disclosure.

As a result of acceptance by my hon. and learned Friend of some of the disquiet felt, he played, I believe, an important and instrumental part in urging MIBOC to come forward with a document on how it saw the arrangements for the supervision and the status of the various people who would be involved in these activities.

The document was published in April and, despite some misgivings of practitioners and commentators, has received a broad degree of support for what was proposed. This applies in particular to its conclusion that should be a polarisation imposed regarding the activities of company representatives and independent intermediaries by which the traditional role and activities of the tied agent who might represent a number of different companies would be ended. There would be only two sorts of practitioner in the market and, potentially, knocking on Aunt Agatha's door — the company representative and the independent intermediary.

It was also proposed in the document that disclosure provisions on commission should attach to the categories of salesmen and representatives They would be required to say that the commission they would be receiving fell within a commissions agreement that it was hoped— it still is hoped — to establish between the various life companies operating in this sphere with company representatives. They would have to declare the actual commission in comparison with the commissions agreement; that is, if it were more than the commissions agreement, they would have to state the amount cif commission that they were receiving and compare it with the amount of commission under the commissions agreement if it had been established.

In making these proposals. MIBOC drew attention, I think rightly, to the fundamental difference in status between a company representatives and an independent intermediary. The latter is unambiguously a representative of the company, owes no allegiance to anyone other than the company and is overtly out to sell its investment products and life insurance products while the independent intermediary by his very nature is an agent of the investing member of the public and is in a quite different position from the company representative. Many of the disclosure provisions and other requirements placed upon these two categories flow from that fundamental difference. I think that this is well put in the document and is widely accepted.

The document proposals have gone quite a long way to alleviate some of the deeply felt fears of independent intermediaries about the extent to which they would be placed in a prejudicial position in the market place, in particular by having to declare a commission, whereas those who were company representatives would have no similar requirement placed upon them. It is exceedingly difficult for a member of the public who has never before been subject of any such approaches or sales tactics to know that there is any difference in status of the people who knock at their door trying to sell them exactly the same investment product. However, it is important to establish this difference for the purposes of supervision and proper regulation of the market.

It was feared by independent intermediaries that the requirement on them to declare their commission without a similar requirement on company representatives would be a serious negative sales factor and might deter many people from placing their investment for life assurance through independent intermedianes because it will be felt that a better deal will be done by going to the company direct or dealing through an employee or company representative of the life assurance company concerned.

Concern was also expressed by independent inter-mediaries and many Members of Parliament prior to Committee consideration of the Bill about the principle of equivalence. This principle should be cherished, and we should be careful not to introduce into the market place different requirements on categories of people selling exactly the same product.

Since the publication of the MIBOC document, there have been expressions of concern as to whether there will be a commissions agreement at all. It is feared that insufficent agreement will be reached among the principal companies involved; that, if there is an agreement, many people will fall outside it, or that it will not be written into the rules of the SRO or insisted upon by the SIB so that to all intents and purposes there will be no commissions agreement.

If that is so, one of the fundamental points behind the MIBOC proposals falls away, and we are left again with a prejudicial position for independent intermediaries in the market place. They will still be required to disclose their commission whereas the company representatives, in the absence of a commissions agreement, will have to declare the commission, but in their case it will be a very small amount. The remuneration that they receive may be a variety of other benefits — salary, bonus or a cheap mortgage that they receive from their company. Therefore, the commission that they have to declare will be very small. Yet that position will be quite unrepresentative for members of the investing public because the cost to them of entering into the agreement, whether through the company representative or an independent intermediary, will be exactly the same.

Like other hon. Members, I have received a great deal of representation from those affected, both during the Committee stage and subsequently. There might be a case for an amendment along the lines of that which I have tabled, which seeks to place a duty on exempt representatives to notify investors that the cost of entering into an investment agreement, by way of premium or cost involved, will be exactly the same whether they do it through a company representative, direct with the company concerned or through an independent intermediary.

The advantage of the amendment is that it extends the principle of equivalence, it does not blemish the integrity of MIBOC proposals and, last but not least, it is even more important if no commissions agreement is established. If the amendment were accepted, I hope that it would not be read by the companies as an alternative to a commissions agreement — the amendment is an addition to that. Basically, under the present proposals an independent intermediary must declare his commission, while a company representative does not have to do so, but say only that it falls within certain minimum standards agreed in the industry. Under the amendment, he would have to say that the commission that he received fell within that standard, but must point out to the public that from whomever they buy their investment agreement, it will cost them exactly the same. Therefore, all practitioners in the market will be obliged to point out to the public that while they are rightly declaring the commission, it will not be cheaper to buy that investment agreement through anyone else. By having a statutory or some other firm duty placed upon them so to declare, we will substantially overcome the negative sales factor about which many independent intermediaries still complain, despite the production of this document.

I hope that my hon. and learned Friend the Minister will favourably consider my amendment. I ask him to say to what extent he considers the commissions agreement, according to latest information, to be likely or unlikely, and to what extent he feels, even if he is unable to accede in law to the amendment — I claim no rectitude of drafting — there may be other means of achieving the same purpose. The purpose can surely be unobjectionable as it will seek in large measure to rectify a wrong and a grievance that are still felt by many people who offer members of the public an important service that should not be prejudiced in the way that I fear it otherwise will be.

Sir Peter Blaker (Blackpool, South)

I have no financial interest in the amendment, but my son is a finance broker and I am grateful to him for stimulating me into taking an interest in this important matter. I entirely support my hon. Friend the Member for Chichester (Mr. Nelson). I wish to make one or two supplementary points.

I welcome the proposal for polarisation in the latest MIBOC document — it is a useful step forward. However, I believe that those proposals, or whatever arrangements may be made, could go further in the directions of consumer protection and fair competition. My hon. Friend has described the proposals as they differentiate between independent intermediaries and company representatives on the matter of disclosure. I believe that they are not fair as between those two groups.

I have had the benefit of discussions with MIBOC, to which I pay tribute as it has been extremely helpful in clarifying for me the position. It has confirmed that there is still a great deal of anguish among the independent intermediaries. Even if a commissions agreement is made — I endorse wht my hon. Friend said about the importance of that — as things now stand I do not believe that the present proposals will be satisfactory.

8.45 pm

I believe that equivalence can be achieved on the lines of the principle contained in the amendment, even if its exact wording may not be precisely right. What objections can be made to our proposal? A distinction is made between independent intermediaries and company representatives in respect of the law of agency. I accept that their positions are different, but that is beside the point—it need not prevent us from ensuring that better information is provided to the consumer and that there is a fairer system of competition between the two parts of the industry.

The second objection to complete equivalence between the two parts of the industry is contained in paragraph 77 of the latest MIBOC document. That shows that there are practical considerations that make that difficult. Very often the commission earned by the company representative is on an entirely different basis from that earned by the independent intermediary. That is a valid point.

My hon. Friend and I are trying to bypass that problem. We are focusing not on commission earned but on charges, costs or premiums. Those charges, costs or premiums are the same to the client whatever channel may be used to make the contract.

I have three letters from leading life companies on that point. One is from Allied Dunbar, which states: I confirm that none of the charges under our policies are geared to the introducing source. Another, from Royal Life Insurance, states: the charges levied on my Unit Linked products are defined at the outset and are irrespective of the source of the introduction to the company he it on independent intermediary, a company sales person or a direct enquiry. This is true also of with-profits policies. Another letter from Legal and General (Unit Assurance) Limited is on similar lines. We have the opportunity to obtain real equivalence by taking advantage of that fact.

I wish to say a little more about the question of a commissions agreement. When my hon. and learned Friend replies I hope that he will tell us what he feels are the prospects for obtaining such an agreement. MIBOC says that I cannot assume that there will be such an agreement. Many of those who were concerned about the matter during the Bill's Committee stage assumed that there was certain to be such an agreement.

One reason why we cannot be sure that there will be an agreement is that it will depend not on the independent intermediaries, who will be directly affected by whether or not there is an agreement, but on the decision of the life companies. furthermore, MIBOC says that it would feel it essential, if there is to be an agreement, that it should be supported by the vast majority of the life companies. But their interests may not be the same as those of the independent intermediaries. Incidentally, they will be members of different SROs so there will not be a common membership.

In recent years there has been a trend towards more and more direct sales, and it is quite legitimate for the life companies to aim for that. However, we would be wrong to create an artificial disadvantage for the independent intermediaries. That is really what is presently proposed. I am all in favour of fair competition, and so are the independent intermediaries with whom I have discussed the matter, but I believe that it would be wrong to have an artificial bias against the independent intermediaries.

The chairman of the MIBOC is the chairman of one of the principal life companies which concentrates on direct sales. He has had a distinguished and successful career and I make no criticism of him. I merely say that it will be unfortunate, bearing that in mind, if there is seen to be a lack of equivalence and a bias against independent intermediaries. It is important in that context that there should be real equivalence. Justice must be done and it must be seen by everyone concerned, including independent intermediaries, to be done.

We have raised two problems which it is important should be resolved. We have the question whether there will be a commissions agreement and there must be real equivalence between the two sides of the industry. When my hon. and learned Friend the Minister replies, I hope that he will give us some reassurance about the probability of there being an agreement. I hope also that he will be able to give us an undertaking that he will do what he can to ensure that there is proper equivalence either in the Bill itself, or by the use of the powers which are available to him under the Bill.

Mr. McCrindle

I shall take a very few minutes of the time of the House to add my voice to those of my hon. Friend the Member for Chichester (Mr. Nelson) and my right hon. Friend the Member for Blackpool, South (Sir P. Blaker) in support of the amendments.

During the rather lengthy passage of the Bill through the House, much time has rightly been spent on investor protection. A good deal of attention has been paid also to creating a fair and competitive atmosphere within which different agencies and different types of person will have an equal opportunity of selling to the public. This approach to equivalence is justified and the amendment turns our attention yet again to this subject.

There is a good deal of confusion in the public mind, and probably in the minds of a number of Members, about commission and how it is paid. For example, there is an assumption that it must be cheaper to purchase product A direct from the company which produces it rather than by buying the same product through an independent intermediary. The aim of the amendment is to make it a requirement that it is communicated to the prospective purchaser that that is not so. It is the gross premium which is important, because that is what the purchaser of the policy will pay irrespective of the agency through which he purchases it, and in all instances it will be precisely the same. To require that some statement to that effect be made comes a great deal closer to the equivalence of which I have spoken.

Not surprisingly, there may be a tendency among insurance company representatives who are attempting to sell their products by approaching the public direct to imply, or even sometimes to state out of ignorance, that the price of the product is not always the same. I do not think that those representatives should be able to take advantage of being able to make statements of that sort. If the amendment were to be added to the Bill, they would be unable to do so.

A good deal of time was spent in Committee discussing disclosure, and I think that the Committee was wise to spend its time in that way. I have always been mildly sceptical about the use to which information on the commissions payable on a policy would be made, or could be made, by the prospective purchaser of a policy. Nevertheless, that element of disclosure is being required, and I accept that.

This is an appropriate juncture to ask, as my right hon. Friend the Member for Blackpool, South has done, about the present status of the proposed industry agreement on commissions. The House will recall that the idea is that, if such an agreement can be reached and if an independent intermediary is not receiving more than the commission laid down within the agreement, specific disclosure will not be required. The assumption that there is something inevitable about the commission's agreement must be heavily discounted. The House will remember the register of life assurance commissions. That was a voluntary effort and the result was something on broadly the same lines as that which we are discussing when we talk about an industry agreement.

ROLAC was brought to life. but it limped for a long time. Even when it saw the light of day, many companies refused to become members of it Let us assume that there are 150 companies on the British market. If no more than 30 of them were to come together to form a commissions agreement, does my hon. and learned Friend think that that would be acceptable? Is these a minimum level below which he would consider it would not be worth referring to such an agreement as an industry agreement? If it is impossible for the appropriate SRO to bring together a sufficient number of companies to create an agreement, could the SIB step in and require the SRO to take further steps, or could it take steps itself to create a commission's agreement?

We must contemplate the possibility that ultimately there will be no agreement and on possibility of reaching one. In the circumstances, we an entitled to know tonight, as we come close to the end of the consideration of the Bill in this place, just what would happen in the circumstances that I have outlined. Would we revert to no obligatory disclosure, which is the present position, or would there be, through some clause or subsection which I have overlooked, an automatic requirement for full disclosure, which is not the compromise that the MIBOC presented? It was wise of my hon. Friend the Member for Chichester to move the amendment and I hope that it will be added to the Bill. If that is not possible for some reason, I hope that my hon. and learned Friend the Minister will address himself to some of the important considerations to which I have referred.

Mr. Howard

My right hon. and hon. Friends have done the House a service in giving us the opportunity to discuss the important issue of the regulation of insurance intermediaries under the Bill. I hope that they will not press the amendment to a Division because, as I shall explain, it suffers from a number of defects. Nonetheless, I hope that I can offer them some comfort on the substance of it.

I am grateful to my right hon. and hon. Friends for the welcome which they gave to the MIBOC document. I take this opportunity of paying tribute to the MIBOC for responding so effectively and so quickly to the request which I made of it in Committee. I made that request at a time when it was anticipated that Report and Third Reading might take place at a rather earlier stage than they have. The MIBOC responded most energetically to my request and I am happy to have this opportunity of paying tribute to it.

Mr. Gould

As I do not propose to make any substantive contribution to the debate, I wish to associate the Opposition with the tribute which the Minister has paid to the MIBOC.

Mr. Howard

I am grateful to the hon. Gentleman.

I shall explain briefly some of the problems with the amendment. Clause 41 is a general clause, the main point of which is to put appointed representatives—that is, essentially self-employed persons working for an authorised business under a contract for services—in the same position as employees of an authorised business. We expect that the majority of people who will become appointed representatives will be insurance and unit trust salesmen, but it is a clause of general application and representatives will be appointed outside the area of insurance.

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If one considers that point one can see a real problem with the amendment. There may be all sorts of investment agreements that those appointed representatives may lead their customer into, and the cost or premiums payable could be very different if the same agreements were sold by authorised businesses. I am sure that the House would not want to require appointed representatives to make an untrue statement. There may indeed be no way in which the appointed representative could know what cost or premiums were payable under investment agreements offered by authorised businesses.

Apart from being in one sense too general for its purpose, the amendment is in another sense too specific. It relates only to appointed representatives. It would have no implications for salesmen employed directly by insurance companies. Yet I am sure that my right hon. and hon. Friends would agree that if there is merit in the proposal they are making, it should apply, to use MIBOC's jargon, to all company representatives, whether employed or self-employed. Depending on the particular wording of the statement to be made, there might even be a case for requiring independent intermediaries to make an equivalent statement.

Turning to the substance of the amendment, the issue of the rules to regulate insurance intermediaries, whether independent or company representatives, raises some difficult questions and has aroused a good deal of comment from interested parties. I expect that we shall have a fuller discussion on those questions when we come to the Government amendments to schedule 6, nos. 176 and 177, which were prompted by the useful discussion we had in Committee on the subject. However, let me make it clear that I consider it important that the different rules which are applied to the different functions of insurance broking and representing an insurance company do not in practice give one or the other an unfair competitive advantage in the market place. That was the basic point that underlines the observations made by my right hon. and hon. Friends.

It has been suggested that that could happen because company representatives might suggest that they do not receive commission and might imply that the customer thereby gets a better deal by acting through them. A representative who did this would, I suggest, have to be very careful not to commit a breach of the conduct of business rules, or even a criminal offence, by misleading the consumer.

My right hon. and hon. Friends have made an interesting proposal on the sort of statement company representatives should make. It is a proposal which I shall want to reflect on further and doubtless MIBOC shall want to do so also. As the comments I made earlier on the amendment suggest, this is a difficult area on which to draw up rules. As I understand it, although premiums of on policies are now generally the same whether policies are bought through company representatives or independent intermediaries—that point was made by my right hon. Friend the Member for Blackpool, South (Sir P. Blaker) —there is no guarantee that this is always the case or that it will continue to be so.

One would have to consider what sort of statement might be made when the premiums paid differed depending on the particular sales outlet. One would also want to consider whether companies might seek to get round a rule of this sort by changing the premiums they charged to favour their preferred sales outlet. In the case of companies which specialised either in selling through independent intermediaries or company representatives, a comparison might be drawn up which could be misleading to the consumer. On the other hand, it is Government policy to leave companies' pricing policies to market forces and for them not to be Government controlled.

At first sight, the ideas of my right hon. and hon. Friends seem interesting, and I shall want to have them pursued. MIBOC is at the moment drawing up conduct of business rules on which it will be consulting. I shall ask it to consider whether there is a case for a rule to meet the concerns of hon. Members. May I stress that detailed rules of this sort are for the board to make. We in this House are unlikely to arrive at formulae in which practitioners will be unable to find loopholes.

My right hon. and hon. Friends raised the likelihood of a commissions agreement. My right hon. Friend the Member for Blackpool, South asked what the chances were of a voluntary commissions agreement for independent intermediaries. In the White Paper on financial services, the Government clearly envisaged that, subject to the competition regime, there could be such an agreement, with disclosure by reference to it. Since then, MIBOC has considered the issue and has concluded that disclosure that commission is within a voluntary industry agreement is of more use to the investor than full disclosure, since under the latter the investor would not have a clear idea whether his agent was receiving more commission on a particular policy than was generally the case on competing policies.

We expect that the SRO for insurance companies and unit trusts will include a commissions agreement as a part of its rules, although members of the SRO would be free not to abide by the agreement. For those who did, disclosure would be by reference to it, and for those who did not full disclosure would be made. The Life Assurance and Unit Trust Regulatory Organisation—LAUTRO— which as hon. Members may know is seeking to become the self-regulating organisation in this area, has plans for such a system. In this it has the support of the majority of the life offices, which have already come together in the Registry of Life Assurance Commissions, with a view to establishing a voluntary commissions agreement.

Companies representing about 80 per cent. of the market have given their support to ROLAC. Apart from their concern for the impact of excessive competition in commissions on the impartiality of intermediaries' advice, they are also, of course, concerned by its impact on their finances. That concern would be shared by all insurance companies. We have grounds to expect that there will be a considerable incentive for those companies to enter into the type of agreement desired by all my right hon. and hon. Friends who have spoken. I hope that the totality of the matters to which I have referred will give a good deal of comfort to my colleagues. In those circumstances, I hope that my hon. Friend the Member for Chichester (Mr. Nelson) is prepared to withdraw the amendment.

Mr. Nelson

I am obliged to my hon. and learned Friend the Under-Secretary of State for his important and helpful response. I was especially pleased that lie emphasised at the beginning of his remarks the importance that he attaches, as do many of us, to the principle of equivalence. if he attaches importance to that principle and holds it paramount, as he appeared to do, I hope that, by inviting the MIBOC to consider this matter again, a way can be found to redress what some of us perceive to be a continuing problem.

My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) asked what will happen if there is no agreement. That question was not fully answered. If there is no commissions agreement, the basis of the polarisation proposal falls away. If there is no commissions agreement, there is no basis on which company representatives have to make a meaningful declaration. The principle is therefore substantially undermined.

Although I share the hope that there are sufficient incentives and time to reach such an agreement, we must bear in mind that it may not be reached, or it may not be reached adequately. In either event, there are urgent and compelling reasons for the MIBOC to consider writing into its rules and proposals a provision along the lines of the amendment. I take it that the endorsement in principle, rather than in drafting, that my hon. and learned Friend has given to the amendment will be taken fully into account. I have no doubt that we shall return to the matter in the later stages of the Bill. Many of us will keep a watching brief on that aspect.

I think that we have been given sufficient reassurances to allow me to withdraw the amendment. My hon. and learned Friend has responded fully and helpfully to the initiative. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 70, in page 26, line 30, leave out 'exempt' and insert 'appointed'.

No. 71, in page 26, line 37, leave out 'exempt' and insert 'appointed'.—[Mr. Butcher.]

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