HC Deb 12 June 1986 vol 99 cc551-5

Amendments made: No. 3, in page 130, line 14, at end insert ', industrial and provident societies or credit unions'.

No. 4, in page 131, line 17, at end insert 'or in respect of two or more different investments falling within paragraph 3 above and issued by the same person.'.

No. 5, in page 131, line 19, after 'in', insert 'or securities of'.—[Mr. Howard.]

Mr. Howard

I beg to move amendment No. 6, in page 132, leave out lines 30 to 39 and insert—

  1. (a) the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity;
  2. (b) no benefits are payable under the contract on a death (other than a death due to accident) unless it occurs within ten years of the date on which the life of the person in question was first insured under the contract or before that person attains a specified age not exceeding seventy years;
  3. (c)the contract has no surrender value or the consideration consists of a single premium and the surrender value does not exceed that premium: and
  4. (d)the contract does not make provision for its conversion or extension in a manner that would result in its ceasing to comply with paragraphs (a), (b) and (e) above.
(2) Where the provisions of a contract of insurance are such that the effecting and carrying out of the contract—
  1. (a) constitutes both long term business within the meaning of the Insurance Companies Act 1982 and general business within the meaning of that Act; or
  2. (b)by virtue of section 1(3) of that Act constitutes long term business notwithstanding the inclusion of subsidiary general business provisions,
references in this paragraph to rights and benefits under the contract are references only to such rights and benefits as are attributable to the provisions of the contract relating to long term business.'. The intention behind paragraph 10 of schedule 1 is to exclude from the definition of "investments" long-term insurance contracts whose sole purpose is protection against risk. However, the precise dividing line between those contracts which have an investment element and those which do not is obviously a somewhat difficult one to draw, given the complexities of the insurance market, and for that reason I was happy to acknowledge in Committee that we might not initially have got it exactly right in all respects. I promised, however, to consider the matter further, with a view to tabling appropriate amendments to the Bill on Report and I have now done that. The wording of the amendment reflects the result of extensive and wide-ranging consultations with a variety of interested parties, in an attempt to draw as accurate and as precise a dividing line as may be possible. The broad effect of the changes is to allow a slightly wider class of pure protection insurance contracts to qualify for exclusion but the exemption is of course, intended not to be available for any contract that would normally be regarded as an investment.

Mr. Tim Smith

On 30 January I moved in Committee an amendment that was similar to the Government amendment. I am grateful to my hon. and learned Friend the Under-Secretary of State for the consultation that the Government undertook with interested parties on this matter. Those who have commented to me on the Government amendment have said that they are satisfied with the changes that the Government have made, and they are therefore duly grateful.

Amendment agreed to.

Mr. Ashdown

I beg to move amendment No. 7, in page 132, line 46, at end insert— '(11A) Real property of any type or description, except residential property, wherever situated and whether or not subject to encumbrances.'. The purpose of the amendment s to bring investment in non-domestic property within the meaning and the terms of the Bill—property relating to office buildings, shops, factories, agricultural land, and so on. The amendment closely follows on the proposals and recommendations put to me by the National Association of Pension Funds. However, we have deliberately excluded residential property because we have no wish to draw every estate agent in the land within the ambit of the Bill.

I do not pretend for one moment that this is a perfect solution. It is a balanced one which nevertheless is useful because it goes some way, in a sensible and reasonable way, towards recognising the type of investment decisions that can be taken and their impact in relation to property, without drawing in domestic property.

The word "real" in the amendment is well understood. The National Association of Pension Funds advised us that it was normally used in the trade and its lawyers said that it was appropriate. It may well be that it is not the right term to use, in which case we shall be more than happy to accept an amendment. The principle is what is important.

6.45 pm

The pension funds have vast amounts of money invested in property. The Government have calculated that they have about £12 billion invested in property. According to the NAPF's 1984 survey, 10 per cent. of its portfolios are in that category. In the 1970s the investment in property was much higher — about 20 per cent. of portfolios. The percentage has now dropped, for reasons that we can well understand — for example, lower inflation and the recession in rental growth. That position could easily be reversed if inflation were to increase, as some say it might, if there were a rise in property prices, or if the Government simply stopped issuing index-linked bonds.

Whatever the case in the future, at present substantial proportions of the portfolios of pension funds are invested in property. Few of those funds have their own property departments. They therefore rely heavily on agents of one sort or another for management and advice on acquisition and disposal. There is potential for severe conflicts of interest between clients of the same firm and between agents and the firms and their clients. The Royal Institution of Chartered Surveyors attempts, and in many cases does a good job, to regulate the market. I understand that on a number of occasions pension funds nevertheless have had to seek redress through the courts against property agents for breaches of duty under the law of agency.

I have no doubt that every vested interest will oppose the amendment, and I suppose that one can understand that. I suggest that there is no reason why, given the impact and importance of decisions in this respect, conflicts of interest here should be treated differently from conflicts of interest anywhere else. The acquisition by larger conglomerates of some of the firms involved may lead to the wholy inconsistent position in the future in which one service offered by a conglomerate is regualated and another—on property advice—is not. There could be the stupid situation in which pension fund trustees meet a number of advisers sitting around the same table — say, an adviser on United Kingdom securities, an adviser on international securities and an adviser on property—some of whom are regulated and therefore fall under the Bill's provisions, but the property adviser escapes those provisions. We wish to bring that aspect within the scope of the Bill.

The exclusion of this provision from the legislation would be more understandable if property investment had not created problems in the past, but we know that that is not so. The early 1970s were marked by what one Conservative Prime Minister referred to as the "unacceptable face of capitalism"—directly, I recall, in relation to property investment.

Mr. Tim Smith

It was in relation to Lonrho.

Mr. Ashdown

I stand corrected, but it was certainly part of the same era. Without doubt, problems have been created in the past with respect to the law of agency. Without doubt, the scandal of the secondary banking crisis in the 1970s was created because of problems of property valuation.

Our purpose is to bring such investment advice within the scope of the legislation and to prevent such a thing happening in the future. If the Under-Secretary of State intends resisting the amendment, we shall want to know that he will be ready and willing to extend the Bill's scope under the powers given in, for instance, clause 2, should such problems again arise.

Mr. Howard

By the exercise of characteristically tortuous logic, the hon. Member for Yeovil (Mr. Ashdown) has passed from the identification of inaccurate reasons why I come to the decisions which I do to an identification of the vested interests which he suspects will oppose any amendment which he tables and which will accordingly doom that amendment. It is an interesting sign of the degree of accuracy with which his party approaches these matters. Any allegation may be made as long as it corresponds to a certain period, if it relates to the right era, and it does not matter whether it is inaccurate in every other respect. However, the general principle underlying the definition of investments in the Bill is that it excludes physical property which a potential purchaser can inspect and which passes under his direct control on purchase.

A person wishing to buy a building can have it surveyed and establish its physical condition, the cost of any essential repairs and the likely maintenance costs. Once he has purchased it, he will he able directly to influence at least that part of its value which relates to its structural condition. This distinguishes real property from investments as defined in the Bill, where the purchaser acquires rights, directly or indirectly, in underlying assets which he generally cannot inspect or control.

Two arguments have been advanced for including real property within the scope of the Bill. The first is that for large fund managers, such as insurance company and pension fund managers. property is an alternative store of value to investments as defined in the Bill, and that it should therefore be regulated in a similar fashion. The second is that property is frequently promoted and purchased as an "investment" in the sense of an asset which it is hoped to sell subsequently at a profit. But the problem with both these arguments is that they do not present a case for drawing the line at real property. Fund managers have other stores of value available, such as works of art. A wide range of things — for instance, stamps or limited edition porcelain plates — are promoted on the basis that they will rise in value, and are bought in that expectation, or at least that hope. It would be wholly impracticable to extend the scope of the Bill to cover all those areas.

Moreover, to include real property within the definition of investments would greatly increase, to no clear advantage, the range of businesses to which the Bill would apply. For instance, even with an exclusion for residential property, the mainstream activities of a large number of estate agents and property management agents and solicitors who undertake commercial conveyancing would be brought within the Bill's scope. What would be the benefit of doing so? To what sort of rules should they be subject? Clearly, rules drawn up to cover, for instance, the management of a portfolio of shares would be wholly inappropriate to the management of an office block as such.

I believe that what has been called the touch-and-see principle is the right one to adopt when defining investments. The provisions of the Bill are inappropriate for physical objects and real property which pass under the direct control of the purchaser. I urge the House to reject the amendment.

Mr. Ashdown

The opening of the Minister's speech, in which he sought to play the person not the argument, was rather typical of the rest of it because I was very dissatisfied with that. He failed to recognise the scale of the problem and sought to relate it to the same kind of area as, for example, advice on works of art when he knows that, by the Government's own figures, £12 billion is currently invested in pension funds in property. The scale is wholly different.

It seems that the Minister has considerably underestimated the seriousness of this problem—in terms of scale, of the damage done to the probity of the City and to the economy in a previous age, and of the effect and possibility of its happening again. I found his remarks offensive in the early stages and downright complacent in the latter part of the speech. In the light of his reply, I am tempted to call a vote on this amendment. I shall not do so for one reason only. There is pressure on time and we are being asked to move things forward. I accede to that because I may want to call a vote later in the interests of the business of the House.

We have put down a marker, and in the future we shall probably have good cause to remind the Minister, or some other person who holds his position, of it so that we can say that the complacency he has shown in this matter will be called into account later.

Amendment negatived.

Amendments made: No. 8, in page 133, line 21, leave out 'a' and insert 'an authorised'.

No. 19, in page 135, line 23, at end insert—

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