§ The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. Neil Hamilton)
I beg to move,
That the draft Insurance Companies (Amendment No. 2) Regulations 1992, which were laid before this House on 30th November, be approved.The regulations which I have laid before the House are intended to fulfil our obligation to implement the second Council directive on life insurance, directive 90/619/EEC, of 8 November 1990.
The main purpose of the directive is to allow life insurance companies which have head offices in one member state to operate in another without having to set up a branch or agency in that state. This concept of selling insurance across member states' borders is known as the freedom-to-provide services. This freedom has existed for most non-life insurance for two years and was extended in November last year to companies providing cover for motor insurance risks. The regulations now before the House extend this freedom to life insurance, although not, for the time being at least, to long-term business falling within class VII, that is, pension fund management.
This freedom is, however, of limited effect. Only insurers of large non-life risks and life contracts which are taken out by the policyholder on his own initiative enjoy full freedom to provide services under the second directive. The directives allow the member state where the services are provided to continue to authorise the provision of other insurance into that member state. The Government did not take up this option in respect of non-life insurance provided into the United Kingdom, and do not propose doing so for life insurance. Thus we will continue to allow freedom to provide services into the United Kingdom.
The directive represents a midway stage between the first life directive, which in 1979 allowed life insurers for the first time to establish branches in other member states, and the third directives which were adopted last year and which complete the single market for insurance by introducing the single passport concept for all direct insurance. This single passport will mean that an insurer will be able to offer insurance anywhere in the European Community on the basis of a single authorisation which it receives in the state where its head office is situated. These third directives are due to be implemented by July 1994. I shall be laying measures later this year to implement the third directives. Tonight, however, we have to consider the implementation of the midway stage of the second life directive.
The directive is in two main parts. First, it amends and extends the first life directive by introducing provisions in four areas: first, rules governing the law applicable to direct life insurance contracts; secondly, procedures for the transfer of life insurance contracts from one insurer to another; thirdly, an extension of the supervisory authority's powers to take action against an insurer which infringes the laws of another member state; and, fourthly, the establishment of reserve powers to enable member states to act together to obtain effective access to non-EC markets.
§ Dr. Norman A. Godman (Greenock and Port Glasgow)
Can the Minister give an assurance that he is satisfied as to the measures of protection for individual policyholders contained in the regulations?
§ Mr. Hamilton
As regards contracts which are written in the United Kingdom, there is no change in the protection that applies to policyholders. As regards United Kingdom residents who wish to take advantage of the opportunity to purchase contracts of insurance from other member states in the Community, they will be protected by such arrangements as are in force for those member states.
I reiterate that this is a halfway stage between the first and third directives. We are not going to be in a situation where there is complete freedom to provide services throughout the Community which we shall eventually enjoy, and to that extent the need to be authorised as an insurer in other member states will, to some extent, I suppose, provide the kind of protection which the hon. Gentleman might be envisaging.
Secondly, the directive introduces freedom for life insurers to provide services. The provisions include a requirement on the insurer to notify the supervisory authorities in the member state where his head office is situated of his intention to provide services in another state, to notify the authorities in the state where the services are to be provided, and, where the insurance is to be provided from a branch established in another member state, to notify the authorities of that state also.
The option to which I referred for member states to choose to make the provision of services in their territory conditional on the grant of an official authorisation from their authorities except where the policyholder takes the initiative to conclude a contract on a cross-border services basis includes also a power for the competent authorities in the member state where the services are provided to take action against companies which fail to comply with the laws applicable to them in that state, and if the authorities in the member state where that establishment is situated fail to do so it also provides for cooling-off rights for all individual life assurance policyholders contracting on a cross-border services basis, and the exchange of statistics on premium income receivable from services contracts.
I have placed in the Library and in the Vote Office detailed notes on the regulations. I hope that hon. Members will find those helpful to their understanding of their effect. I shall explain briefly how each regulation implements those principles, but I shall be happy to explain any point should hon. Members find that helpful.
Regulations 2 and 4 extend to long-term insurance business existing provisions in the Insurance Companies Act 1982 which were introduced by earlier regulations in respect of general insurance business. Regulation 2 extends the Secretary of State's powers of intervention, powers to withdraw a company's authorisation and powers to petition for the winding up of a company where that company has failed to comply with the laws of another member state if those laws implement the first or second life directives.
Regulation 4 extends the provisions relating to the provision of life insurance into the United Kingdom from another member state and thus fulfils one of the key purposes of the directive. Regulation 6 provides interpretation for certain phrases used in the Insurance Companies Act 1982, as amended by these regulations.
Regulation 3 implements article 6 of the directive, which lays down detailed arrangments for consultation with the authorities in other member states before approval can be given to a transfer of long-term insurance business from one authorised insurer to another. It also requires the authorities in the member state where the head 872 office of the transferee company is situated to certify that the transferee will have the necessary margin of solvency after taking the transfer into account.
Regulations 5 and 9 implement the provisions of the directive which determine the law applicable to direct life insurance contracts. Regulation 5 amends the Insurance Companies Act by introducing the rules of article 4 of the directive and the Rome convention. Regulation 9 clarifies the relationship between article 4 and the Rome convention on the law applicable to contractual obligations.
Regulation 7 limits the notification requirements on EC insurers providing insurance into the United Kingdom, if that insurance is investment business within the definition in the Financial Services Act 1986. The FSA requires such insurers to notify the Securities and Investments Board of its intention to provide such services into the United Kingdom. However, all EC insurers providing any sort of life insurance services into the United Kingdom are required by the Insurance Companies Act to notify the Secretary of State. That regulation allows such insurers to be deemed to have complied with the FSA by submitting a single notification to the Secretary of State, who will in turn forward such notification to the SIB.
Regulation 8 completes the implementation of article 9 of the directive and article 4 of the motor services directive, which is directive 90/618/EEC, which for the most part were implemented by the Insurance Companies (Amendment) Regulations 1992, in the consideration of which I had the advantage of the presence of the hon. Member for Middlesbrough (Mr. Bell) on 19 November last year.
That regulation ensures that the Secretary of State's or the Treasury's powers to take action under section 183 of the Financial Services Act against an insurer which is connected with a non-EEC country cannot be exercised in situations where the Council or Commission may issue a direction under the directives. In the view of the Government, the powers of the Council and Commission are exclusive. A similar provision in respect of banking was made last month in the Banking Co-ordination (Second Council Directive) Regulations 1992.
Regulations 10 and 11 introduce a statistical requirement on life insurers to provide details of premium income receivable from their services business broken down into each class of business in each member state in which the services have been provided. Regulation 11 limits the provision of statistics to cover only that business provided from the time the regulations come into force —that is, after 20 May this year—thus ensuring that the requirement is not retrospective.
The schedule to the regulations provides the form in which this information should be supplied.
These regulations do not implement the cooling-off provisions of article 15, to which I referred earlier. This article was amended by article 30 of the third life directive, which was adopted on 10 November last year. I intend, in due course—shortly, I hope—to lay separate regulations to implement the cancellation provisions of both directives. These regulations would come into force on the same day—20 May—as the regulations we are discussing now.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
This means that we shall end up with two different cooling-off periods 873 —one, of 10 days, for policies within the Community, and another, of 14 days, for those involving countries outside. Does the Minister agree that this will be rather confusing?
§ Mr. Hamilton
I admit that it is less than satisfactory. As the Church of England might say, it falls short of the ideal. The difficulty is caused by the problem of vires under European Community legislation, inasmuch as we can implement by order the provisions of the directive only insofar as it is required to fulfil the purposes of the directive with regard to the provision of services entirely within the European Community. As regards third countries, it is not possible for us to include provisions to harmonise the legislation by order. We should have to introduce primary legislation to do that.
In view of the fact that the regime under these directives will subsist for only a relatively short period—12 months or so—it does not seem to us to pose too great a risk, although I have to admit that if we had had a completely free hand in the matter we might have acted differently. However, I see no prospect of our being able to implement a common regime by means of primary legislation in the meantime. As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) knows, we have much pressing business to do in the remainder of this Session.
The Government attach high priority to the completion of the single market in insurance. The second direclive and the regulations that we are discussing tonight represent a small but useful step. I therefore look forward to bringing before the House later this year regulations to implement the third directives, which, as I have said, will grant the single passport to European Community insurers and make the single market a reality.
On that basis, I commend the regulations to the House.
§ Mr. Stuart Bell (Middlesbrough)
I am grateful to the Minister for taking us through the regulations and explaining the great entanglements involved in dealing with European Communities legislation. We can see that our signing the Single European Act, with the single market coming into force on 1 January, permeates all the legislation that goes through this House and produces entanglements such as the Minister has described. We have here a clear example. The regulations with which we are dealing impinge upon and modify the Insurance Companies Act 1982, the Financial Services Act 1986, the Insurance Companies (Amendment) Regulations 1992—not to mention the Contracts (Applicable Law) Act 1990.
Today I have noticed a curious paradox. On one hand, the Prime Minister called for more deregulation, whereas later in the day we are debating more, rather than less, regulation. While the Government consistently call for more deregulation, anyone in the business of protecting the consumer—it is the duty of the Department of Trade and Industry to supervise the insurance industry—must look for regulations such as we are debating tonight.
Regulation or not, it can hardly be said that the Government have been particularly successful in maintaining the pre-eminence of our insurance industry as an international leader at the heart of the European Communities. In 1990 the insurance sector's net foreign earnings were £2.2 billion—below its 1983 level, and well short of the peak of £4.9 billion attained in 1986. An analysis of London's actual share of international insurance business suggests a decline from 50 per cent. in 874 1976 to 25 per cent. now. Specialist insurance, a field in which London was formerly an international leader, has also registered a decline. In total, funds such as pension and life assurance under portfolio management in the United Kingdom fell some way short of the equivalent totals managed in Tokyo and New York.
The insurance industry has not provided a reassuring face for the British public. Throughout the country there is genuine concern about increased premiums and the sheer inability to get insurance cover. I—and, I am sure, many hon. Members—have constituents who cannot get insurance cover for items such as rented flats, youth clubs and community centres or even for businesses whose leases are running out and will not be renewed because of the absence of insurance cover.
§ Sir Nicholas Bonsor (Upminster)
The hon. Gentleman is aware of my interest as a member of Lloyd's. One of the reasons for British insurance not being so successful as it should is that the tax regimes of successive Governments have made it impossible for British insurance companies and, indeed, Lloyd's to build up adequate reserves in the way that all our overseas insurance competitors have done. Will the Opposition support tax measures which will make such reserves possible?
§ Mr. Bell
I am aware of the hon. Gentleman's interest in Lloyd's and in insurance in general. One of the side issues of the directive will be taxation and whether there should be support for the view that policyholders' funds relating to services business written by United Kingdom insurers should not be taxed as they build up, so that United Kingdom insurers can compete on an equal footing with insurers in other countries. The debate has consequences for taxation. I shall deal with the matter of Lloyd's later in my speech.
The uncertainty and insecurity that the Governments of the noble Lady Thatcher liked to strew around the country as her own particular stardust have now affected the insurance industry—those who are insured and those who do the insuring. Equally important is the effect on those who invest their lives in their work for insurance companies. Local authorities encountered difficulties following the sudden withdrawal from the insurance market of MMI. Those difficulties have been lessened by its acquisition by the Zurich Insurance Company and by the hiving off of other assets of MMI. Those difficulties arose because MMI diversified into property, finance and computing and moved from its traditional base of insuring local authorities.
Local authorities throughout the country must have adequate insurance cover at reasonable premiums to avoid additional charges upon their council tax payers—especially at this time of Government-induced stringency. With the threat of council tax capping hanging over them, reasonable premiums are even more important. I am grateful to the Minister for his courtesy to me and my hon. Friends when we met him to discuss the future of MMI and the uncertainties faced by its staff. We are hopeful that the Zurich Insurance Company will understand that its future success will be founded on the kind of co-operation between management and workers that existed at MMI.
Insurance companies throughout Europe which will be covered by the directive employ nearly 790,000 people. Life assurance accounts for about 44 per cent. of premiums. We should all encourage that industry.
875 In this country, the Confederation of Insurance Trade Unions alone represents more than 100,000 insurance staff.
It is ironic that the Government use the cloak of European Council directives to amend our internal legislation, notably the Lloyd's Act 1982 and the Insurance Companies Act 1982. That means that the Secretary of State, in accordance with regulation 2 of the order to which the Minister referred, now has powers of intervention over Lloyd's underwriters when they fail to satisfy obligations laid down in Community legislation.
It is a significant turn of events whereby the House is called upon to modify domestic legislation through the instigation of a European directive rather than a Bill through the House, especially on such an important matter as Lloyd's underwriters. The Minister was honest enough to say that the kind of primary legislation that we would need to put the various Community directives into order is not likely to happen, due to pressure on time. Therefore, we welcome this short debate tonight which allows us to air some of the matters that we have wanted to debate which otherwise would be excluded.
We have seen the untoward publicity that Lloyd's of London has received of late, the allegations of widespread insider dealing, financial mismanagement, the steps that Lloyd's has taken to put its house in order, the appointment of a new chief executive and chairman—both of whom I wish well in their work—the actions of the so-called burnt names and the difficulties with certain syndicates. We are looking closely at the question of self-regulation and statutory regulation. We are even considering in the long term whether the Lloyd's Act should be repealed.
On the complex question of taxation that the hon. Member for Upminster (Sir N. Bonsor) raised, while the Opposition closely scrutinise the regulation of Lloyd's, we are anxious to ensure that the Lloyd's market is successful not only in the City of London but within the framework of the EC and on the global stage.
The regulations touch on solvency margins. Will the Secretary of State tell the House what the solvency margins referred to in the directive and the regulations are? What is the excess of assets over liabilities within the EC? Is the minimum margin permitted approximately 17 per cent. of premiums, but is the benchmark throughout Europe the 30 per cent. margin that the Department of Trade and Industry thinks is the more appropriate margin?
We can also see from the regulations that there has to be full reciprocity throughout the Community in that regulation 8 precludes the issue of a notice in relation to a subsidiary insurance company where the only ground for the issue is the failure of a third country to allow insurance companies in the United Kingdom to carry on direct insurance business on an equal basis.
Regulation 8 also highlights the intertwining of insurance business throughout the European Community, which the Minister mentioned when he referred to the variety of regulations that we shall have to debate and discuss. We can also see the application of private international law in the regulations—that is to say, a court in this country looking into another's jurisdiction and satisfying itself that specified conditions in that member state are met.
876 We see, too, that under Community legislation not only must the Secretary of State satisfy himself as to the obligations of an insurance company under our own United Kingdom law, but he may also act to satisfy an obligation under the law of another member state. The Chinese walls between member states become ever thinner in what is clearly a drive to harmonisation and, it is hoped, consumer protection.
We see under regulation 10 how the Department of Trade and Industry maintains its supervisory status—its watchdog status—by requiring establishments to prepare additional information to be submitted to the Secretary of State in respect of operations, namely, in the case of gross premiums.
My hon. Friend the Member for Greenock and Port Glasgow (Dr. Godman) and the right hon. Member for Berwick-upon-Tweed (Mr. Beith) referred to the cooling-off period. As I understand it, the regulations introduce a mandatory cooling-off period of between 14 and 30 days for all cross-border business, and that is extended to establishment business by the life framework directive. As the Minister has said, it is proposed to implement those provisions at the same time by insurance companies' cancellation regulations and he issued a consultation document last year. There may be some anomalies and paradoxes, but the 14 to 30–day cooling off period will be of assistance to those who wish to take out insurance in another country in accordance with the framework of the directive.
The Minister referred to a Committee sitting which took place on 19 November. Over a period, the Committee has observed the way in which EC financial directives are affecting the City's relation to Europe—and the insurance industry is at the centre of the City. Opposition Members believe that, while the City may be a leading player in the world financial markets, it is no longer the sole leading player.
We consider the City to be a leading financial centre, which will be working within the Single European Act—under a variety of directives, such as the one that we are debating tonight—to ensure that the single market includes a basic harmonisation of the rules and operations of financial intermediaries and markets. Our party will look carefully at the way in which we handle regulation in the City. We shall consider whether that regulation should be self-induced or independently induced; and whether there should be statutory regulation, along the lines of the Securities and Exchange Commission, or whether there is another form of regulation in harmony with the European legislation and directives that we can enact. We shall also consider the fact that we have two life investor protection statutes and two prudential supervisors for the life assurance industry.
The strategy that we shall work out will be one which links the City to Europe through directives such as this, and which links the City to industry. It will ensure that insurance industries are able to satisfy the home market with appropriate premiums at reasonable rates, which are within the reach of those who wish to insure, while at the same time playing a full part in that sector of the globalised economy which is Europe.
The insurance industry is a massive employer: some 490,000 people are employed in it throughout Europe. It is a creator of work, which we should encourage as we will encourage the City of London as a whole, but we should do that within a framework which not only protects the 877 consumer and those who work in the industry, but gives the City a reputation for health, wealth and encouraging people throughout the country.
§ Mr. John Butterfill (Bournemouth, West)
People in the insurance industry have told me how much they appreciate the co-operation that has been shown by the Department of Trade and Industry—not only in regard to the specific issues in the regulations, but in regard to their representations to the Treasury about taxation. Although this is only an interim measure, it will assist greatly in the completion of the single market, which is so important to the UK insurance industry.
One or two matters, however, present problems. One, which was mentioned by the right hon. Member for Berwick-upon-Tweed (Mr. Beith), is the difference in the cooling-off period. As I understand it, the difference will arise in respect of policies provided by UK insurers for non-EC policyholders and the UK branches of non-EC insurers for UK policyholders. Those are the policies for which primary legislation would be required and which at present involve the anomaly of a 10–day cooling-off period rather than the 14–day period that is proposed.
In his reply to the right hon. Member for Berwick-upon-Tweed, my hon. Friend the Minister suggested that the anomaly would disappear in a year's time—presumably when the life framework directive comes into force in July 1994. It would be helpful if he could confirm that that is so and tell us under what mechanism UK statute law will be changed through implementation of that directive.
Another matter that is still giving rise to concern is a new one concerning taxation. There has been no problem with the overseas branches of UK insurers being able to conduct business on the same footing as companies in the countries concerned. The problem is that the directive will permit United Kingdom life offices to sell direct to people who are resident in other EC countries. As I understand our present tax system, those policies would be subject to the principle of United Kingdom taxation, whereby the policyholder's funds are taxed as they build up. United Kingdom insurers selling across border would therefore be at a competitive disadvantage with other EC insurers who may be selling domestically or across borders. I am sure that that is not what the Government intend. Has my hon. Friend the Minister made representations to the Treasury on that matter and can we look forward to the Government addressing the problem?
I repeat my welcome for this measure and for the constructive approach of the Department to the problems.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
Although the regulation is, as the Minister said, a temporary measure, it is nevertheless important for the workings of an important industry that is a major employer, especially outside London. One thinks of cities such as Norwich, Bristol and Edinburgh, where the insurance industry is a major employer. The Minister has the headquarters of Refuge, which is an important employer around the country, on the edge of his constituency. It is doubly important, therefore, that we ensure that the regulations are as accurate and satisfactory as possible.
878 I mentioned the cooling-off period, about which questions were well put by the hon. Member for Bournemouth, West (Mr. Butterfill), so I shall not add to what I said.
Mention has been made of the tax implications of the regulations and the belief of British insurance companies that they will be at a competitive disadvantage in trying to attract business from customers in the face of competition from businesses based elsewhere in Europe whose taxation system does not operate in the same way as ours but treats earnings on a basis that allows the expenses of getting the business to be reckoned against income at the beginning and which pays more regard to the way in which income arises and the investment that follows insurance business. The Government contend that other aspects of company taxation in Britain may help to compensate for that, but the significant difference in the way in which insurance operations are taxed will have to be taken into account.
Another factor that will loom large if we ever have a single currency will be divergence and fluctuation in the United Kingdom exchange rate in relation to other European countries. This is an uncomfortable matter for the Minister, who, when he pointed to the existence of legislation that is filling our parliamentary timetable, could not mention his own traditional hostility to much of that legislation now that he has to vote for it. People taking out insurance policies in the future will have to have regard to exchange rate fluctuations and will have to make calculations about what they think will happen to their stream of income from, for example, a policy in retirement if they do not know what the relative strength of the currencies will be and if those currencies are not pegged together. Most parts of business and industry are well aware of the importance of a single currency to a single market, not least in financial services.
There is another area where the implementation of this regulation will present new problems for the insurance industry that are not so much of the Government's making but more of the industry's making. British companies will have to compete in a market that is not so dominated by tying as has latterly become the practice in the British insurance industry. It has suited large parts of the British industry and most of the large financial institutions to develop tying arrangements under which the decision to take out a mortgage commits the subsequent decision about which company will be used for endowment insurance policies or other insurance policies. That is not the pattern throughout Europe, where insurance brokers play a large role in a number of countries. The British insurance industry may have to look once again to its traditional ways of seeking business when it cannot rely on such tying arrangements.
The hon. Member for Middlesbrough (Mr. Bell) mentioned some of the problems faced by customers who find gaps in insurance provision which may lead them to look to overseas companies. I constantly come across such problems, but the other day I heard of a new one. Someone in my constituency was seeking to let his home, but found that his existing building society and insurer would not accept his current insurance for any tenant whose rent was paid by the Department of Social Security. He applied to other insurance companies and found that they too would not accept insurance for property if the tenant's rent was paid by the DSS. That is another restraint on the provision of rented housing for those who need it, but in this case one arising from the insurance industry.
§ Mr. Jeremy Corbyn (Islington, North)
I am surprised by what the right hon. Gentleman said about insurance, tenants and the DSS. Is he convinced that it is legal to prevent DSS tenants from renting a house in such circumstances?
§ Mr. Beith
I do not think that it could possibly be illegal. An insurance company is merely placing conditions on the letting of a property on which there is a mortgage. Many different conditions can be imposed, including the approval of a tenancy. If it becomes a blanket condition that no one whose rent is paid by the DSS can be a tenant, it will be extremely damaging although not illegal. It would be a severe restraint and something would have to be done about it.
The example that I gave is another reason why there should be more competition in the insurance market. British consumers should have the opportunity to compare British products with those of other countries and I want our insurance companies to operate successfully and obtain business in the rest of Europe, thereby bringing employment to this country.
§ Mr. Quentin Davies (Stamford and Spalding)
I suspect that this is an issue on which there is much agreement across the House. I also welcome the regulations in principle, but I have two concerns one of which has been mentioned by my hon. Friend the Member for Bournemouth, West (Mr. Butterfill). One is a minor concern and the other major, and I should be grateful if the Minister could reassure me on both of them.
My minor concern is that the Minister explained that under the directive member states will be granted the option of insisting that all life contracts which are not sold as a result of the initiative of the assured remain subject to authorisation and that we had decided not to take advantage of that option although it existed. The assumption is that others will take advantage of it. Clearly there is a lack of reciprocity inherent in such a situation. At first sight, it seems to go against the purpose of a single market. I should be grateful for the Minister's assurance that, in practice, it is not a basis on which the export channel from this country will be constricted whereas the import channel will not.
My major concern involves tax but is not the point mentioned by my hon. Friend the Member for Upminster (Sir N. Bonsor). He spoke about the different tax treatment of insurance provisioning here and in other Community countries. It is a very important point, with which I agree. My major concern, however, is the one mentioned by my hon. Friend the Member for Bournemouth, West.
In this country, the tradition has always been that life insurance funds are subject to tax as they accumulate and not subject to tax in the hands of the beneficiary when payment is finally made to him. On the continent, the reverse generally applies. The funds roll up free of tax—they are, in effect, gross funds, like pension funds in this country—and the beneficiary is taxed when he receives payment. It follows that if in this country a fund is subject to tax as it builds up, and if the beneficiary is the resident of another Community state, he will be charged by his own tax authorities in the country in which he is resident tax on the amounts accruing from the policy when he receives it, and he gets the worst of all possible worlds.
880 It seems at first sight—and, I fear, probably at second and third sight as well—that, if that is the case, the tax handicap carried by life insurance policies written in this country will be such that no sane man or woman on the continent will purchase one. It must be blindingly obvious to the whole House that all the tremendous bureaucratic and ministerial effort—I am sure that it was very gallant and talented effort—that went into the negotiation and drafting of the directive will have been completely wasted in terms of the interests of this country or of our insurance industry if such a tax handicap is carried by any policies written in this country as we enter the single market in life insurance.
I know that it will be possible for life insurance companies based in this country to sell policies through their subsidiaries in other Community countries and that they will thereby be able to escape from that tax charge. However, the whole purpose of the directive was supposedly to make progress on the regime we have had since 1979 under which it has been possible for British life insurance companies to set up subsidiaries in the Community and to sell life insurance policies from there. My point is fundamental to the utility for this country in practice of the new arrangements that are represented by the directive. I look forward with great interest to what the Minister will say. I am sure that my hon. Friend will say that any remedy to the problem that—
§ Mr. Davies
So that the hon. Member for Islington, North (Mr. Corbyn) can fully appreciate the weightiness of the ministerial answer when he hears it, it may be a good idea for me to establish the essential question with which my hon. Friend will deal.
§ Mr. Corbyn
I was only trying to assist, Madam Deputy Speaker, and to ensure that the Minister understood the question. I had the distinct impression that the Minister was not giving the slightest attention to the hon. Member for Stamford and Spalding (Mr. Davies).
§ Mr. Davies
The Minister has no doubt grasped my point, and I am sure that we shall hear an answer. I hope that it will be a reassuring answer because much of the industrial interest in the directive turns on the question of tax.
I also share the concerns of the right hon. Member for Berwick-upon-Tweed (Mr. Beith) about the prospects of a single currency emerging in the European Community in terms of our ability to exploit the single market in financial services. We could argue all night—we may do so tomorrow—about the merits of a single currency or about the prospects of such a phenomenon arising. If it does come about by the end of the century or in any other timetable that a large part of the continent adopts a single currency, that will create a major problem for any British 881 insurance company that seeks to sell life insurance products or other financial services, such as unit trusts, on the continent.
A life insurance policy is something that people will always want to buy denominated in their own currencies. It is a fundamental asset for any individual who holds it. No one would seriously wish to incur a foreign exchange risk for such a fundamental asset. It follows that if one wants to sell a life insurance policy in France or in Germany and those countries have at the time a single currency, one will have to offer a live insurance policy denominated in that currency. To be able to do that, one will have to invest the premiums in assets largely denominated in that currency.
That means that people will not be able to cross-sell the products that they have in this country in the single market. There will have to be different products managed, packaged and marketed in different ways. They will be very different products. Therefore, in the single market, British life insurance companies will not be able to benefit from their very good management record by citing the returns that they have been able to make for their clients and beneficiaries over the years. They will not be able to point to what a particular policy has done over the past 20 or 25 years. Rationally or not, life insurance products have to be sold on historic record and our companies will not be able to use that record because it will relate to a sterling product.
One of the fundamental premises on the basis of which we entered the single market was that there are some sectors in which we in Britain have an inherent competitive advantage, and many of us for a long time believed that financial services, insurance products and life insurance were among those sectors. That will not be the case, however, if a single currency emerges in the single market and we are not part of it.
§ 11 pm
§ Mr. John Greenway (Ryedale)
I have no wish to detain the House at this late hour, but there are so few opportunities for us to speak on the insurance industry that I felt it appropriate to make one or two comments. Essentially, my comments are directed at the Minister, because I want to give him some encouragement. My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) is absolutely right and, like him, I want to place on record the fact that the Minister's efforts on behalf of the United Kingdom insurance industry are much appreciated.
Although, as the Minister said, the directive is an important, if small, step on the road towards the single market, we should not delude ourselves into thinking that the single market—particularly in the life assurance sector —will mushroom overnight. A great deal of effort will be required on the part of United Kingdom life assurers and life insurance companies if they are to exploit that market and I suspect that it will be five to 10 years before we see much development of it.
There are clear cultural and structural differences between the insurance industry in the United Kingdom and that on the continent, although I often speak on behalf of the all-party group—which, as the Minister knows, is blossoming at the moment—and I hear encouraging noises to the effect that the markets in Spain and Italy look particularly attractive.
882 Will the Minister please give our life assurers every possible encouragement to be innovative, flexible and entrepreneurial? The market creates an opportunity for us to expand into the European dimension in a sector in which Britain has great traditions, great expertise and a great deal to offer. I sense, however, that those who work in the industry sometimes need a little encouragement to put their entrepreneurial hat on and be as innovative as their forebears were 100 or 200 years ago, when the United Kingdom life assurance industry and the great mutual funds—I shall not advertise by mentioning any of them, but I think that the House will know those to which I refer—were born. The industry has provided a great service to United Kingdom policyholders and can provide a similar service to policyholders on the continent.
When the Minister is persuaded to try to argue with the Treasury that we want a level playing field as regards tax —I entirely endorse and agree with what has been said —he should remind the life assurers that, on premium rates, we have an enormous competitive advantage which makes some of the tax problems shrink into insignificance.
That brings me to my third point. One of the reasons why the United Kingdom has such a competitive industry is that we have a strong independent intermediary sector. It is that sector that has provided the competitive market in life assurance in the United Kingdom which will provide the springboard for a competitive market in Europe and every prospect for United Kingdom life assurers to take advantage of the single market.
There is one caveat, however. We must ensure that in the next year or 18 months we get right the United Kingdom regulatory framework for insurance intermediaries, whether in the financial services sector or in the general insurance sector. I am sure that hon. Members will not need much imagination to recognise that there would have been considerable difficulty in and damage to the United Kingdom insurance industry if the Financial Services Act 1986—often much maligned—which brought to the surface a number of scandals and the fraudulent behaviour of disreputable firms, had involved European policyholders and not just those in the United Kingdom. I want us to look to the longer term, the next five, seven or 10 years, and recognise that we will be able to launch ourselves confidently in Europe and secure a much bigger market for the United Kingdom insurance industry if we get our regulatory framework right and ensure that those who work in the industry are properly regulated and are, above all, fit and proper to be in the industry.
§ 11.6 pm
§ Mr. Neil Hamilton
I am grateful to all hon. Members, on both sides of the House, for their helpful speeches on the regulations. As I said earlier, the second life directive represents a small but useful step towards completion of a single market in insurance. The directive is a small step for the United Kingdom because we already have a more open market than that provided by it. Of course, the directive represents a bigger step for other member states.
The directive is useful because it established the principle of single-country supervision for certain insurance contracts—those entered into by the policy holder on his own initiative. The principle of single-country supervision became the foundation stone for the much more significant third directive which was agreed last year.
883 I have no difficulty whatever in agreeing with the right hon. Member for Berwick-upon-Tweed (Mr. Beith) and my hon. Friends the Members for Ryedale (Mr. Greenway), for Bournemouth, West (Mr. Butterfill) and for Stamford and Spalding (Mr. Davies) and others who lauded the achievements of the British insurance industry. As a result of the flexibility which we have traditionally exhibited, the British insurance industry stands to gain considerably from the increased freedom which will come from the implementation of the third directive next year.
§ Mr. Corbyn
Will the Minister comment on the matter raised by the right hon. Member for Berwick-upon-Tweed (Mr. Beith) about insurance companies refusing to allow Department of Social Security claimants to become tenants in houses in which they have an insurance interest? Is the Minister aware that the hon. Members for Stamford and Spalding (Mr. Davies) and for Ryedale (Mr. Greenway) have declared interests, one in the insurance industry and the other as a merchant banker? Clearly they were speaking on behalf of those interests in the general sense of the industry.
§ Mr. Hamilton
I know that the hon. Gentleman thinks that it is a considerable disadvantage to know what one is talking about when one speaks in a debate. However, we could not accuse him of that when he speaks on such complex matters, so I acquit him of any knowledge or understanding as a result of experience. I hope that he is pleased by the accolade which I have just given him.
§ Mr. Hamilton
I have made one mistake, and that should probably be sufficient. I will respond to the matter raised by the right hon. Member for Berwick-upon-Tweed, as I will attempt to deal with all of the matters raised by hon. Members in the debate.
The hon. Member for Middlesbrough (Mr. Bell) brings great expertise to our debates. I welcome him to the Opposition Front Bench because it is worth listening to him. He raised a number of matters which were referred to by my hon. Friend the Member for Upminster (Sir N. Bonsor) and others, and I hope to respond to them.
I shall start with the matter of taxation. I know that representations have been made by the industry and others about the different approach to taxation which has been adopted in respect of the insurance industry in the United Kingdom. It is always possible to pick out the tax advantages and disadvantages in the various member states of the Community. To believe that we will ever harmonise the tax regimes of the different Community member states so that there is no difference between the tax systems is fantasy. However, the Government have said that they will consider action if clear evidence shows that United Kingdom insurers are worse off, overall, than their EC counterparts. In particular, we must consider the lower tax rates in the United Kingdom.
I do not know how many of my hon. Friends or how many Opposition Members noticed my right hon. Friend the Chancellor of the Exchequer lurking behind the Chair 884 at the beginning of the debate. He is enjoying a period of purdah in the Chamber. I am therefore limited in what I can say as I cannot anticipate his Budget. However, the competitive position of United Kingdom insurers as opposed to those in the rest of the European Community is currently being examined.
Hon. Members may have no doubt that the Department of Trade and Industry sees it as its role to be the advocate for British industry and commerce and, if arguments are put to us that are relevant to the policies of other Departments, we will ensure that they receive a fair hearing.
§ Mr. Bell
In response to a point raised by the right hon. Member for Berwick-upon-Tweed (Mr. Beith), the Minister referred to the number of directives that are required. One of the difficulties of the Minister and of the House is the division of responsibility between the Treasury and the Department of Trade and Industry. However, as the DTI has a supervisory role over insurance, we would welcome confirmation from the Minister that there will be the closest co-operation between the two Departments.
§ Mr. Hamilton
As the hon. Gentleman will know, the Government are indivisible. We are indistinguishable from one another in all respects and wholly united on all policies at any one time. I confirm that the position is as the hon. Member for Middlesbrough would hope it to be. I guarantee that the representations that he and other hon. Members have made in respect of complex taxation issues will certainly be considered very carefully.
§ Mr. Bell
I am grateful to the Minister for responding to me, but I now have a longer intervention to make on two points. The first point relates to the comments made by the right hon. Member for Berwick-upon-Tweed after my reflections and the second to the point raised by my hon. Friend the Member for Islington, North (Mr. Corbyn) about those who rent premises or apartments for which the Department of Social Security is paying board and lodging.
In respect of the second point, insurance companies are now refusing to insure landlords in respect of such properties. As a result, landlords are reluctant to rent property to those individuals. It is not a question of it being illegal to rent the property. However, landlords will be worried if there is no proper insurance on such flats. That is a cause for concern on the Opposition Benches, and that point must be examined.
Will the Minister also note the intervention of the hon. Member for Ryedale (Mr. Greenway), who made a significant contribution in respect of regulation? We have certain views about regulation. In respect of the City and the industry, it is a matter of "physician heal thyself." The industry must note the comments made in this place and elsewhere about the need for clear regulation which works in relation to those who insure with insurance companies and which gives confidence to the outside world. I should like the Minister to address those specific points.
§ Mr. Hamilton
On the latter point, as the deregulation Minister I am well aware of the costs that can be imposed by laws that we pass which are not clear or effective in achieving the objectives that we set when we draft legislation. I assure the hon. Member for Middlesbrough that we attach considerable importance to that matter.
885 With regard to the alleged lack of insurance cover for properties in multiple occupation, it is not simply a question of DSS claimants. As my correspondence with hon. Members shows, the problem can also be found in other areas.
This is first and foremost a commercial matter for the companies. My principal responsibility as the insurance regulator is to protect the interests of policyholders. I have to ensure that insurance companies manage their business in such a way as to satisfy the prudential requirements of the insurance companies legislation. It would be quite wrong for us to seek to lean upon companies in the carrying out of their day-to-day commercial business to try to slant things in favour of one class of policyholder rather than another, particularly if the consequence of that were to be to expose them to an excessive risk, which would be paid for by other policyholders. I am not in a position to second-guess insurance companies in this respect.
The hon. Member for Middlesbrough and others will know from their correspondence with me on this and similar topics that it is not the case that no cover whatever can be obtained in the market, although I admit that fewer and fewer companies are prepared to take the risk which they believe to be associated with that kind of occupation. It is not a question of discriminating against people because they happen to be social security claimants; it is just that a multiple occupation property presents higher risks for insurance companies. There is an increased risk of fire and various other characteristics which make it a less acceptable risk for the companies. Consequently, if insurance can be obtained, inevitably the premiums will reflect that risk.
It would be wrong for the Government, in my view, to seek to intervene in the commercial contracts of insurance companies in that way. If we do it for one class of insurer, we have to do it for all classes, and in that way madness lies.
§ Mr. Beith
I remind the Minister that this problem is not confined to multi-occupation. In the case that I mentioned to him, it was a straightforward letting of a single house to a single family, and it seems a little odd to the outside world that those people whose rents the Government are paying can be regarded by the industry as a bad risk.
§ Mr. Hamilton
It is a mistake for the hon. Gentleman to say that the industry regards it as a bad risk, because the industry does not speak with a common voice. There is competition in the insurance market; insurance is a highly competitive business. I believe that if, through the intermediaries about which my hon. Friend the Member for Ryedale (Mr. Greenway) spoke so eloquently, as he always does—he knows what he is talking about, as I am sure the hon. Gentleman appreciates—the cover can be obtained.
The hon. Member for Middlesbrough asked me some technical questions. I shall have to crave his indulgence, if he will excuse me for using such an elitist and gentlemanly term in respect of him, and carry on to deal with some more serious points which he and others have raised in the debate.
The hon. Member for Middlesbrough raised some questions, to which the answers are complex, about solvency margins. I know that this is an issue which has excited some interest and comment in recent months. I 886 have seen criticism of both the slimness of the minimum margin for general business and the inability of the factors included in the margin calculation to reflect all the risks to which an insurance company is exposed. Supervisors generally expect companies to maintain a margin of at least double the minimum and to examine a wide range of other parameters—for example, type of business, profitability, the level of reserving, quality of management and systems—in forming their view on the financial strength of companies. So, important as the solvency margin is, it is not the whole story.
The answer to the specific questions which the hon. Gentleman asked me is contained in the first life directive, in articles 18 to 20. It would probably confuse the House as much as I am confused myself if I were to go into too much detail on that, but he will find all the details on the questions which he asked in those articles. If he still has some specific doubts or questions that he wishes me to answer, I will of course be more than willing to put on record, by means of a written reply, the facts that he requires. I answered a question from his hon. Friend the Member for Wolverhampton, North-East (Mr. Purchase), which said precisely what I have just said about the statutory minimum solvency margin insofar as there are Community obligations stemming from the first insurance directives in respect of non-life insurance, 1973, and of life insurance, 1979.
The Commissioners have undertaken to review and report on the need for further harmonisation of the solvency margin by July 1997 at the latest, so these are matters which will be under active consideration and the hon. Gentleman will be able to contribute to the debate on that. I would welcome his active co-operation. We will certainly bear in mind the implications of the questions that the hon. Gentleman raised.
The hon. Gentleman also mentioned the situation as regards Municipal Mutual Insurance. I was grateful for the opportunity to meet him, his hon. Friend the Member for Warrington, North (Mr. Hoyle), representatives of MSF and others who were concerend about the employment implications of the unfortunate events surrounding MMI. I share with him the joy at what appears to be in prospect, the rescue of MMI by Zurich Insurance, and, although contracts have not yet been signed, we very much hope that all the loose ends will shortly be tied up. I bore in mind very much the arguments that the hon. Member raised with me in the Department, and although, as I indicated then and earlier in the course of this speech, my principal concern must be the interests of policyholders, as I am a prudential supervisor in respect of them, I do not depreciate the importance of the employment-related issues that he has raised, and I will certainly draw attention once more to the points that he has made in this debate to the Zurich Insurance Company.
I am sure that the hon. Gentleman appreciates the difficulty that the DTI always encounters in circumstances such as those surrounding MMI, whether to use our powers to cease to authorise business or to put it into run-off, effectively to reduce the value of the assets of the company; and there are circumstances in which immediate action is required in the interests of policyholders. In other circumstances, if one can preserve the company in being as a going concern, the assets that can be realised in the interests of the policyholders can be augmented and therefore the interests of policyholders can be advanced. Happily, this is one of the cases in which there appears to 887 be such a consequence, and that is to be applauded. I hope that as a result the solvency of MMI, in effect, will be restored.
We have had a wide-ranging debate which in some respects has gone beyond the details of the regulations, but that is no bad thing. As my hon. Friend the Member for Ryedale pointed out, there are few opportunities for us to exhibit a serious interest in debating insurance matters, and I am glad to have had this opportunity of doing so. The Government attach considerable importance to a successful insurance industry in this country. I pay tribute to the ability of our insurance industry to compete successfully in the world and, in particular, in the single market in insurance which will shortly be upon us. I am sure that the flexibility which the relatively free market that we in this country have traditionally enjoyed will be rewarded by an increasing share of European business.
I take, in particular, the point made by my hon. Friend the Member for Stamford and Spalding about reciprocity in the authorisation of business within the Community. He asked me whether it was not an unlevel playing field, that we did not propose to authorise or require authorisation for business sold into this country from other member States of the Community, and whether it would be reciprocated elsewhere.
So far as I am aware, only the Netherlands intends, like us, not to require the authorisation of business sold into its own country. We do not yet know for certain what is to happen with other member states, and the hon. Gentleman will know that the second directive is a temporary state of affairs. It will not be in force for very long before the third directive supervenes and takes over, after which there will be no need for authorisation for the inward sale of business. So I suppose it is true to some extent that in all probability we shall have a more liberal regime than some of our Community partners, but I do not think that we should regard that as a weakness. Ultimately, as the experience of the years shows, a protectionist attitude weakens one's industry, makes it less able to respond flexibly to the requirements of the market and therefore, when the restrictions are reduced or removed, the consequence is that one is not as strong as those who have had to compete in rather more rigorous selling conditions.
I have every confidence in the British insurance industry 888 being able to compete successfully in the regime which will shortly be inaugurated to give us a single market in insurance in the Community. We attach considerable importance to the completion of the single market in insurance, and I know that the directives which we are debating tonight and which we shall debate in due course have the support of the insurance industry and consumer organisations.
I welcome the opportunity to put these points on record and welcome the contributions which have been made by my hon. Friends and Opposition Members. I therefore commend—
§ Mr. Butterfill
May I press my hon. Friend on the point of harmonisation of the cooling-off period? He indicated earlier that there was some mechanism whereby that would be achieved by 1994. Would he deal with that?
§ Mr. Hamilton
I apologise to my hon. Friend for forgetting to deal with that point. In response to the earlier intervention of the right hon. Member for Berwick-upon-Tweed, I pointed out that we cannot remove the difference in treatment by means of orders because the European Communities Act does not allow us to do that. Section 2(2) of the Act gives us the vires to implement our obligations by secondary legislation only in respect of insurance business within the Community. Outside the Community we require primary legislation to achieve that effect. I hope that it will be possible at the time we implement the third directive to complement that by means of primary legislation in order to remove this anomaly.
That depends, of course, upon the good will of my hon. Friends the business managers, by whom I am surrounded, and who are glaring at me and looking at the clock. I cannot guarantee to my hon. Friend that we shall be able to align them in terms of time because that will take place in a different Session, but I am well aware that this is an unsatisfactory situation and we shall seek to correct it at the earliest opportunity. I hope that I have been able to satisfy my hon. Friend.
I commend the regulations to the House.
§ Question put and agreed to.
That the draft Insurance Companies (Amendment No. 2) Regulations 1992, which were laid before this House on 30 November, be approved.