ARRANGEMENTS TO AVOID UNFAIRNESS BETWEEN SEPARATE INSURANCE FUNDS ETC. 1982 C.50 (Hansard, 30 October 1986)

§ Mr. Alan Howarth

Hon. Members may recall that in Committee I was concerned that we might be failing to establish a regime fully adequate to supervise the investment management of long-term funds of life assurance companies. I contended that that was not a negligible consideration, given that they manage the premiums of a large number of small savers and the premiums total, in aggregate, some £125 billion. It is of major importance that we should be satisfied as to the regime of investment supervision. The objective had to be to achieve—this is Professor Gower's phrase—the level playing field, the principle of equivalence of treatment which the Bill articulates.

I am grateful for the consideration that the Government gave to the amendments that I put forward. I accept that insurance policies are a distinct class of investment and that insurance is covered by a distinct body of law. I have noted the extensive analysis given by Lord Lucas of Chilworth in another place. I appreciate that amendment No. 211 provides that companies must have arrangements to ensure that they do not act unfairly as between different funds. That is an important point. I am grateful to the Government for introducing the amendment.

I note that the reports that companies are asked to make will be subject to audit. That is an additional valuable safeguard. It is fair to acknowledge, of course, that under the Insurance Companies Act and various EEC directives the solvency of insurance companies is regulated.

I come to a lingering anxiety. The monitoring of solvency is not the same as supervision to ensure that there is the best investment performance in the interests of investors. The United Kingdom Provident Institution 575 debacle demonstrates that even the monitoring of solvency can be somewhat laggardly, although it is fair to acknowledge that the Department spotted that problem.

Will the Parliamentary Under-Secretary of State assure us that the Department of Trade and Industry will be empowered and directed to ensure that the investment policy of insurance companies aims consistently to achieve the best return for policy holders? Will the Department of Trade and Industry operate a regime of supervision of investment managers of the funds of long-term insurance policies that is truly comparable to the regime operated by the SIB and SROs in respect of investor protection elsewhere?

The principles of best execution, prohibition on dealing with connected persons and the maintenance of proper records should be common to investment managers wherever they operate. Will the regime that the Department of Trade and Industry will apply in the case of insurance companies be at least as rigorous as the regime that the SIB and SROs will operate elsewhere?

§ Mr. Howard

The amendment was a response to concerns put to us in Committee which arose from comments by the city capital markets committee. Unlike other forms of pre-packaged investments, such as unit trusts, policy holders of long-term insurance policies do not own the underlying assets. Instead, insurance companies own assets and manage the investments. Since they manage their own investments, it is not an investment business and is not covered by the Bill.

It was put to us that the economic realities of insurance companies, in managing their long-term funds, are managing the assets of their policy holders. If we broadly accept the justice of this argument, the purpose of the new clause is to cover the principal abuse that can arise when a fund manager has a number of investment clients. The clause provides that where an insurance company has identified funds in different parts of its long-term business, it must have arrangements to ensure that it does not act unfairly as between those funds. That will be a new provision in the Insurance Companies Act. It goes a long way towards meeting the concern expressed by my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth).