PRINCIPLES APPLICABLE TO DESIGNATED AGENCY'S RULES AND REGULATIONS (Hansard, 12 June 1986)

§ Mr. Howard
I beg to move, in page 143, line 17, at end insert— 'including information as to any commissions or other inducements received or receivable from a third party in connection with any such transaction.'.

§ Mr. Speaker
With this, it will be convenient to take Government amendment No. 177.

§ Mr. Butterfill
In Standing Committee when we discussed the problems that arise from disclosure, our main preoccupation was with disclosure of commission. I and the hon. Member for Dagenham (Mr. Gould) voiced doubts in Committee that commissions were not the only things about which we ought to be concerned. We made the point that we ought to ensure that the public knew the totality of costs being charged to an insurance policy, and how these could affect the interests of a policyholder. We made it clear in that debate that it could be confusing or even misleading to focus exclusively on commission because insurance companies selling in a direct way might well incur substantial marketing costs through such things as television advertising and advertising in newspapers, and that all such costs would be loaded on to the policies.
607 We felt that there was a need for something more than mere disclosure of commission, and for that reason I tabled an amendment which was supported by a large number of my hon. Friends, and a similar amendment was tabled by the hon. Member for Dagenham which was supported by a number of his hon. Friends. It became quite clear in Committee that we enjoyed the support of my hon. and learned Friend the Minister, who undertook to consider the matter in detail and to bring forward an amendment at this stage. I am pleased to say that my hon. and learned Friend has been as good as his word and has brought forward two amendments which substantially meet the anxieties expressed in Standing Committee.
When these matters were discussed in Standing Committee I made it clear that I did not think it was right for us to try to lay down the detailed rules, but that we should merely lay down the ground rules. I am pleased to see that that is exactly what my hon. and learned Friend the Minister has done in his amendments.
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However, we must consider the amendments in the light of the proposals that have now been published by MIBOC for the regulation of salesmen and the general regulation of the marketing of life assurance and unit trusts which is contained in its latest document, "Life Assurance and Unit Trusts and the Investor", published in April this year.
Here we have some difficulty. First, I must say that I congratulate MIBOC on the way in which it met many of the other concerns of the Committee. In some cases it has met them most ingeniously, and, indeed, improved upon some of the suggestions that were made in Committee. But in the one area of disclosure it has failed to meet the concerns that were expressed in Committee. It is worth illustrating that by reference to some correspondence which I have had on the subject.
First, can we identify those areas where further disclosure ought to be available? Information should be available about what proportion of the payments for a premium will go towards the company's costs, which we have already identified, and what proportion will be invested on behalf of the policy holder.
Secondly, we should know what effective rate of interest is being offered by the insurance company in the case of the amount that will accumulate towards a given sum. In every other form of investment there is an indication of the interest which is being paid, but that is not done by insurance companies.
My concerns on this matter are not unique. Indeed, I have had a large number of letters from not only members of the public who are concerned in these matters, but also people throughout the insurance industry, not just one section of the industry, but a wide cross-section. For example, I have had correspondence from people engaged in computer systems relating to the analysis of policies. I have had letters from people who are involved in the marketing of insurance policies. I have had letters from people who are actuaries, engaged in the insurance industry. It may be worth quoting from some of the letters that I have received.
Let me read a letter that I have received from one of the leading Scottish companies involved in the personal and corporate financial services sector which is relevant to the view that we should take of the MIBOC document. It says: Dear Mr. Butterfill, We among others, forwarded our comments on the consultative document published by MIBOC earlier in the year. On that occasion there was time 608 for a consultation; on this occasion, time is short, and I therefore hope that our observations on the latest document will assist you in appraisal. Members of the standing committee are to be congratulated for grasping so quickly the complex subject and not allowing the wool to be pr lied over their eyes by an industry expert on this practice. We were particularly impressed by the insistence on the disclosure of all marketing and administrative charges within a product, not just the commission. The vested interests represented on the Board will continue to water down your proposals if possible. Perhaps there should be a statutory requirement for, at least, provision of estimated surrender values bas( d on industry — standard assumptions. I am pleased to say that that aspect has been largely met.
The letter went on: We still feel that the con mission system is the root cause of the industry's problems. but perhaps full disclosure of charges will persuade the industry to modify an indefensible system. We still feel that MIBOC is still trying to fudge the issue. If it is possible to come up with a means of product disclosure for with-profits policies, then it is possible to devise a method of commissions disclosure for company representatives as well as independent intermediaries. The battle over polarisation appears to have been won, however, although the definition of 'introducer' is a puss bledoophole that should be plugged. We thank you for helping to clean up such a rotten mess. Yours sincerely." That puts it more strongly and colourfully than I would have put it, but it shows that many of those in the insurance industry are unhappy with the latest MIBOC proposals.
That letter was fairly typical of much of the correspondence that I received It is worth quoting the view of the National Consumer Council. On 5 June it wrote to me saying: On 21 April SIB and MIBOC published their response to issues raised during Committee, Stage on disclosure of commissions and charges and the status of salesmen. We welcome the proposal that those selling life assurance or unit trusts will have to be either independent intermediaries or company representatives (restricted to the selling of the products of one company or group). However, we do not believe that SIB-MIBOC proposals for the disclosure of commissions and charges go far enough. It is our view that there should be full disclosure of commissions by independent intermediaries whether or not there is an industry agreement on maximum commissions. We also feel that consumers purchasing policies from company representatives should be made aware of the amount of. heir premiums which are absorbed by selling costs. These are, in effect, a charge on the policy and should be included in the disclosure of charges, surrender values etc. so that consumers are able to assess the value for money of the investment they arc being offered." That is the point made in the amendments of my hon. and learned Friend the Minister.
All the controversy has provoked a quite extraordinary response from the Association of British Insurers, which produced u news sheet that I believe has been sent to the vast majority of hon. Members, Much of it is concerned with rubbishing the comments that I and other hon. Members made in Committee. It is worth taking up some of the points that it makes in the news sheet. It claims that we have unfairly stated its position and that as regards the right to share in profits there is some definition, because it is written into the articles of association of most insurance companies.
Earlier, I said that I had received correspondence from members of the actuarial profession. I have with me a letter that I received from a consulting actuary who is also 609 a research fellow in actuarial studies at one of our leading universities. In his letter, he points out that that claim by the insurance companies is somewhat spurious. At the risk of boring the House, I shall quote from his letter. He writes: Around about the beginning of this century with-profits premium rates were approximately 10 per cent. higher than the equivalent non-profit rates. This with-profits policyholder was this taking a chance that he would get approximately 10 per cent. less than he was paying for. In practice, his reward for taking this chance was that he would get a little more than he paid for in the form of bonuses. Bonus additions were expected to form 10–20 per cent. of his final policy proceeds. This seems quite a sensible system really. Since then, interest rates have increased dramatically. The result is that non-profit premium rates have reduced substantially over that period. On the other hand, for a given sum assured, with-profit rates have stayed fairly constant. The bonus rates have risen substantially to take up the slack. The result is that at present under a typical policy only approximately 40 per cent. or 50 per cent. of the eventual proceeds are guaranteed; the rest is bonuses. This has the advantage of being admirably flexible. For example, it allows the life offices to invest heavily in equities which they probably could not do under the old system. However, one of the side-effects of this has been to increase substantially the share of the premiums which ends with the insurance company's shareholders. As I explained at our meeting, for a typical proprietary office, the surplus declared at each valuation might be split in the ratio 90 per cent. to policyholders and 10 per cent. to the shareholders. The ratio is fixed for each company. At the start of the century approximately 20 per cent. of a typical policy's proceeds consisted of bonuses which had been declared out of surplus. It may be seen that, at that time, the shareholders' share of the total policy proceeds was approximately 22 per cent. ie. 10 per cent. of the 20 per cent. Under present conditions the shareholders might expect to receive approximately 6 per cent. of the policy proceeds, ie 10 per cent. of 60 per cent. 60 per cent. is the part of the policy proceeds which has emerged as surplus over the term, of a typical policy under current conditions. This means that the return to the shareholders has trebled over that period. The position is further complicated by the type of valuation method required (a net premium valuation at an artificially low rate of interest which would tend. in general, to increase the proportion attributable to shareholders.)" The Association of British insurers and MIBOC are saying that what we asked for by way of detailed disclosure is not reasonable, cannot be done at fair cost and would be confusing to the investor. All I can do is to say that some members of the industry—the better members—are already doing substantially what we ask.
I invite hon. Members to look at what the Scottish Amicable does at present. This is one of the better insurance companies with which, I am pleased to say, I have a policy. The Scottish Amicable booklet gives a bar chart entitled "What happens to your premiums". On that bar chart are shown the proportions as to commission, expenses and taxation. All this could be reasonably done by most members of the industry. Indeed, this example could be improved upon. I offer it as a model, and hope that my hon. and learned Friend will urge it upon MIBOC.

§ Mr. Howard
My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) began by paying tribute to MIBOC and congratulating it on its latest document. Given those remarks, I confess that I was disappointed that he did not dissociate himself more robustly from the remarks of his correspondent who went on to accuse MIBOC of fudging the issue. I do not believe 610 that MIBOC has fudged the issue. It is committed to full disclosure of charges wherever possible. It believes that disclosure of expenses on with-profits policies is not practicable. I have no doubt that, if it can be shown that such disclosure is practicable, MIBOC will carefully consider the matter and fully explore the material that has been made available to my hon. Friend.
However, the bar chart to which my hon. Friend referred, and which he held up for the edification of the House, if it is the same bar chart that he showed to me earlier, refers to the proportion of profits, expenses and so on in relation of the whole of the fund of the insurance company concerned and not to any particular policy. That is, of course, an entirely different matter.

§ Mr. Butterfill
I am grateful to my hon. and learned Friend for pointing that out. I said that it was not entirely what I had hoped for, but that it gave an illustration of what could be done. I agree that it relates to the whole of the fund and that is its deficiency. Nevertheless, I am advised that a similar bar chart could be done for each product.

§ Mr. Howard
It does not follow from the fact that one has a bar chart for the fund as a whole that it can be done for particular policies. To say that one does not entirely meet the other leaves a fairly wide gap in the argument.
Schedule 6, as improved by the amendment, is deliberately flexible. It speaks in terms of the rules making proper provision. What proper provision is at any one time must take account of what is practicable at that time. Systems for allocation costs within insurance companies may well change and develop. What is not immediately practicable may later become so. There is, therefore, some scope for evolution in this area. Even if MIBOC is not capable fully of responding to my hon. Friend's concerns in its initial rules, it may be possible in the years ahead, as methods improve and one can identify the breakdown of premiums in the way that my hon. Friend would like to see, for the rules to be changed subsequently.
I commend schedule 6 as amended to the House, as conferring the flexibility that I think is needed and proper to provide the requisite degree of consumer protection in this area.