§ 3.2 p.m.
§ The MINISTER of STATE, DEPARTMENT of INDUSTRY (Lord Beswick)
My Lords, I beg to move that this Bill be now read a second time. I understand that this is considered a controversial Bill by some, so that I begin with a point upon which we might all agree. We shall all agree that there will be few pieces of legislation before this House on which so many noble Lords have such practical experience and direct interest. According to a list before me, no fewer than 56 noble Lords between them hold 81 directorships in insurance companies of one kind and another. We might also conceivably agree that if this undoubted weight of knowledge and experience in the insurance industry had applied itself earlier and been more ready to co-operate effectively with the Government of the day on this matter of policyholders' protection, much loss and some downright suffering of individual savers and insurers might have been avoided. As it is, Her Majesty's Government believe that it is their duty to bring this Statute forward.
The Bill is a part, and only a part, of the Government's strategy to protect insurance policyholders. Central to that strategy are the powers to supervise companies which the last Government, with our support, introduced in 1973. The 1973 Act allows more stringent super- 203 vision of insurance companies, and gives more effective means of keeping irresponsible people out of the industry. Moreover, we are setting up new machinery for the industry to advise the Secretary of State on the exercise of his powers. These advisers will have an important role in the context of our strengthened supervision.
Many of the new supervision arrangements depend upon regulations: we have made important ones already; more will be brought before Parliament this year; but it will be some time before the new system is fully in force. In any case, no system of supervision, however strict, is foolproof. Bad fortune, changing and worsening economic circumstances, may still cause occasional failure. Moreover, insurance is not a transaction like the buying of a motor car or a washing machine. It may involve 10, 20 or more years of commitments, during which time many circumstances may change. So it was decided that something more than supervision was needed to protect policyholders if a company did get into difficulties.
My right honourable friend first discussed with representatives of the industry how such a protection scheme might be organised. They were sympathetic to the idea in principle, and undertook to try to devise a scheme of their own; but they were unable to agree among themselves. We told them that if they could not agree on a voluntary scheme, it would be necessary to introduce a statutory one. In December, the industry did come forward with agreed proposals; but they were considered unsatisfactory and I shall discuss later why the Government took this view. But may I first say what is in this Bill, which is the Government's solution.
Clause 1 establishes the Policyholders Protection Board, which will administer the protection scheme. The Board will have five members appointed by the Secretary of State; and my right honourable friend has said that a majority of the members will be from the insurance industry. I emphasise that, because there would appear to be some misunderstanding. The Board's functions are set out in the Bill, and the Secretary of State may issue guidance as to the exercise of their functions, subject to Affirmative 204 Resolution of both Houses. The Board's main functions are set out in the form of duties: in other words, the Board will be under an obligation to perform them. But the Board will have discretion to use certain wider, additional powers—discretion, that is, within the limitations laid down by the Bill.
The Board's primary duty will be to protect policyholders of a company in liquidation. Only policyholders of authorised insurance companies will be protected; thus Lloyd's, who have an effective protection scheme of their own, will be excluded. Only holders of United Kingdom policies will be protected, and marine, aviation and transport insurance, and re-insurance are excluded. Claims under compulsory insurance policies will be met in full. In the case of general business other than compulsory insurance, private policyholders only will be protected, and to the extent of 90 per cent. of the benefits. In the case of longterm business, all policyholders will be protected, and the protection will also be 90 per cent. except where the proposed benefits are considered excessive.
Clause 6 sets out the various types of compulsory insurance. It seems right that, where the law requires a person to take out an insurance policy, it should give him full protection if the company, through no fault of the policyholder, is unable to meet its liabilities. The Bill will not affect a person's duty to take out a new insurance policy if his company goes into liquidation—it will simply guarantee that claims are met which are outstanding at the time the winding-up order is made. All the existing forms of compulsory insurance relate, of course, to third party liabilities. The main ones are compulsory motor insurance and employers' liability insurance; but there are also compulsory requirements under the Nuclear Installations and Riding Establishments Acts. If, as expected, the Motor Insurer's Bureau continues to function in its present form, the Board set up by this Bill will not, in practice, be concerned with compulsory motor insurance. It will, however, be possible to extend the Bill, with Parliament's approval, to give 100 per cent. protection to any new types of compulsory insurance which may be introduced.
Clause 8 deals with general policies other than compulsory insurance. Again, 205 the Board will guarantee that claims outstanding at the beginning of the liquidation are met, but only to the extent of 90 per cent.; and only private policyholders will be protected. I should emphasise that the 90 per cent. figure has the agreement of the insurance industry. It is designed to provide protection, but at the same time to leave an incentive for prospective policyholders to choose carefully, insofar as information permits, a company of maximum reliability. The restriction of protection to private persons, in the case of non-compulsory non-life insurance, is justified by their greater need of protection as compared with corporate bodies trading with limited liability. This does not apply to compulsory insurance or long-term business, where under a policy the beneficiary is normally a private person, even though the nominal policyholder may not be.
Clauses 10 to 12 deal with long-term policies. The principle is the same as with general business: 90 per cent. protection. Where benefits are outstanding at the beginning of the liquidation, the Board will ensure that they are paid to the extent of 90 per cent. Very often, however, the benefits will be for the future. The policyholder will have paid substantial premiums, but his policy will not yet have matured. In these circumstances the Board will still have a duty to provide 90 per cent. protection, and they may secure this object in one of the following ways. First, they may arrange the transfer of the failed company's business to a sound company. Secondly, they may arrange for another company to issue substitute policies. In either case the policyholder will, in effect, have his policy continued on more or less similar terms, except that the benefits may be written down to 90 per cent. And if for example, under an annuity, payments became due while the Board seek an arrangement with another company, then the Board will have a duty to secure that 90 per cent. of the amount of such payments is paid. Thirdly, it is unlikely that the Board will be unable to arrange the transfer of business, or the issue of substitute policies, but if in the event it proves impossible in a particular case the Board will be required to secure the payment of 90 per cent. of the value attributed to the policy.
206 There is one important qualification to the Board's duties in relation to long-term policies. If they consider that the proposed benefits under a given policy are excessive, they may refer it to an independent actuary. On his recommendation they will treat the benefits as reduced in exercising their duties. In such a case, the policyholder would be guaranteed less than the 90 per cent. of the face value, though he could, of course, pursue his claim in the liquidation if he wished. Again there is encouragement to a potential policyholder to view with caution the more seductive over-generous policies. The Board will finance their activities out of levies on insurance companies—one for general, one for long-term business. There will be no fund; the Board will impose levies only to meet expenditure as and when it is incurred. This again, I gather, is what the industry wanted. The Board will not be able to raise a levy before 1st April 1976, and the levy on life business will be based only on income from contracts entered into after 1st January this year. So there is no question of the levy affecting premiums under policies taken out before the scheme was announced. On current figures, the maximum possible levy in the first year would be about £15 million on general business, £9 million on long-term. Since the long-term levy will be based on new business only, the maximum will increase progressively over the years.
The levies will be the Board's only source of income; there is no provision for public funds to be available. If the levy proved insufficient in any year, the Board would have to postpone making payments until adequate funds were available unless, of course, they could borrow the extra money needed. There is little likelihood that the levy will be insufficient, and, in view of the tighter supervision now intended, calls on the industry by way of levy should be rare. The levies will, it is thought, normally be less than 1 per cent., and, indeed, may never be imposed at all. I hope that bearing these facts in mind noble Lords will consider that some of the more anxious opposition to this provision is not justified.
An aspect of the Bill which has attracted attention is the power in Clause 16 to arrange for the continuance of an 207 insurance company's business. We regard it as an important feature, since a rescue might sometimes be in the interests of policyholders and of the industry as a whole; but it is a secondary feature. This power is discretionary and will be available only in strictly limited circumstances. I gather that this fact so far has not been fully appreciated. It has been alleged that the powers contained in Clause 16 will enable irresponsible companies to be protected, and will undermine the insurance market, and that it will become the norm to rescue companies in difficulties rather than allow them to go into liquidation. That seems a strange anxiety in view of the fact that a majority of the Board's members will he drawn from the insurance industry, and will presumably use these powers, discriminatingly. But apart from that, there are other reasons why the rescue powers will be used sparingly.
First, the restrictions in Clause 16 itself. The Board will only be able to give assistance directly to a company at risk after changes have occurred in the management, control or membership of the company. These changes will he designed to ensure that anyone who may have had any responsibility for, or profited from, the circumstances giving rise to the company's need for assistance would be unlikely to benefit to any substantial extent from the assistance. Even after such changes, moreover, the assistance must be subject to any conditions necessary to ensure, so far as is reasonably practicable, that the existing members of the company will not benefit as such from the assistance.
These provisions of Clause 16 mean that the proprietors and members of a company do not benefit from a rescue operation. It is true that corporate policyholders and other creditors might benefit incidentally from a rescue; but they would be left undisturbed by a rescue operation in any circumstances, whether or not any assistance was given by the Board. And of course corporate policyholders' premiums will be included in the premium income figure on which any levy will be calculated. In addition, the Secretary of State will be able to issue guidance as to the circumstances in which rescues might be undertaken, but I should emphasise that use of the powers in 208 Clause 16 will be at the Board's discretion and the Board will have a majority of persons from the insurance industry.
§ Lord DERWENT
My Lords, may I interrupt the noble Lord briefly? It is the third time that the noble Lord has said there will be a majority of insurance people on the Board, but there is no such reference in the Bill. Although an undertaking was given by the Parliamentary Under-Secretary of State, surely the noble Lord is not in a position to bind future Secretaries of State.
§ Lord BESWICK
My Lords, what I am saying is with the authority of the Secretary of State. The point which the noble Lord makes is valid and one which might well be raised at the Committee stage.
If they do not wish to rescue a particular company they will be under no compulsion to do so. There is evidently a misunderstanding over the Secretary of State's powers to issue guidance in Clause 2. There are some who fear that the power to issue guidance would be used in particular cases to turn a discretionary power into a duty. This is not the intention of the clause, which in this respect is modelled closely on similar "guideline" provision in other legislation. What is intended is that the guidance should set out the various considerations to which the Board should have regard before they use the Clause 16 power. Before consulting the industry, it is impossible to be specific about the guidance that might be given; but it might provide, for example, that the Board, before using Clause 16, should take account not only of the interests of protected policyholders, but also of the wider interests of the industry as a whole; and should accordingly, in weighing up the alternatives open to them in any particular case, consider the implication of each course for the stability of the insurance industry in Britain and for the health of the industry's business overseas.
They would also, and importantly, have regard to the net cost of each course to the industry through the levy. The Secretary of State would expect them to have regard to whether it would be cheaper to allow the company to go into liquidation. It is impossible, even if it were desirable, to lay down rigid criteria covering such factors—to define in advance the circumstances in which the Board must rescue 209 or must not rescue. These decisions must be left to the Board's judgment at the time, though if they wish for the Secretary of State's guidance on the factors to which they should give weight, it seems only right that he should be able to give it.
A more general argument against the Bill is that it is unfair on the policyholders of prudent companies, who have to contribute to the protection of the less prudent. The first point to be made is that excessive benefits will be regarded as reduced; so the holders of irresponsible policies will only be guaranteed the benefits they might have expected if the terms had been more normal. But, in addition, this argument rests on assumptions that are difficult to sustain. It is assumed that an ordinary person can distinguish between a prudent and an imprudent company. Few people have the information to make this judgment. The fact is that not all, nor probably most, policyholders of imprudent companies are themselves imprudent. And an impeccably prudent company may in the course of time, before a policy matures, have changes in management, and competence of management can vary over a period of years. There is unfortunately no guarantee that a company, however prudent, may not find itself in difficulties in the future. The principle behind this Bill is that all policyholders of all companies are deserving of protection; and equally, that all companies should contribute to that protection.
A further line of argument has been that the proposals submitted by the industry in December would have achieved the objects of the Bill, without the need for extensive legislation. The proposals would have involved the setting UP of a British Insurers' Bureau. The Bureau would then have protected policyholders on a basis set out in agreements between the Bureau and the Secretary of State. The following features were crucial in making these proposals unacceptable. First, the industry's Bureau would have been non-statutory and its commitments would have rested on agreements between itself and the Secretary of State, terminable at one year's notice. This would have made the scheme virtually meaningless for long-term policyholders. Someone who took out life assurance would have had no guarantee that the scheme would last till his policy matured.
210 Secondly, if it were later considered desirable to extend the scheme to types of insurance initially excluded, this would have been impossible without the negotiation of further complicated agreements with the industry. Under the Bill this could be done by Statutory Instrument, subject to Affirmative Resolution by Parliament. Thirdly, there would have been no option for the Bureau to intervene before a liquidation. We regard this as essential. Fourthly, there would have been a number of complex and controversial changes in the winding-up rules. It is likely that we shall want to suggest changes in these rules, some of which are 100 years old. But we want a thorough study to be carried out, first by the Department and the industry jointly, rather than rushing into changes which we might later regret.
These major deficiences made the industry's scheme inadequate as a means of protecting policyholders. But having said that, I should emphasise that our proposals are similar to the industry's in many important respects, and on a number of other points we have been able to incorporate the industry's views. Among the more detailed points on which we have accepted the industry's view, it is now proposed to exclude marine, aviation and transport insurance and reinsurance. If one studies fairly and carefully the provisions of this Bill, it will be seen that there is a wide measure of agreement between the Government and the industry. Disagreements are restricted to narrow, if crucial, aspects of the proposals.
This Bill, in conjunction with the strengthened supervision of insurance companies, will have important consequences. It will give extra security to millions of insurance policyholders; and since insurance is the most important form of saving for ordinary people throughout the country, it can scarcely be denied that policyholders deserve such security as is possible. Moreover, the Bill will not have the dire effects on the insurance market that some people have predicted. On the contrary, the general effect will be to strengthen the industry, to reinforce its stability, to enhance its reputation both at home and overseas, and to enable it to play an even greater part in our economy. The Government and the industry certainly are united in that aim. The new advisory 211 arrangements should help to create the spirit in which close co-operation between the Government and the industry is possible, and it is in that spirit I ask for a Second Reading of the Bill.
§ Moved, That the Bill be now read 2a.— (Lord Beswick.)
§ 3.27 p.m.
§ Lord ABERDARE
My Lords, we are grateful to the noble Lord, Lord Beswick, for having explained the Bill clearly, if with a good deal of honey. His honeyed words flowed smoothly over the various clauses, though not, I fancy, over Clause 14, which is but one to which we take considerable objection. The noble Lord made the best of the Bill. I will, in the spirit of what he said at the beginning of his remarks, declare my interest. I am a director of a small life insurance company and I am also a member of Lloyds.
We still consider, even after what the noble Lord said, that this is an unnecessary Bill with a number of highly undesirable aspects. Unfortunately the first instinct of this Government when faced with any problem is to produce legislation and we have seen over the whole sphere of the nation's affairs massive State interference, most of which has still to reach your Lordships' House, but it is coming and it is coming very shortly. There is the Industry Bill, which is still in another place; the Scottish and Welsh Development Agency Bills, which will be with us very shortly and which have had their First Readings here; and two nationalisation Bills, of the shipbuilding and ship repairing industry and of the aircraft industry. The story is much the same with this Bill, for which there is no need despite what the noble Lord said.
The noble Lord freely admitted that the British Insurance Association has a scheme ready to put into operation. It could be implemented now if this Bill were withdrawn. He said that it did not meet all the requirements and he gave a few reasons why that was so. The first reason he gave was that the Insurance Industry Bureau, which was to be set up under this voluntary scheme, could not operate because it was a voluntary body and therefore went on year by year, but it could be made statutory. The scheme should be made statutory. It 212 should be an agreement arrived at, proposed by the British Insurance Association and put into statutory form so that the insurance industry would be contributing equally to it.
It seems to me so much more satisfactory to allow the industry itself to regulate its own affairs. Only yesterday, we were discussing the freedom of establishment of doctors, nurses and other professions within the EEC and it was acknowledged—I think on all sides—what a great advantage we have in that the professions in this country run their own business. It is quite different in many other countries in Europe, where everything is regulated by Statute. This is one more instance where it would be far preferable to leave these matters to the insurance industry itself, backed up where required with statutory provisions. This would be infinitely preferable and more flexible.
The noble Lord, Lord Beswick, spoke of possible difficulties arising if by chance there were a failure and the Board had not sufficient funds to meet it. As I understand it, however, under a voluntary system with the insurance industry behind it, that sort of delay would not arise. The noble Lord gave other reasons why the suggestions of the industry were unacceptable. One was that to extend the scheme would be difficult. I think, however, that many of us would think that an advantage, not a disadvantage. We quarrel with the fact that there are powers in the Bill for the Secretary of State to extend it and to apply it to other people without having to go through a proper legislative process. As for the other objection about rescue being difficult, we do not like the idea of a rescue anyway and we prefer that it should remain, as it is at the moment, a possibility on normal, commercial terms, in which way it has often been brought into effect.
I know that there are many of your Lordships who take very great exception to the Bill and I shall be very surprised if I hear many voices raised in favour of it among the 21 speakers who will be speaking this afternoon. There must be a temptation to defeat the Bill on Second Reading. I can well understand the feelings of those who are totally opposed to the Bill in principle. They would argue that it is wrong to expect policyholders in sound and respectable companies to support those who, ill-advisedly, are tempted 213 by uneconomic terms to deal with risky companies. In particular, I have sympathy with the case made by the mutual societies and the Co-operative Insurance Society which have a very strong case and one with which I am sure the noble Lord, Lord Beswick, has a great deal of sympathy. They have no share capital. Their resources have been built up over the years by careful management. Why should their members contribute up to 1 per cent, of premium income to help others who have taken a gamble with a company that is recklessly or even dishonestly run? I can understand the force of their arguments.
Nevertheless, on balance, we feel that it would not be right to vote against the Bill on Second Reading. We believe that we should seek to amend it at the Committee stage. The reasons are two: first of all, it would be highly unusual for your Lordships to throw out a Government Bill on Second Reading, particularly when that Bill had not been to another place. Secondly, it is undeniable that there have been unfortunate cases of hardship as a result of the failure of insurance companies in recent years. For that reason, some measure of consumer protection beyond the regulations of the 1974 Act could, I believe, be justified, though, as I said, I should prefer it to be done by the industry itself with statutory backing.
In fact, as the noble Lord, Lord Beswick, said, the basic provisions of the Bill differ little from the voluntary scheme put forward by the industry, although there are additional objectionable features which we would seek to remove at Committee stage. Should some of your Lordships feel that the Bill is so objectionable in principle that they wish to vote against it on Second Reading, I should not, for the reasons I have given, feel able to advise my noble friends to oppose the Second Reading. On the other hand, I could not vote positively for a Bill which I think to be unnecessary and I would strongly advise my noble friends to abstain if there were a vote on the Second Reading.
My Lords, so far as the details of the Bill are concerned, there are two aspects to which we take serious exception. First, we intensely dislike the proposal in Clause 16 to give the Board powers to 214 assist a company at risk to continue in business. "A company at risk" is very widely defined in Clause 16(1) and it would seem likely that it could well become normal practice. when a company is unable to meet its liabilities, for the Secretary of State to refer that company to the Board and for the Board to take steps to rescue it. We are not all that comforted by the remarks of the noble Lord, Lord Beswick, about the composition of the Board, because, first of all, as my noble friend Lord Derwent has said, the pledge that a majority of its members should be from the industry does not appear in the Bill and, secondly, we do not as yet know what is meant by the words, "representatives of insurance interests". No doubt, however, we can clarify that at Committee stage.
If it were to become the norm that rescue operations were put into effect, it would mean that the Bill's sensible proposals to protect policyholders would rarely be brought into operation. This could have grave repercussions. Instead of companies going into liquidation or receivership, the money of individual policyholders would be used to protect trade creditors and commercial and industrial policyholders who are not within the basic protection scheme of the Bill, which relates to individuals, not to commercial policyholders or trade creditors. if one once moved into the area of rescuing companies, one would also be protecting trade creditors and commercial policyholders at the expense of the Board's finances and, ultimately, at the expense of the premium payer. Moreover, an implied Government guarantee of that sort would induce people to go for the lowest level of premium or the largest benefit, disregarding the security of the company in the knowledge that, if it ran into difficulties, it would in all probability be rescued. That would only encourage cut-price trading, and all the fears which have been so forcefully expressed about encouraging reckless companies would be justified. The financial burden would ultimately fall on the policyholders in responsible companies.
My Lords, we believe that a company should go into liquidation or receivership unless it is a sufficiently viable commercial proposition for a purchaser to be found. If it is a commercial proposition, it is almost certain that a purchaser will 215 be found within the industry, without the need of any direction from the Secretary of State or any consideration by the Board. This has been the case on many occasions in the past and I believe that it is far better to leave the matter of rescue to the commercial judgment of the industry itself than to the Board. Clause 16 epitomises all the major objections of principle to the Bill and we shall certainly seek to remove it at the Committee stage.
We also object to the sweeping powers given to the Secretary of State in the various clauses of the Bill. This, again, is something which crops up more and more these days in Government Bills, particularly in those which are about to reach this House. In this Bill, too, there are many instances of it. Under Clause 2 the Secretary of State has powers to give guidance to the Board on the performance of its functions, and it is the duty of the Board to follow that guidance. Under Clause 3(3) the Secretary of State has powers to bring members of Lloyd's within the scope of the Bill. Under Clause 4(5) he may extend the Bill to cover marine, aviation and transport insurance or reinsurance. Finally, under Clause 14 he can vary the duties of the Board in any way he wishes. My Lords, these are sweeping powers, the need for which we question. If it should prove necessary in future to make such substantial changes in the scope of this Bill, surely the right way to do so would be by amending the Bill itself rather than by subordinate legislation of this sort? Again, this is something we shall go into at the Committee stage.
Overall the Government should be much more willing than they have shown themselves to be hitherto, to trust the industry itself. This industry is one of the country's most important assets and has shown itself, over many years, to be thoroughly responsible and financially sound. Its contribution to our invisible earnings cannot be exaggerated. In 1973—the last year for which I have figures—its net earnings of £372 million were more than those of the rest of the City put together and virtually the same as for the total export of all our motor cars that year. London is the largest international insurance market in the world and accounts for about 10 per cent. of world premium volume. Pre- 216 miums written by United Kingdom insurance companies exceeded £6,000 million in 1973, more than 40 per cent. of them in overseas business. In proportion to the success of this industry its failures have been very few. In most instances the industry itself has come to the aid of companies in difficulty, always provided that they have been properly and honestly run. Hopefully, future failures will be rare occurrences once the regulations under the Insurance Companies Act 1974 are fully effective. Had that been the case previously it is quite likely that the tragic failure of Nation Life might never have occurred. This is a great industry and one that is vital to the future of this country. It behoves the Government to go gently when dealing with an industry of this importance. In my view, this Bill is both ham-fisted and flat-footed.
§ 3.43 p.m.
§ Lord BANKS
My Lords, first I wish to declare an interest. I am by profession an insurance broker and a director of the life and pensions subsidiary company of a firm of Lloyd's brokers. My noble friend Lord Byers very much hoped to address your Lordships this afternoon, but unfortunately he has been prevented from being present through an attack of influenza. There is much sympathy in the House with the aim of the Bill; that is to say, the idea that we should protect private policyholders. But in this connection it is important to bear in mind the greatly increased powers which the Department of Trade will have once all the regulations under the Insurance Companies Amendment Act 1973 come into force. The noble Lord, Lord Beswick, referred to these regulations. That Act did not come into force early enough to prevent the recent fringe failures of Nation Life and London Indemnity. But regulations have recently been made with reference to the valuation of assets of insurance companies and other matters, including, for example, the size of a single investment which an insurance company may have.
As the noble Lord, Lord Beswick, said, further regulations are to come before Parliament. The Minister's approval will be required before a new managing director or chief executive of an insurance company can be appointed. The Minister's approval will also be required before 217 the acquisition of voting control of an insurance company is permitted. Regulations are to be issued dealing with, among other things, insurance advertisements and the connection between insurers and intermediaries. The supervision of new types of policy, new premium rates and policy conditions is, I understand, also under consideration. The British Insurance Association may well be regretting that it has not been prepared over the years to undertake the task of supervision from within the industry itself, as the Committee of Lloyd's supervises the work of the Lloyd's syndicates, with the power to stop a syndicate from trading, if that is thought necessary. Now the powers have been taken by the Government, and the need for Government supervision, in the absence of supervision from within the industry, is clear and few would dispute it. But there is a danger that there might be the imposition on the industry of a uniformity. For example the life assurance market, which I know best, is one which is highly competitive. Some companies at any given moment are better in terms of rates or policy conditions for particular types of contract, while other companies are better for other types of contract. Potential policyholders—the consumers—benefit from this fact and would suffer greatly, in my view, if State regulation was such as to reduce the competitive nature of the market. Subject to that proviso, supervision by the Government is necessary and, as we see it, is to be stringent.
However this Bill is based on the premise that stringent supervision is not enough. The assumption underlying the Bill is that with all these powers the Department of Trade will not be able to eliminate the possibility of failure. In the event of such a failure, even with the existence of these powers, I agree that help should be available for private policyholders. But the blame for such a failure falls first on the management of the company which gets into difficulties, and secondly, surely, upon the Government who have intervened and set up the stringent system of regulation, which, if the company fails, has itself failed. Why should policyholders of soundly managed companies carry the burden of assistance when they themselves are very unlikely ever to require the assistance of such a fund? Why, fo rexample, should 218 the policyholders of mutual offices, which have no shareholders, see their savings diverted away for that purpose? Surely, if there is to be assistance there is a greater obligation on the community as a whole, in whose name the Government have intervened and failed, if there is indeed a failure by an insurance company, despite the regulations. Even if we accept that the policyholders of successful, prudently and responsibly managed companies must be made to meet the bill, and even if we accept the levy system, it is even harder to agree that this money should be used to rescue companies which get into difficulties. In spite of what the noble Lord, Lord Beswick, said it is difficult to see how the Bill, as it stands at the moment, can be anything but a cushion for the incompetent and an incentive for the irresponsible. It is difficult to believe that the rescue operation would not be of benefit to shareholders, to creditors and to non-private policyholders who are all supposed to be beyond the scope of the Bill.
There are other fears about the Bill which cannot be brushed aside. There are, for instance, the wide powers, referred to by the noble Lord, Lord Aberdare, to be given to the Secretary of State to broaden the scheme and to guide the Board. There is also the confusion which would appear to exist as to the way in which the Secretary of State is to guide the Board. In addition, there is confusion as to how, if at all— for they are not provided for in the Bill—the interests of the insurance industry are to be represented on the board, and the interests of policyholders which is perhaps more important still.
In view of the strength of criticism which has been expressed with regard to this Bill, and which I have no doubt will be expressed for the remainder of this afternoon—criticism which has come from all quarters outside the House from trade unions as well as from the insurance industry, I hope the Government will be ready to accept Amendments to the Bill in Committee. For example, if they were prepared to consider the deletion of Clause 16 with regard to rescue operations that would limit the help to policy holders; if they were prepared to consider the deletion of subsection (5) of Clause 4 and Clause 14, 219 which deal with the power to vary the purpose of the Board; and if they were prepared to amend Schedule 1 in order to ensure majority representation for insurance and policyholder interests, then I believe that a compromise might be reached which, while not satisfying either the Government or their critics, would remove the most bitterly contested Parts of the Bill and perhaps enable a degree of support to be obtained from all parts of the House.
§ 3.53 p.m.
§ Lord CACCIA
My Lords, like my two predecessors, I should declare an interest before speaking. I am a director of the Prudential Assurance Company. I speak in that way not in any sense with a feeling that this is something to be ashamed of—quite the contrary. From the point of view of your Lordships' House, it may be of use for people to speak about things in which they are intimately engaged and in which they have confidence. Indeed, I should regard it as strange if a visit by a man from the Pru was thought to be some sort of anti-social activity.
On the Bill itself, my sympathy is with what the noble Lord, Lord Aberdare, has said: "Why have a Bill at all? Why not leave it to the industry to regulate these matters?" After all, during the last year that is precisely what it has done. Also, as the noble Lord, Lord Aberdare, mentioned, it has put forward a scheme with the object of protecting, in particular, the individual policyholder. Where this Bill becomes objectionable is that it not only seeks to protect the individual policyholder, but stretches that to the corporate policyholder—that is in Clause 14, in particular. As drafted, the Bill then gives the Secretary of State wide powers to extend the guarantees to protecting corporate as opposed to individual policyholders in areas where such corporate holders are normally professionally advised by insurance brokers, and so on. If such corporate policyholders then decide to insure their risks for the lowest possible premium available in the market, without regard to the financial standing of the insurer, then they must reasonably be expected to accept the risk and the consequences of such an insurer failing. To adopt any other line would encourage irresponsibility.
220 It would also wreck the highly competitive market which the insurance market is now, and which I assume your Lordships would wish it to remain. As has been pointed out, this is not only an internal industry; it is one which gives us considerable earnings in the foreign field. Why does it do so? It is because it can carry confidence with it, and therefore the foreigner will feel that by coming to this market for insurance he is getting highly competitive and highly reliable rates.
The second aspect of the Bill which has already been touched on, and which of course is making it at least highly debatable, is Clause 16 in which there is a proposal for the Board to have powers to rescue companies as opposed to protecting policyholders—and, again, I mean individual policyholders. Rescuing companies means effectively protecting policyholders 100 per cent., and where benefits promised or commissioned to intermediaries are higher than the general market level, it is surely nonsense to suggest that those higher benefits should be guaranteed at the expense of prudent policyholders of sound established companies.
These, I think, are the main objections to the body of the Bill. But, apart from Clauses 14 and 16, Clauses 2 and 4 give the Secretary of State for the time being wide-ranging powers to extend and modify the Bill. Although in certain cases these powers are subject to Statutory Instrument procedure, experience suggests there is a danger that at some future date the character of the Bill could be changed without full and proper debate. That, again, is something which, if this Bill is to be proceeded with, will need very careful study and caution in protecting. Again, paragraph 1 of Schedule 1 sets out the composition of the Board. There have been assurances —and the noble Lord, Lord Beswick, gave us some this afternoon—that a majority of the Board will, as it is phrased, "represent insurance interests", or "be representative of the insurance industry". Surely, My Lords, these phrases are capable of very wide interpretation and if there is to be a Bill it should be much more precisely defined.
My Lords, there are a great many of your Lordships with great knowledge of 221 the insurance industry who wish to speak this afternoon, and perhaps I have said sufficient to support those who question the need for a Bill. If there is to be a Bill at all there are parts of it, especially the clauses to which I have referred, which need far more careful study and debate in Committee. I would end on this note. We are here dealing with an industry which not only has a high reputation in this country but, on the basis of that reputation, has a very high standing abroad. Anyone who has represented this country—for instance, in the United States—will be reminded if he goes to San Francisco, even now after many years, that the prompt payment made by the British insurance industry after the earthquake and fire in the early years of this century is very well remembered there. If we do anything here to bring this industry into doubt in this country, it may well have repercussions abroad which none of us in this House would wish to see happen.
§ 3.59 p.m.
§ Lord GREENWOOD of ROSSENDALE
My Lords, I hope that my noble and life-long friend the Minister of State will not think that what I feel obliged to say about this Bill this afternoon indicates any weakening in my allegiance to the Labour Party or in my personal affection for himself. That is very far from being the case. But this Bill has grave defects which I am not at all convinced can be repaired by amendment here or in another place. And that is a view which is widely held in all parts of the Labour movement.
Before I outline my criticisms—and I shall not keep your Lordships more than a few minutes—I must declare a personal interest. Like the noble Lord, Lord Caccia, I hope that practical experience will not be a positive disadvantage in this field. The noble Lords, Lord Aberdare and Lord Banks, referred to the mutual companies. I am a managing trustee—the equivalent of a director—of the Municipal Mutual Insurance Company Limited. It is, as its name implies, essentially a mutual company founded over 70 years ago by, among others, George Bernard Shaw as a piece of practical municipal Socialism to provide local authorities with insurance protection. It now does at least part of the insurance work of the great majority of local auth- 222 orities. The significance of that is that, as most of our premium income comes from local authorities and other public bodies, we are working mainly with the money, not of individuals putting up risk capital, but of local authorities and their ratepayers.
My noble friend Lord Beswick said that the levy would be raised only if and when required. But I find myself in agreement with the noble Lord, Lord Banks. I can see no valid reason why up to 1 per cent. of that premium income, coming from public funds, should go compulsorily into a fund to rescue from the consequences of their actions those who have been misled into putting their faith in cut-price mushroom companies charging hopelessly unrealistic premiums in pursuit of inordinate profits. What is needed is sufficiently stringent regulation, and sufficiently vigilant monitoring, to stop the bad insurers gulling the public.
I cannot believe that it is all that hard to know which are the phoney insurers and which are not in the light of the experience we have in the last few years. If I may quote The Times on 12th April:It is hard to argue with the industry case that the prime cause of insurance company failures in recent years has been the marketing of contracts offering unrealistically generous terms, particularly single premium policies with guaranteed surrender values. These extravagant benefits will continue to be offered and they will continue to be taken up if there is provision to rescue companies offering them, the BIA says.What the Government are proposing is that there should be a Board—and I hope that I have understood my noble friend correctly that at a subsequent stage there will be Amendments from Her Majesty's Government defining the scope of membership of that Board—but at present it is an ill-defined Board which could rescue a failed company and must rescue policyholders. It is hard to see how such a situation could do other than encourage irresponsibility and discourage prudent management. And let us not forget this; the Government would always be liable to be pressured into saving a company for political reasons even though all the financial and commercial arguments went the other way.
Nor am I happy about other implications of this measure. The Bill gives the Secretary of State wide powers to guide 223 —that is to say, to instruct—his Board to vary the scope of the Act to include general insurance and reinsurance and to alter the benefits payable by the Board. In the words of the Financial Times:He can vary, extend or restrict its duties.I believe we are putting too much power into the hands of the Secretary of State, great as is my respect for him. This, I think, is much too important a subject to be left to subordinate legislation.
Finally, I should be ungrateful if I did not thank the Secretary of State for the courtesy and consideration he has shown since I first made representations to him on this subject six months ago. He has met many of the fears I expressed at that time and I am truly grateful. But I cannot believe that this Bill is in the true interests of the Government, of Parliament, of the insurance industry, or of the public. Like the noble Lord, Lord Aberdare, I shall not, and would not, seek to defeat the Bill on Second Reading, but I should be very happy if, at a later stage, my fears were proved wrong and it turned out to be possible to make this Bill a workable and desirable measure.
§ 4.5 p.m.
§ Lord ALDINGTON
My Lords, it is a pleasure to speak after the noble Lord, Lord Greenwood, and, for me a rare thing, to be in full and complete agreement with him. I feel particularly sorry that he should be here having declared his interest in connection with a company founded by one Shaw (spelt in one way) and about to be hurt by another Shore (spelt in another way). I, too, have an interest to declare in that I am chairman of one of the leading British insurance companies, and I, too, hope that your Lordships will not think that a defect.
I hope that I shall not be beguiled into speaking for too long. I should like to start by affirming that the first and main purpose of the Bill—that is, the protection of policyholders, as set out in paragraph (a) of the Explanatory Memorandum—seems to be to be completely unexceptionable; but one has to ask whether one needs this Bill to secure that protection. Why not trust the industry and back it, as my noble friend Lord Aberdare said so effectively in his splendid speech; for is it not true that the 224 real protection of policyholders in insurance depends on the quality of management, and the quality of the board of directors to whom the management of the insurance industry are responsible?
That industry has a long and reputable history, as well as a high reputation worldwide, because it has, with very few exceptions—and I stress very few—offered for a great many decades full protection to all who take out policies whether in life assurance or other forms of assurance, whether national or international. It is the efficiency of the British insurance industry which is the real basic protection to policyholders. It is this efficiency which has built up the massive invisible earnings from overseas which are credited, rightly, to the British insurance industry. In 1973 something over £370 million was earned that way compared, to give your Lordships some guide, to about £110 million by banking.
The dominant position in the world of the London insurance market was built up before the days of strict rules and regulations. Nevertheless, I have always welcomed the fact that rules and guidelines have grown up and been adopted not only here but throughout the world. They have been incorporated in Statutes and regulations, and have been further improved even today. There has always been one central aim in these Acts and regulations; that is, to insist upon, and support and encourage, proper standards in the conduct of insurance business. I support that, and I think that every noble Lord, certainly the noble Lord who preceded me, supports that concept.
Nevertheless, it is true that despite governmental powers—which many of us have thought were powerful enough, and many of us have thought were not always fully used—in recent years we have seen the collapse of some small insurance companies, which collapses resulted in damaage to policyholders or threats of such damage. I must add that this has not damaged the international position of London. On a number of occasions, as your Lordships will know, steps have been taken voluntarily by the British insurance industry itself to mitigate the damage in the most appropriate way open to them. In the case of third parties in a road traffic case who might otherwise have suffered from the failure of an insurance company, the claim has been 225 met for a number of years in full by voluntary arrangements through the Motor Insurance Bureau. My Lords, I suppose we have all asked ourselves what the right approach is to the matter of further consumer protection. We have all been aware of the feelings of public opinion and the damage done to some people at home. First, I agree with the Government and with others who have spoken that the other cases of compulsory insurance must be dealt with from the point of view of third party claims, and the industry agree with that.
But, apart from that, there has had to be—rightly so—a good deal of debate on how much further the industry, or anyone, ought to go in giving protection to those who have suffered from imprudent management by an insurance company, and some also by imprudent choice of an insurer; that is, the policyholders themselves. For surely we must all be careful not to tinker with the motivations that lead to excellence in our private enterprise, capitalist system. One cannot encourage prudent insurance management by making the prudent compensate the imprudent. Consumer protection is an aim we all share; but the protection of one consumer at greater cost to another more prudent consumer is something of which we should be a little wary. So it seems to me right that we should look at the position of the policyholders themselves in a rather different way from the way in which we have looked at third party claims. After all, they make the choice, either directly or through a broker, regarding the insurance company—or Lloyd's for that matter—from whom the policy will be bought.
In making that choice, the factor of price—that is, the level of premium, and other conditions attaching to the policy —must be important. But they should not be the only factors of importance to be taken into account. The strength of the company, which can be found out indirectly by advice or directly by reading, is another factor of equal and, I would say, greater importance. In the real world, whatever may be the theory, the less reliable companies or underwriters can attract business only by offering specially favourable premiums—I think that the noble Lord, Lord Beswick, described them as "seductive" —or other seductive conditions. By 226 doing that, it is possible—and this has been proven—to attract away from the soundly-run companies a massive amount of business, with consequences for them and for their policyholders. I do not accept that normally prudent people cannot themselves find out about the standing of insurance companies. They can and ought to make a deliberate choice when they take out a policy, and if they are confronted with seductive terms they should be put on notice so that they make further inquiries.
Bearing these factors in mind the industry came to the view that it would be correct to set up a scheme jointly which would cater for private policyholders for insurance against fire risks, accident and other general insurance matters in part but not in full. We had chosen the figure of around 80 per cent., but, after discussion with the Government, we were prepared to go up to 90 per cent., as the noble Lord, Lord Beswick, said; but with lesser proportions in specially defined cases, it comes to the same thing as the terms of this Bill in drafting benefits. Such a scheme has been worked out and is ready for introduction, as has already been said. It would include provision for meeting third party claims at 100 per cent., to which I referred a few minutes ago.
A similar approach was made to the problems of the protection of life assurance policyholders, and other noble Lords have and will talk about that. All this is well known to the Ministers at the Department of Trade. I must emphasise, as has been said, there is a close understanding between the industry and the Department of Trade. That is a good thing for the running of insurance in modern conditions and, as has been indicated from both Front Benches, even with the industry's scheme it would still have been necessary for the Government to give their backing because of the legal complexities involved. There is no argument about that. Disagreements, often wrongly described as a "quarrel", relate to the terms of this Bill and, in particular, what is to me the regrettable decision of the Government not to leave the working-out and implementation of the schemes to the industry itself. In this I am in full accord with what my noble friend Lord Aberdare had to say, and, in talking about the co-operation between 227 industry and the Government, I am in accord with what the noble Lord, Lord Beswick, said.
Instead of this, we now have a Bill in front of us with one more statutory board and with several very undesirable Ministerial powers. When I hear the noble Lord, Lord Greenwood of Rossendale, saying a Minister has too many powers, I begin to wake up, if I may say so. In a great deal of this Bill there is no difference between the industry's scheme and the statutory scheme; but in some parts of it there are very important differences to which reference has been made. I will deal with three of them shortly and one at greater length. First of all, the Secretary of State has powers to extend the scheme to a wider range of insurance by including marine, aviation and transport. I hope your Lordships will agree to delete this power from the Bill. In the second place, the Secretary of State has power to tell the Board how to conduct its duties. I hope your Lordships will agree to delete this abominable power. In the third place there is Clause 14, and I will not add to what has been rightly said by my noble friend—if I may so call him—Lord Caccia.
I am sure that there are improvements to be made in other parts of the Bill, but to me the most objectionable thing is to be found in Clause 16 in which the proposed statutory Board is to be given power not only to protect policyholders, but in effect to protect shareholders. Whatever the terms of the Bill may say, I was not persuaded by Lord Beswick's explanation that not only was it not intended but it would not happen. I am not persuaded, either, that the Bill does not produce the effect I assume by the curious thought that it had not previously been my understanding that it was any part of the Labour Party's policy to use statutory board funds, however obtained, to protect shareholders.
The dangers of rescue powers have been rightly described and I will not add to what has been said about the political and other pressures, and the dangers to the industry and to the consumer of bowing to them. There is one aspect that worries me; the funds of this statutory board would have been pre-empted compulsorily from competing insurance com- 228 panies and would be used under this clause to secure the rescue of an insurance company believed to be in difficulties, with all the consequences of that which are far outside the purposes of the Bill stretching to corporate policyholders, creditors et cetera. This seems wrong in principle, and will not become any less wrong even if the statutory Board were to be composed of five insurance Archangel Gabrielles. In reply to what the noble Lord, Lord Beswick, said, a wrong is none the less a wrong because it is discretionary and because it may be used only rather specially—the story of the housemaid's baby comes to mind.
We shall no doubt be able to probe further the intention of this clause in Committee. It seems to me incontrovertible that a rescue through the statutory board must either leave the ownership of the protected company in the same hands or compulsorily transfer the ownership of the company, against their will, to another insurance company with a subsidy from the rest of the industry. In the former case, the subsidy from the levy will protect existing shareholders if only by saving them from the liquidation of their company, and in the latter case the existing shareholders will probably lose everything; but the transferee company shareholders will presumably gain something, for otherwise why should they agree to accept the business?
Of course the idea of rescue before liquidation is attractive; prevention is usually better than waiting for the need to cure. As your Lordships were told, rescues have been arranged on a voluntary basis where it was felt prudent so to do. I have no doubt that will continue to be the case. But in all such cases boards of directors responsible for providing the funds agree the terms on which they should be provided and take the decision to make the rescue or to contribute to it on the grounds that it is in the broad interests of their own shareholders.
Clause 16 is very different. There is a compulsory levy. Those who provide the funds have no say in the purpose for which they should be used. They have to sit by while others. at the instigation of a Minister, use their funds to subsidise a competitor. I do not believe that any private sector of a nation's 229 economy can work well like that. Not only is Clause 16 wrong, but it could also be positively dangerous to the national interests of Britain in overseas territories; for, if other Governments were to follow this example, British insurance companies operating overseas could be required to pay money to rescue non-British, less efficient insurance com-panics so as to enable them to compete very often on unfair terms. Therefore I hope your Lordships will agree to delete this offending clause. I cannot stress too highly the importance to the nation's interests both of protecting the good name of the London market for insurance and the position of the whole British insurance industry overseas.
My submission to your Lordships is, therefore, that we have within this Bill some provisions which are the same as the scheme which the industry itself is ready, and remains ready, voluntarily to introduce. On top of those provisions are some others which are wrong and should be deleted. Even on its introduction in this House, I would not think it right to vote against such a Bill, and I particularly would not think it right to do so on Second Reading. I accept wholeheartedly my noble friend's advice on that, though I would still prefer the industry to run its own scheme with legal backing. I believe this Bill can be amended—here I admit I have more hope than the noble Lord, Lord Greenwood—and become a sensible piece of legislation which will give proper protection to private policyholders and will not do damage to British insurers. For my part, therefore, I shall not be voting against the Second Reading, but I shall try, along with others of your Lordships, to improve the Bill on the lines I have outlined.
§ 4.23 p.m.
§ Lord HOUGHTON of SOWERBY
My Lords, I have no interest to declare. I must be one of the smallest of the small policyholders. Apart from the usual kind of household policy, the only other policy I hold is a paid-up one for £2.17.4d, which was the outcome of a policy taken out by my mother when I was born, for which she paid a premium of one halfpenny per week for years and years and years, until I put a stop to it. So I have no interest to declare, nor for the moment have I any particular affections to bestow.
230 I am what the Law Society once described as an "intelligent layman". All I can bring to bear in this connection is a little political nous and a little bit of common sense.
Governments, even Labour Governments, do not generally intervene in a matter of this kind unless some need has been shown. I think need has been shown and that there are temptations and dangers around in the present unstable financial and economic situation. There are bound to be anxieties among insurance management and policyholders alike in present conditions. The collapse and liquidation of insurance companies generally believed to be prudent and sound is bad for the high reputation of the insurance industry, and even worse for the policyholders. In recent years there have been some very doubtful operators in this field of insurance. I agree with other noble Lords that the reputation of the insurance industry stands high both at home and overseas, and this reputation for soundness, integrity and fair dealing must be upheld. It would do much harm if the idea gained ground that there are bucket-shops around in the British insurance industry.
Reference has been made to the position of the policyholder. He has been described, when he goes in for the wrong sort of policy, as "ill-advised". It has been suggested that perhaps he is lacking in prudence in searching around for the cheapest policy in the market. The customer in insurance is in a very difficult position. He cannot see what he is buying. He cannot look over something and test it like a motor-car or play it like a grand piano. He is buying money protection; he is insuring a risk. He has little to go on except the terms he is offered and the reputation of the insurer, and at the end of it he has little to show except a contract.
The public are not really in a very good position to choose when it comes to matters of insurance. The truth of the matter is that there is wide confidence in insurance generally in this country, and this is why it is so important that the reputation of insurance generally should be upheld. We are not in a position to say, "This is a good company; this is a disreputable one"; and the law of libel being what it is, one gets very little guid- 231 ance from any of the financial correspondents or from the expertise of bodies advising the consumer. Therefore, when a company folds up and thousands of trusting policyholders lose their money and their protection, it is a severe blow to public confidence in insurers generally. That is why insurers, I think, arc bound to be very interested in anything which will safeguard their high reputation. It is in the interests of the insurance industry to reassure policyholders that when they put their money into insurance they can put their confidence along with it.
The question is: how is this to be done? I think there is no dispute over the general intention here. The difference comes on method, and up to this point this Bill has been a singularly friendless Bill. Looking down the list of noble Lords who are yet to speak, I imagine there is quite a lot of criticism still to come. I am the only one, perhaps, to oppose it outright and then say that I am not going to vote against it. I am, as usual, trying to find a basis upon which disagreement and good intention can be brought together. I have no doubt the industry could do a good deal for itself. It is a pity it has not done it; but what we lack today is full understanding—and here I am speaking for myself, at least—of what the insurance industry would do for itself. All we have before us and all we have had explained to us are the Government's proposals. They represent their side of the case, and there may be another that we ought to listen to.
The Government feel that it is desirable to underwrite the risks of the policyholders throughout a wide range of insurance and to do this by a compulsory levy on the industry. The alternative method is to ensure, if one can, that those who are in the industry and those who come into the industry—perhaps those who come into the industry are the more important—are both positively vetted and are sound in wind and limb. This I suppose in theory can be done by supervision and intervention and the use of the powers—very extensive indeed—which have been conferred on the Secretary of State by the 1973 legislation. The Act of 1973 gives the Secretary of State wide powers, and the question is whether they are enough. Are they by 232 themselves enough to achieve the purpose we all have in mind? Could they be made even more effective? Could they be strengthened? Has the insurance industry any ideas as to how the 1973 Act might be amended to make it a better protection for policyholders and to give greater assurance that unstable companies are not allowed to continue in business? We must hear in mind that when these insurance companies fail shareholders may lose their money; policyholders may lose their protection, but usually somebody has made off with quite a fruitful picking. There are already people living in the South of France who would not like to return to England to "face the music" on things that have happened in the insurance world in recent years.
Other branches of public risk such as Stock Exchange, Lloyd's, have found their own solutions. Motor-car insurance is excluded from this Bill because it has a scheme of its own which is regarded as satisfactory. But when compulsion is used—and this is what the Bill proposes to do—it is either because there is general agreement that it would be better to be done that way in order to overcome the objection of small and insignificant dissenters, or because there is substantial dissent and the Government feel that it must be overridden. It is important for us to know which it is.
Some objections to this Bill are objections of principle. It is argued that this is compulsory insurance for a risk which is not common to all the insured persons and companies. There is something in that contention. Usually when insurance is made compulsory there is a common risk; there is something to which all those insured are more or less equally exposed. That is not the case, I think, with those who would be compulsorily insured under this Bill. The noble Lord, Lord Beswick, said that nobody knows; over the course of years the most prudent and most reputable companies may run into difficulties. I do not think that that is a serious risk. Experience scarcely supports that theory. If many reputable insurance companies run into difficulties and dangers, then the whole country will be in a mess and not merely a few insurance companies; the whole financial fabric of society will be on the point of collapse if insurance companies generally 233 are exposed to these grave consequences. So we must be realistic about this issue and accept that if this form of compulsory insurance is imposed it is a levy on the reputable societies in order to cover the risks which will be run by the policyholders in those which are less reputable, less fortunate or less well managed. I believe that that is an honest appraisal of what this Bill would do.
However, this Bill is opposed by some very sound insurance institutions. Voices are being raised against it to which anyone must listen with respect. On these Benches particularly we must listen with respect to an institution such as the Co-operative Insurance Society which has made representations to many Members of your Lordships' House, probably on both sides and certainly on this side. What, My Lords, is the area of agreement and disagreement on the Government's plan? How substantial is the objection of those who say: "This is wrong in principle and unfair in practice"? Is the opposition justified? We in your Lordships' House are asked to judge. I know we are ill-qualified to do so. I see from some utterance of a Scottish Conservative Member of the House of Commons that we are the dumping ground of the "political discardees". I resent this description, but if this is the qualification which Members of another place bestow upon us in reaching judgments on these complicated matters, one feels it is almost time for us to pack up and go home.
Policyholders can be exposed to serious risks when they put their money in insurance companies. The reputable insurance companies probably feel that they are in competition with risky undertakings offering policies on terms which can scarcely suggest prudent management; yet when these unsatisfactory societies fail, the reputable people, after facing their competition, have to come in and bail out their policyholders. That, we can understand, is something the reputable ones do not like. Reputable insurance companies may feel: "What is the point of building up a high reputation for managing affairs with prudence and offering policies which are sound economically and actuarially when policyholders can go into other institutions, lose their money, and be bailed out by those who have suffered from the com- 234 petition of less desirable members of the industry?" All these are serious questions.
The risk is not spread evenly over the industry as a whole. The area of risk is relatively small and probably can be identified. So the question is: Is it a matter of going straight to where the risk is thought to exist or where steps can be taken to safeguard policyholders against it, or should the cover be undertaken by this method of comprehensive levy? It is very difficult to judge. I believe that, having regard to the reception that is being given to this Bill, it will not be satisfactory for it merely to go through the normal Committee stage of this House. I fully endorse what the noble Lord, Lord Aberdare, said about not voting against the Second Reading; that would be a wrong course for this House to take. It is perhaps a pity that a contentious Bill of this kind comes to your Lordships' House in the first instance. But it is here and we have to deal with it, and it is unthinkable that we should reject outright a Bill of this kind on Second Reading. So I sincerely hope that your Lordships will accept the advice of Lord Aberdare and give this Bill a Second Reading.
What would happen to it then? My difficulty is this. The Bill contains a principle which itself is challenged and to which there may be an alternative—an alternative principle, one might say. It is not so much a matter of amending the terms of the Bill as of arriving at some judgment on the choice of method of meeting the purpose upon which I think we are generally agreed. I believe that the method of doing this is by Select Committee. When this Bill has passed its Second Reading, as I hope it will, I think that consideration should be given to referring it to a Select Committee in order that evidence may be taken, that expert opinions can be heard, a judgment arrived at and a report made to this House. My fear is that if we go through a Committee stage in the ordinary way, not only will this Bill be amended, it will be mutilated. Then it will begin a long trek to and fro between this House and another place and it will be full of combustible material both ways. I think that would be extremely undesirable. It 235 is a complicated matter. To have Amendments made in detail or in principle to a Bill on the Floor of your Lordships' House without hearing a great deal more about it than is possible in the normal course of debate, may result in some unhappy consequences from your Lordships having dealt with this Bill at all. That is the lifeline which I offer to my noble friends on the Front Bench, and it is my offering to the House as, I believe, the common sense way of dealing with this Bill.
§ 4.41 p.m.
§ Lord PEDDIE
My Lords, may I congratulate my noble friend Lord Houghton of Sowerby on being the first speaker to stem the steady stream of declared interests that we have heard about in this House. It made me think that insurance was the major and certainly the most popular activity of my colleagues in the House. I, too, should declare an interest, but in my case it is an historical one, in the sense that I was a director of the Co-operative Insurance Society for a matter of 20 years. Therefore, nobody can accuse me of having any interest at the moment, but at least they will accept my suggestion that I know something about the subject.
I do not share the view of the noble Lord, Lord Aberdare, who expressed it as his personal view that Government, or the State, should not intervene in matters of this description where individual interests are involved. I think that it is the responsibility of the State to intervene. Also, it is the responsibility of the State to ensure that it does so in a manner which is effective and which makes certain that there is no damage either to the industry's interests, or to the interests of the individuals they are seeking to protect.
I do not believe that anybody in this House would deny the comment which was made by my noble friend Lord Beswick, that there is need for some protection of the interests of policyholders. I go along with him completely in that regard and I am quite sure that the insurance industry also does so, because by the very essential character of the industry, built as it is upon faith and confidence, anything that maintains the integrity of its operation and protects the 236 policyholder is in the best short-term and long-term interests of the industry itself.
I think that this Bill is a bad one. At its best, it offers an imperfect and exceedingly expensive "ambulance service". At its worst, it does little or nothing to prevent the kind of activities which bring peril to the policyholder. Indeed, I would go so far as to say that if the Bill ever became an Act its operation would be of such a character that it would do precisely the opposite of what those who created it intended. That is the significant point which we must keep in mind. It imposes upon the policyholders—not the companies, My Lords—of the successful and prudent companies the responsibility of carrying the burden of the losses entailed by the imprudent or unsuccessful companies.
I believe that this is inequitable but I personally would not use, as certain noble Lords have done, the argument of inequity as being the major argument against the operation of such aid. I believe that it is wrong, because if we try to assess the reasons for the failures that bring losses to the policyholders, those failures are occasioned by bad management, imprudence and sometimes by deliberate criminal intent. But all this would not be possible, to put it at its worst, were it not for the greed or irresponsibility of individuals who are seeking to get the best possible terms regardless of the consequences.
There is a measure of responsibility on the shoulders of the individual policyholder. If this Bill went through in this form, we should be giving encouragement to the imprudent. We should be giving encouragement to the irresponsible to seek out the best possible terms and the most exaggerated offers on the part of insurance companies—all of which in the long term would bring about trouble for the insurance industry itself. Even if the Government could prove that the operation of this Bill brought about rescue operations for a dozen companies over the course of a few months or a few years, the mere fact that they had had to do this would in itself be detrimental to the interests of the insurance industry. It would indicate that there was a degree of instability, and certainly it would not be good for our overseas insurance trade.
237 I come now to Clause 16 which is, I think, the worst clause of all. It indicates a rescue operation. A rescue operation would be enshrined in the legislation and would be brought into action whenever there was a company at risk. A great deal of argument may be put forward to support the need for such assistance in some way. However, if it operated along the lines which are indicated by the very loose expressions of Clause 16, again it would have precisely the opposite result from that which was intended by the draftsman, for the reason that if, through aid secured from other policyholders, they bring about support for firms which are at peril, it will mean not only rescuing or supporting individual policyholders but also supporting and protecting commercial creditors. You would possibly also be supporting—and let us face the fact, because it has been suggested elsewhere—even the shareholders. You would be supporting, without any shadow of doubt—
§ Lord BESWICK
My Lords, as the point was made by another noble Lord. I should like to ask my noble friend why he thinks that one would be supporting shareholders, since this is specifically excluded from the provisions of the Bill.
§ Lord PEDDIE
My Lords, my point is that you cannot exclude it, because the intention is to maintain the continuance of that company; the shareholders will still be in existence. Therefore, I reject completely the point of view that has been expressed. I am sorry so to do, but if that clause means anything at all it means that the rescue operation will keep that company in existence; and if it is kept in existence then, instead of going into liquidation or receivership, the commercial creditors will have to be met. It will also mean that other firms' commercial and industrial policies will have to be met, and that is not the purpose of the Bill. I repeat, it will also mean protection for the shareholders, because if they had gone into liquidation the shareholders would have got nothing, whereas under the support that is given here there is at least some measure of protection for them.
I need say no more, and I have spoken longer than I intended. I end by saying that I share the view that it would be quite wrong on our part to oppose this 238 Bill on Second Reading. I think that the longer the process of discussion, both here and in the other place, the more likely it is that common sense will prevail—of that I am sure. Furthermore, while I reject the Bill, I applaud the sentiment that lies behind it. I honestly believe that whoever created the idea in the initial stages felt that there was some need for protection. I also believe that as a result of the treatment this Bill will receive, both here and in another place, there is a possibility of the industry and the Government coming closer together and ultimately developing a programme, a plan or a suggestion of some kind which will be infinitely better than this Bill. Therefore, I regret the necessity for opposing it, while at the same time I repeat my hope that after this discussion will come something that is acceptable to the industry, and is certainly in the long-term interests of the policyholder himself.
§ 4.56 p.m.
§ Lord GORE-BOOTH
My Lords, like the noble Lord, Lord Peddle, I start by applauding the compassion which this Bill shows in regard to a problem of a situation that may be unfair on individual people. But while expressing next my interests as a non-executive Director or the United Kingdom Provident Institution, a mutual life institution, I am bound to join emphatically with all those noble Lords from all sides of the House who have identified the bad principle at the base of the way in which the Bill proposes to beat this problem.
It is—it must be—a bad principle that people who are in no way involved, who have made a choice which is not involved in the collapse of a less well managed insurance company, should find themselves taxed (which is what it is) in order to enable that company either to be rescued or the people who invested in it to be compensated. I need not develop that point; so many noble Lords have developed it already. But I ask myself whether a Bill is necessary and, if so, is this Bill necessary?
On the question of whether a Bill is necessary, I feel that the noble Lord, Lord Beswick, has a point. It is all very well to say "Leave this to the industry", but that is rather like the situation when, as an individual, one suddenly finds oneself asked "Why did you not do that?" 239 Then you say, "Well, I was just going to do it"—and it is not very convincing. I think there is a point here where the industry has not grasped this in time, and therefore at least it must be expected that the Government should intervene. The question of course is whether the Government have intervened in the right way.
Before coming to that point, may I allude to one that stands, in a way, in the middle. Of course one has sympathy with people who have insured with a company which turns out to be dishonest, careless, or merely misguided. But the caveat emptor principle applies, that the buyer must beware. Having said that I again tack, and admit that the person, say in London, who wishes to find out which is the soundest insurance company is in a much better position to do so—and is in an environment where one would do so—than somebody wishing to do this from Much-Binding-in-the-Marsh.
I support the noble Lord who referred to the point that the information available to people who are likely to wish to insure should be much wider and much better. I refer not so much to information on specific policies but information on how to get after information. This is what I have spent my life doing in a different profession and I think the public generally, especially the modest family which wishes to start an insurance policy, is, around the country, probably ill-equipped to judge, or to find somebody who can help them to judge. This is a problem which perhaps cannot be covered by Act of Parliament but ought to be thought about and acted upon.
On the question of whether this Bill is necessary, I suggest that what I was carelessly about to call "Lord Aldington's housemaid's baby" should be called "housemaid's babies" because there are so many things in this Bill which seem to me to be wrongly conceived and capable of further abuse beyond the Bill itself. For instance—and I do not think any noble Lord has drawn attention to this—we start with 1 per cent. of premium income. If anybody has studied the history of, say, death duties, how does one know that it will stay at 1 per cent.? Supposing there are quite a lot of failures. 240 The next thing that happens is that the Government say, "We are in great economic difficulty. We cannot lay this on the taxpayer; call it 2 per cent." There is nothing to prevent this if a Government with a majority want it. So we should be quite liable to get this Bill developing into a more serious tax on precisely those people who can least afford it. because one must add to what I said about the kind of people who take out a modest life insurance that they are the people hardest pressed by the present state and tendency of our economy.
Another point which I doubt whether the Bill, or perhaps even the speeches hitherto, has dealt with is the difficulty of judgment. After all, it is as well to remember that one notorious collapse, the Vehicle and General, was largely due to a misjudgment in a Government office, and that the National was due to a misjudgment of investment in an insurance company. There needs to be more thought on identification: the omniscient Board will no doubt do its best—and like other noble Lords one would like to see the definition of membership. But I hesitate to credit any body of people with infallibility of judgment. One simply cannot say that this kind of board will rightly judge what should be done. I fear that it is a negative rather than a helpful comment, but it is a recognition of a further difficulty that exists.
Then of course there is the whole question of Government powers, which again I need not refer to in detail. But I really must protest—and I put it as strongly as that—against the psychology by which government (with a small "g") says "This and this problem we can settle in the Bill; this is too difficult for us—leave it to the Ministers' discretion". One really cannot leave Government in that state, especially as the tendency to perpetuate and increase that state of affairs seems always to be growing. Therefore, one hopes that the Government will respond to the very severe criticisms made. I know there are Affirmative Resolutions attached to some of the powers, but this really is not sufficient. I plead most earnestly for a thorough rethink of those clauses which seem to widen the authority of the Minister and of the Government in so many directions, and in so great a degree.
241 What, then, would I suggest? May I repeat a bow I made in another context to the noble Lord, Lord Houghton of Sowerby. The noble Lord's instincts in many ways seem to be the same as mine, in the sense that having heard the noble Lord speak several times, I know now that he would have been a great ornament to my own profession, because his instinct is to try to find where in the middle there could be agreement. I was going to suggest rather more crudely that, after this debate, the Government could take something of a pause and have another "go" with the industry. That is perhaps the diplomatic method. I am quite ready to concede that the method of the noble Lord, Lord Houghton of Sowerby, is more suited to Parliamentary circumstances.
My Lords, I cannot believe that after the criticism which this Bill in its present form has received, but with the counter-argument that something has to be done for people who have been put at a disadvantage, there ought to be some middle place where expert people on both sides should be able to agree. But, as I say, I have put it perhaps in an un-Parliamentary way, and possibly the way of the noble Lord, Lord Houghton, is better.
My Lords, I conclude as I began, by saying that we all seem to have recoiled from the bad principle at the back of this Bill. I join with other noble Lords in saying that while we should not seek a Division on Second Reading, I hope detailed consideration—and I rather welcome that this should happen in our House and not in another place—will lead to some compromise which should achieve the better purposes of this Bill, without loading it with things to which the human instinct is to object.
§ 5.3 p.m.
§ Lord AUCKLAND
My Lords, I begin with an apology to the Government Front Bench in that I will not be able to be in my place at the conclusion of this debate, because my wife and I have been summoned to a dinner of the International Small Businesses Association, at which representatives of the Royal Family will be present. I hope I may claim the indulgence of your Lordships on that 242 score. Secondly, I have an interest to declare, but not as a director of an insurance company. I have been connected with Lloyd's since 1948. I was a working member of Lloyd's for eight years and, like many noble Lords and others, suffered traumatic experiences as a result of certain hurricanes. So I suppose I can claim to have seen the less favourable side of insurance as well as the favourable. I have now rejoined Lloyd's, but not as a director—at least not at this stage in time.
My Lords, I welcome the fact that this Bill is commencing in your Lordships' House. I suppose it is one of the least contentious Bills of a Session of highly contentious Bills. Your Lordships' House is an ideal forum in which this Bill can be examined with the utmost care and attention. I submit it is a mixture of good intentions and thoroughly bad draftsmanship. On the whole, I think it will do more damage than good to the insurance industry. Of course there is a need to protect the policyholder. There is a need to protect the consumer—after all, we are all consumers—against malpractice and against companies of any kind which threaten to go under, or in fact do so. Certainly Lloyd's have taken the utmost precautions, particularly since the early 1960s, to put their house pretty much in order. While Lloyd's is technically excluded from this Bill, in Clause 3 powers are given to involve members of Lloyd's. Of course, much of the business transacted in Lloyd's is by way of reinsurance, not only through United Kingdom companies, but through overseas companies. This Bill cannot conceivably be said to exclude the largest and by far the most efficient insurance organisation in the world.
Much has been said about Clause 16. I do not think there will be many of your Lordships who will contest the gist of what has been said. Surely it is a very great mistake in any organisation to shore up an ailing company with the proceeds from companies which are buoyant, particularly at a time of grave financial situation affecting many industries and commercial concerns, both in this country and overseas. Surely this is a time to give every incentive to the insurance industry. That is precisely what this Bill singularly fails to do.
§ Lord BESWICK
My Lords, if the noble Lord, Lord Auckland, would allow me to interrupt, he is making a point which I have tried to show is virtually against what the Bill says. The rescue operation will not shore up a company in the sense that it shores up a company which made a mistake. The shareholders of that company will not benefit. The existing shareholders will lose everything. It is quite wrong to say that the other companies are expected to shore up those people. The business may be transferred to another sound company, but that would happen in any case.
§ Lord AUCKLAND
My Lords, I accept what the noble Lord, Lord Beswick, says, but it may well be of small compensation to the sound company. No doubt this is something which will be argued at great length when the Bill goes into Committee stage.
What about the family insurance businesses? There are a number of relatively small businesses in the sphere of insurance. Family companies are going to suffer enough from current Government legislation, and this Bill will be of very little help, whatever the noble Lord, Lord Beswick, says. From the way that Clause 16 is drafted, insurance companies, and particularly family insurance companies, may well feel at least very cynical.
The other clause to which I wish to refer is Clause 20. This seems to be a most extraordinary clause, because one wonders which company will benefit by this idea. I daresay that in principle the idea may be a good one. Will the Board consult with the companies who are to benefit? Will the companies who are not to benefit be similarly consulted? The insurance industry, as my noble friend Lord Aberdare said, is one of our greatest invisible export potentials. Certainly the company with which I am concerned—so I think with the companies with which most people in insurance are concerned—is trying to increase exports; we are trying to increase business in overseas countries. I cannot for the life of me, and with the best will in the world, imagine that this Bill will help this endeavour.
I do not think this is the time for a detailed examination of a Bill which, as I say, may have good intentions. For the sake of the industry and all who work 244 in it and are concerned in it, whether directors, managers, shareholders or policyholders, this Bill needs the very closest examination. I hope the Government will give ample time, before this Bill goes to another place, for this House, as a revising Chamber, to really take the matter by the horns.
§ 5.12 p.m.
§ Lord DARLING of HILLSBOROUGH
My Lords, my noble friend Lord Winterbottom will probably be happy to know that I shall not repeat the general criticisms of the Bill which have so far been advanced. I, too, like Lord Houghton and Lord Peddie, have no interest to declare. I have some policies with the Co-operative Insurance Society, and that is all. I want, if I may, to direct my observations to what I think are two basic weaknesses in the Bill, and then to offer what I hope will be considered a constructive alternative to the main principle of the Bill.
My first point in drawing attention to the weaknesses of the Bill concerns the powers that the Bill gives to the Secretary of State, and the second concerns his and his Department's relations with the Board. My attitude to both arises, if I may venture a personal observation, from my experience as one of the Board of Trade Ministers responsible for insurance matters at the time of the Fire Auto and Marine scandal in 1966. Although I was no longer a Minister when the Vehicle and General Insurance Company collapsed five years later, I have, as I think some noble Lords will know, expressed an interest in the proceedings, because in my view those two failures were in a sense connected. I do not think this Bill will do a great deal to prevent further failures that may occur through bad management, through offering far too generous terms or through generally misleading the public.
The Savundra scandal exposed the lack of supervision over insurance companies by the Board of Trade, and exposed the absence of real authority to intervene in companies which were insolvent, or appeared to be approaching insolvency. or were offering over-generous terms. Some noble Lords may remember that we attempted at the time to give the Board of Trade the powers that obviously were needed to obtain information about 245 a company's business, and to intervene if necessary, by inserting some clauses for that purpose into a Bill that was then going through Committee stage in another place and is now the 1967 Companies Act. Those clauses were, admittedly, rather hurriedly drafted, but they provided the beginning of sterner supervision, by requiring companies regularly to provide to the Board of Trade information on which their solvency could be judged, and in effect giving the Board of Trade authority to intervene in the affairs of doubtful companies and to try to nut things right. But it proved extremely difficult to get the insurance industry's support or approval, even for the statutory returns of necessary information that was wanted.
It may be that the insurance industry has reformed since then, but if my experience is any guide I certainly shall not support self-regulation by the insurance industry. I think that even with the statutory backing, as the noble Lord, Lord Aberdare, suggested, the insurance industry itself is not the body which should exercise supervision over this business. In any case, if we are going to give it statutory backing, it is Parliament that will decide the rules, the regulations, the statutory backing and everything else. If that is going to be done, I think some other kind of body would exercise far more effective control. I think that the control should be taken away from any Government Department; that the supervision and control and power to intervene, carefully laid down in legislation, should be given to an independent authority set up by Statute—something on the lines of the Industrial Assurance Commission—with adequate powers to deal with whatever arises from their regular monitoring of the business of every insurance company.
It is true, of course, that since the unfortunate episodes to which I have referred, the Savundra scandal and the Vehicle and General business, the powers of the Board of Trade have been greatly strengthened, and the staff of the insurance division has been multiplied tenfold. But this has not prevented further failures, the latest, of course, being Nation Life and London Indemnity. if there are to be failures of this kind, mainly because the powers given to the Department of 246 Trade are inadequate, it seems to me altogether wrong that the small savers in life insurance policies should pay into a fund to rescue speculators who have been attracted by overgenerous policies which in my opinion a competent supervising authority should never have allowed to be offered. I do not want to pursue this argument at any length at this stage. I only want to say that this Bill, and even the 1974 Act, have not pursuaded me to change my mind on what I consider to be the right kind of authority to control insurance companies. I am still convinced it should be a body like the Industrial Assurance Commission, outside the Government, but, as I repeat, with adequate powers.
My second point is that I think the relations between the Secretary of State and the Board proposed in the Bill are offering us the worst of both worlds. The Board will not be the kind of independent authority that I have been talking about and it will not have any real powers of intervention. It will not have the authority to move quickly, if it sees an insurance company offering terms that appear to be inviting insolvency, or if it sees from the regular returns it requires that the reserves of the Company are inadequate for its purpose, or simply, if the circumstances appear so to indicate, to get an infusion of new management into a company that appears to be badly managed.
This, I think, is what is needed. I do not want to spell it out in detail at this stage. I would expect that the majority of reputable, prudent, well-conducted insurance companies would welcome this kind of independent supervision. After all, the reliable, proven companies have a vested self-interest in keeping out of the insurance business the imprudent, the overgenerous and the fringe companies, and this is one way in which it can be satisfactorily achieved. But the main business of this proposed Board is not to do this job of supervising and controlling, which I think is so necessary; it is to collect and disburse a levy. The Secretary of State will from time to time tell the Board how to do it. So far as I can see, the supervisory powers which are slowly flowing from the 1974 Act will still be exercised by the Secretary of State and his Department on the advice of unnamed persons yet to be appointed.
247 I do not think that this supervision will work any better than that which has been exercised in the past. This is not good enough. If there is to be proper supervision and control, a levy to compensate the policyholders of failed companies may never, or rarely, be needed.
In my view what the Bill will do is to establish a thoroughly bureaucratic chain of operations through the Secretary of State to the Board, to a group of unnamed advisers, and back again, before decisions —and in this business decisions should be taken quickly—are come to. I am dubious about giving to the industry the task of setting up some kind of organisation on the terms that the industry has proposed for its self-regulation. In view of the time I do not want to develop even that argument. It seems to me that what is really needed at this stage of the Bill's discussion is for the Government and this House to accept the proposal submitted by my noble friend Lord Houghton of Sowerby, that this Bill should be sent to a Select Committee, when we may consider all the possible ways of providing a full measure of protection for policyholders. We should do this by first making certain that all the insurance companies in this country are properly conducted; that they do not offer overgenerous terms, and that we have a body that can intervene helpfully —not to put companies out of business —in ensuring that their business is properly conducted in the interests of policyholders.
§ 5.23 p.m.
§ Lord TAYLOR of GRYFE
My Lords, like several other Members of your Lordships' House today, I have to declare an interest. Some years ago I was a director of the Co-operative Insurance Society and am presently a director of the Friends Provident Society. My involvement in those two companies is relevant to the discussion today. We are discussing the question of consumer protection, and the co-operative movement in this country has pioneered legislation for consumer protection over a very wide field. It is interesting that as we debate this measure on consumer protection in the insurance field, in which the co-operative movement has such a substantial stake, the co-operative movement 248 has made it abundantly clear to the Government that it cannot support this Bill as a means of effective consumer protection. I suggest to the Government that they should pay heed to the advice of the co-operative movement in this regard.
At the moment, my association with insurance is with a mutual company. Here again, the Government should recognise that the mutual companies, which are designed to operate in the interests of policyholders and whose shareholders derive no benefit from the industry, are strongly opposed to this legislation. It has been suggested that because of the failures of one or two companies recently this legislation is now urgently necessary. There has been a suggestion that in this industry the consumer is specially vulnerable, He is vulnerable in the sense that when he takes insurance he takes a long-term investment. But we should not minimise the extent of consumer protection that already exists in the industry. If your Lordships read the provisions of the Insurance Companies (Amendment) Act 1973 you will find that there is more inbuilt consumer protection in this industry than in any other I know.
If your Lordships are familiar with the returns which insurance companies must make to the DTI, you will realise how comprehensive and searching are the questions asked by the DTI. I know of no other industry where a Government Department insists that it has power to refuse authorisation,if any officer of an application company appears not to be a fit and proper person.There is a degree of management audit built into the returns made to the DTI. There is also strict supervision of the actuaries who operate in the various insurance companies. In addition, there is strict examination of the assets of the company and the stablished ratios are designed to protect the consumer, with a separate identification of the existing assets which represent the long-term funds which are specially at risk. So the DTI has very effective powers to ensure that the reasonable expectations of the long-term policyholders are protected, and their powers permit the inspection of an insurance company which is not necessarily itself in any way suspect, and impose requirements on companies which have undergone change of control. So 249 that in the industry there is a considerable supervision in the interests of the consumer.
I am quoting from a Circular which was issued by the DTI when the Insurance Companies (Amendment) Act 1973 was passed. For example, Sections 13 to 17 provide:… when a threat of insolvency is detected at a sufficiently early stage, so that Government intervention is not designed to await the collapse but to anticipate the collapse, and very substantial powers are devolved in the Government to take the appropriate action".So it is incorrect to suggest here that the consumer is somehow standing totally unprotected.
I am much attracted to the proposition which has been put to the House by the noble Lord, Lord Houghton of Sowerby. I hope it will be taken up, because it appears to me to be a reasonable way of dealing with the matter. I suggest to the Government that this House and the other place have a substantial legislative programme ahead. Each day, one reads in the newspapers of new propositions that will be put to the House—the complicated Industry Bill, various nationalisation schemes, social security measures. This House will be very busy, as will the other place. I suggest that a long argument and debate in Committee with the appropriate Amendments to-ing and fro-ing from this House to the other place, would be a disruption of the more important legislative programme which is before Parliament. So I strongly recommend to the Government that they should accept the proposition of the noble Lord, Lord Houghton of Sowerby. I also suggest that the Government might consider seriously whether they should proceed in this matter, in view of the lack of enthusiasm that has been expressed from the Government Benches in this House today, and the fact that the Economic Committee of the TUC, which I suspect carries a good deal of weight in Government circles these days, has indicated that it is not happy with this piece of legislation. I therefore commend the Government to follow the wise path of the noble Lord, Lord Houghton of Sowerby.
§ 5.31 p.m.
§ Lord MONSON
My Lords, I must declare my interest, first as a member of Lloyd's, second as a director of a small 250 insurance broking company, and last but not least as the holder of a with-profits life policy, like many hundreds of thousands of people in this country. There are those who argue that it is the duty of the State to protect all its citizens from the unforeseen financial vicissitudes of this life. I cannot agree with this, from the practical point of view or even from the point of view of desirability, but I can understand the principles advanced in support of such a philosophy. However, the alarming thing about this Bill, when it is considered in conjunction with the Air Travel Reserve Fund Bill, to which your Lordships gave a Second Reading last week, is the random way in which successive Governments have elected to bale out selected groups of consumers who stand to suffer financial loss, while ignoring other groups who are arguably at least as unfortunate, if not more so. Those people, most of them of modest means, who put their savings into the stocks of the Mersey Docks and Harbour Board—narrow range trustee securities, originally almost of gilt-edged status—must have thought this at least as safe as putting their money into a life policy, perhaps more so, and we all know what happened to these unfortunate stockholders.
My next example is the thalidomide tragedy. Thalidomide was prescribed on the National Health Service; and how much this must have reassured mothers-to-be, who would have assumed that the product was thoroughly tried and tested. In my submission, the Government of the day was at least as morally culpable as the Distillers Company—in which, I hasten to add, I have never had any interest whatever. If that company had not been bullied by a section of the Press, with the somewhat unworthy connivance of the Government of the day, the unfortunate victims would have received nothing at all. The most recent example is the unhappy saga of houses and flats built with high alumina cement. Their owners paid perhaps £10,000, £15,000 or £25,000 for these properties, only to find them now virtually worthless. The Department or Departments concerned in approving this building method totally disclaim any legal or moral liability, so that the owners stand to lose their investments in their entirety—in contrast to the fortunate package tour travellers and the protected policyholders.
251 My second philosophical objection to this Bill is that, given that certain groups of consumers are singled out for protection against financial hardship, it seems quite wrong that the entire burden of this should fall on the shoulders of certain other groups who themselves are in no way responsible for things having gone wrong, rather than being spread over the taxpayers as a whole. It is rather as if every housewife who went to her greengrocer or supermarket to buy 2 lb. of tomatoes was required to pay an extra 2p or 3p per lb. in case somebody bought a bag of rotten tomatoes from a barrow boy; or as if every man who went to a reputable dealer to buy a second-hand car was required to pay a levy of an extra 4 per cent. or 5 per cent. on the asking price to compensate those people who bought an old crock from some fly-by-night dealer in the Warren Street or Old Kent Road areas.
It appears from what has been said so far today that your Lordships will give this Bill a Second Reading. That being the case, there are certain amendments that I hope will be made at the Committee stage or later. As the noble Lord, Lord Aberdare, and the noble Lord, Lord Banks, and others suggested, Clause 4(5) should come out, as ought Clause 14, and Clause 16 should be considerably modified. My next suggestion is a good deal more controversial: I believe that in the event of insurance companies being unable to meet their liabilities as a result of extravagance, mismanagement or unwise investment, the first call should be made on the pockets of those directors responsible for mismanaging their companies' affairs; the second call should be made on the pockets of such insurance brokers as may have pushed these policies, possibly tempted by the high commissions offered. Only when these two groups have made a substantial contribution should the policyholders and shareholders in conservatively-managed companies be called on to make their indirect contribution. The precedent for suspending the protection afforded to directors by the law of limited liability is to be found in Clauses 23 and 28 of the Aircraft and Shipbuilding Industries Bill, which was recently introduced in another place by the Secretary of State for Industry. These clauses provide that directors who pay out more than the 252 approved amount by way of dividends prior to nationalisation, or who dispose of assets without permission, become personally liable to reimburse the relevant Corporation, subject only to arbitration in cases where the exact amount is disputed.
The final change which I should like to see relates to the holders of with-profits policies, which are particularly affected by this Bill because of the gearing effect that the levy will have, with consequent adverse effects on future bonuses. It seems only fair that those who recently took out such policies, ignorant of the imminence of this Bill, should have the opportunity to reconsider matters for a limited period of, say, three to six months so that they may perhaps switch to a unit-linked or other policy, and they should be enabled to do this without fiscal penalty; that is to say, they should be able to surrender their policies or make them paid up without their becoming non-qualifying policies, and without forfeiture of tax relief (which forfeiture is provided for in Section 8 of the Finance Act 1975). It may be that such an Amendment could not, for technical reasons, be incorporated in this Bill but would have to await the next Finance Bill. In view of the general feeling of the House, I do not intend to oppose this Bill today, but I hope it will be possible to amend it very substantially in Committee.
§ 5.39 p.m.
§ Lord BROWN
My Lords, in common with many other Members of your Lordships' House, I believe that the Bill is wrong in principle, but I will not recite my reasons for holding that view because they have been adequately adduced already. Instead, I will spend most of the short time I intend to speak dealing with a matter which has not been raised so far, but, first. two small points. The first point should perhaps be made in fairness. It is that several noble Lords have pointed out that under Clause 16 the Board may step in and save the situation, and, in so doing, may rescue the shareholders and creditors. I do not believe that this is necessarily so, particularly if the company was allowed to go into liquidation and was then rescued. In that case, the shareholders or creditors would get only their just dues, which 253 might be nothing or a very small dividend. It is, therefore, unfair to accuse the Government of going as far as some noble Lords have suggested.
I see the noble Lord, Lord Aldington, in his place. He said that he inevitably supported means of protecting policyholders. I well recollect the Committee stage of the 1973 measure when he and others made vigorous attempts to amend his own Government's measure in a way that would have detracted from the protection that it gave to policyholders—
§ Lord BROWN
—and I took part in that debate. He was seeking to protect the position of directors and managing directors in insurance companies in a way that would have detracted from the protection of policyholders. I think that it is only fair to draw attention to that point because—
§ Lord ALDINGTON
I interrupt the noble Lord because I thought that, at the end of all those proceedings, he agreed with me and many other of my noble friends that, as a result of his contributions and mine—I think that that is what he said—the Bill had been greatly improved. The noble Lord's memory is rather short.
§ Lord BROWN
My memory differs from that of the noble Lord. However, we can leave that point and come to a point that has not so far been made. The general theme of what I have to say may well have been discussed before—indeed, I am sure that it must have been discussed in the insurance world and at the Board of Trade. But I, probably through my own ignorance, have never seen it in writing or heard it discussed. It is this: citizens pay money to insurance companies in order to protect themselves from the vagaries of fate. That is the general drift of all insurance. It has always seemed somewhat peculiar to me that insurance companies, by indulging in vigorous and sometimes unbridled competition, should put themselves at risk and that the very institutions which exist to protect policyholders should sometimes indulge in risks which undo that protection.
254 I know from many debates about insurance matters in which I have taken part that the emphasis in risks—apart from defalcation, with which I think the Board of Trade has sufficient powers to deal—is on too-seductive policies based on premiums which are too low or on benefits which are too high. The whole of the debate here has surrounded that issue. It has occurred to me in the past, though I have never spoken about it, that one means by which the risks which competition drives insurance companies into taking, not only with their own funds but with those of their policyholders, might be dealt with is by limiting the extent to which those companies could make these too-seductive offers. The clue to this lies in Clause 12. It is not a suggestion to the same effect as that which I am now making, but it rebuts the argument that it would be impossible for anyone to assess whether the benefits were too high in relation to the premiums. Clause 12 states:If it appears to the Board, in the case of any long term policy, that the benefits provided for thereunder are excessive in any respect, having regard to the premiums paid or payable and to any other terms of the policy, the Board may refer the policy to an independent actuary.(2) Where an actuary to whom a policy is referred under subsection (1) above makes to the Board a report in writing … stating that in his view the benefits provided for under the policy arc excessive …This of course refers to an action which would be taken by the Board and to the advice of an actuary after the horse has bolted, when the policyholder is about to be deprived of his benefits and the Board steps in to rescue him. I see no reason in principle, why this assessment of the actuarial basis of new policies should not take place before they are offered instead of waiting until they have been proved to be too seductive, and waiting for an actuary to say so. That would be a limitation of competition; but surely it is better to take preventive action rather than to allow companies to publish policies, to advertise them and to lure unwise policyholders into paying out their money, when it is no doubt known in insurance circles that the policies are too seductive and will probably lead to sad situations. Surely it is better than waiting until this is proved to be true and then using a levy on all 255 the other insurance companies to rescue the policyholder from this sad fate.
I hope that the advice given by the noble Lord, Lord Houghton of Sowerby, to the House will be accepted and that the Bill will go to a Select Committee. I confess that I am guilty of not knowing enough about the procedure of Select Committees to know whether altogether new principles can be discussed, but I make this point here and now, because it seems that if we can prevent a thing happening it is very much better than allowing it to happen and then stepping in subsequently to rescue those who have been deprived of the benefits of the policy.
My Lords, that is the principal point that I have to contribute to the debate. I have one other suggestion to make, based on the same sort of thinking. One knows that on long-term policies many companies offer profits. That is a self-regulating factor in a policy, in that the premium very adequately covers the basic return on the policy and policyholders know that, with luck, they may get 100 per cent. extra. However, they know also that, if the insurance company does not perform as well as everybody hopes, they may get no bonus, though they are quite well assured of the basic sum for which they have contracted. It seems to me that this principle might be extended to percentage pay-outs on claims if the company was running into difficulties, and that that should be a stated principle of insurance policies at the outset. One should be able to look at the differential performances of insurance companies and see to what extent over the years companies have fully met their commitments by paying 100 per cent. on the claims that they undertook or, in the case of some other companies, that their average had been only 90 per cent. We look at life policies in just that way. That is the other side of the penny to the basic principle of limiting the advertisement of policies which are unsound and too seductive for the unwary.
§ 5.48 p.m.
§ Lord REIGATE
My Lords, like practically everybody else, I must declare my interest. It is very small and is that I am a policyholder of a with-profits life policy —with substantial profits, I am glad to say, so far. Also, I am a name at Lloyd's. That is a point to which I shall return 256 later. It is quite impossible, if one rises as the 15th speaker in a debate of this kind, to attempt to say anything original or anything that will not already be known to your Lordships. It is, however, reasonable, if one is opposed to a Bill, that one should take some opportunity of explaining the reasons why.
I will say this much: I do not think I have ever attended a Second Reading debate in either House in the course of the last 25 years in which a Bill was so universally condemned by every single speaker. I thought for a moment when the noble Lord, Lord Houghton, was speaking that he was going to say a kind word for the Bill. He said a moderately kind word, but that was only a prelude to the moment when he assumed the role of the dove bearing the olive branch of a suggestion to the Government Front Bench. Although I shall come back to that later, it is my hope, like others, that that will prove acceptable to the Government. I must also say that, if one is opposed to the principle of a Bill, one ought, as many speakers have said, to vote against it. Any suggestion of a Select Committee, although it may be face-saving, is, in my view, Parliamentarily wrong. But I shall not dwell on that point, because I think that, if this Bill were defeated, the situtaion would be an embarrassing one for the Government and, in a curious measure, might also be embarrassing for the Opposition, because of the way this House is constituted.
My Lords, as I said earlier, one cannot hope to say anything original. I had one suggestion that I wanted to make, but my hopes of being original were finally dashed by the noble Lord, Lord Darling of Hillsborough, because he made the very point that I had been treasuring throughout the debate as I tore up page after page of my notes. However, I should like to make one or two comments. I am not convinced, and I do not think that I shall ever be convinced, that a measure which, as has been said, penalises the prudent for the benefit of the imprudent can ever be justified. We all agree that, in this age, the doctrine of caveat emptor must, in some measure, be qualified. The 1974 Insurance Companies Act, on which I have refreshed my memory, imposes conditions which I am sure will, in time, establish fair trading conditions and render it impos- 257 sible for some of the difficulties which have arisen in the past few years to occur again. The Act should, at least, lengthen the period of time it takes a foolish man to be parted from his money. If the Government, in bringing forward the Bill, had suggested that it was a stopgap measure until the 1974 Act could become fully operative, it would have had a not unsympathetic reception from your Lordships. It would have meant putting a time limit on its operation and the House would, rightly I think, have demanded more expedition in making the regulations under the very comprehensive 1974 Act. But that is not the argument.
We therefore come back to the basic proposition of how far can one really protect the policyholder? There will always be gullible people. After a century of popular education there are still those who fall almost every day for the three-card trick. There will always be greedy people who will go for a bargain and who will cry when their fingers are burned. If one looks at the failures in recent years which may have occasioned this legislation, one must bear in mind that the policyholders have lost their money sometimes from stupidity, but just as often from cupidity. My noble friend Lord Aberdare said that the Government's answer to everything was to produce a Bill. Your Lordships will be familiar with the 25th Chapter of St. Matthew and the parable of the Ten Virgins, only 50 per cent. of whom were wise. Your Lordships will remember that the foolish five found themselves facing a fuel crisis and missed the party, and got their deserts. I cannot help feeling that in this day and age we would have an Act of Parliament which would establish the Foolish Virgins Protection Board, providing jobs for the girls and imposing an oil levy on their wiser sisters. But I still say that there is a limit to what you can do in the way of protection of the policyholder and the consumer.
My Lords, what is the real purpose behind this Bill? Is it only to protect policyholders? Or is it also to screen the Department of Trade from criticism by the public and Press when these scandals occur? In my view criticism can now arise only because the extensive powers in the 1974 Act are not being used. The Board which is proposed 258 will presumably have some staff and it says in the Explanatory Memorandum that there will be no increase in staff in the Department of Trade. This makes me think that the suggestion by the noble Lord, Lord Darling of Hillsborough, that the regulation of the industry should be transferred to an outside body, is one which merits very careful consideration, because it could take the policing of this industry out of the rather difficult political sphere in which it now takes place.
I have every sympathy for a Minister who finds himself answering questions about the operations of a company, because, his Department is concerned with it. We never hear about the Industrial Assurance Commissioner because he does a superb job, and the same applies to the Registrar of Friendly Societies. We never have any trouble in that sphere. I hope that the suggestion by the noble Lord, Lord Darling, will be given very careful thought, even if it cannot necessarily be incorporated in the Bill.
My Lords, my strongest objection to the Bill is in regard to the incredibly wide powers taken under the Bill by the Secretary of State to make Orders. We all accept Statutory Instruments as a necessary evil in the legislation that is passed in this complex society of ours. But we know the difficulties of thorough Parliamentary scrutiny, despite the admirable work of the various Committees of both Houses. We know the difficulties of debating Statutory Instruments, the impossibility of amending them, and the pressure they cause on Parliamentary business. No doubt some orders—I shall not say that they are undesirable orders—slip through which Parliament would have preferred to have considered more fully. Hence, when in legislating we give power to a Minister to make Orders we seek to limit his powers and to define the purposes as narrowly as is reasonable.
But look at this Bill. Not only does the Minister have wide Order-making powers, but under certain clauses he takes powers to amend this very Bill which is not yet an Act. I do not know whether there is any precedent for that. It appears that the noble Lord, Lord Jacques, says that there is. There is often power to amend other Acts, but I cannot recall a case in which a Minister takes power to 259 amend the Act in the Bill when it is going through the House. But I will yield to more expert opinion. I am no lawyer, as must be only too palpably obvious by now. But surely that is very odd. With the powers that the Secretary of State is to take he need have only one clause which would empower him to do anything in accordance with the Long Title of the Bill.
Let us look in detail at some of the powers he takes. Clause 2 says that the Secretary of State may give "guidance". I like that delicate word "guidance", especially when it is followed up by a provision imposing a duty on the Board to accept that guidance. Would not "order", "command", or "direction" have been rather more honest than the word "guidance", which somehow carries the connotation of guide, philosopher and friend? Clause 3(3) enables the Secretary of State to take power to include Lloyd's if he so wishes. I have already declared my interest there. Why include Lloyd's, of all branches of the insurance industry? Why include Lloyd's, of all institutions, whose policyholders are far better protected than any others under this or other legislation? Why include Lloyd's, which is governed by its own Act, a free but disciplined market with a remarkable measure of protection for all its policyholders? The repercussions of including Lloyd's—that most valuable earner of foreign exchange—might be very widespread, and even disastrous.
Clause 4(4) lists the excluded categories and in the next breath provides a power to include them in the Bill again. Why? Both these powers, which affect issues and concerns outside the intended scope of the original Bill, should be granted, if necessary, only by fresh amending legislation, not by Statutory Instrument. These examples are not all. Clause 14 in effect empowers the Secretary of State to rewrite Clauses 6 to 11, and incidentally, if my reading is right, would enable him to bring in companies such as Nation Life, which were in trouble before the Act. I am not saying that he would do so, but he is taking the power to do it. Taking Clause 14 in association with Clause 24(4) which empowers—the Secretary of State … to make different provision for different circumstances …".which must cover almost everything under the sun, would, as the noble Lord, 260 Lord Gore-Booth, said, give him power to increase the levy. You could hardly get powers wider than those. I am advised that the Secretary of State could take all the new powers to which I have referred in one single Statutory Instrument. No doubt the Minister in reply will say that he would not do so. I think it is easier and surer if at a later stage we seek to remove those far-too-wide powers.
My Lords, what should we do about this horrid little Bill? This debate has not been a normal Second Reading debate. It has partaken of a discussion of what to do with the corpse and how to make decent and suitable funeral arrangements, and a Select Committee seems to be an answer. As I have said, I am against the principle and therefore would have preferred to vote against the Bill. If the Government do not accept the idea of a Select Committee, I think they would be wise to allow many days for discussion, but the idea of going to a Select Committee is one that attracts me very much. May I say to your Lordships that the last time I spoke in this House was in opposition to a Private Bill. I opposed it; it went to a Select Committee and it sunk without trace. Here's hoping!
§ 6.2 p.m.
§ Baroness FISHER of REDNAL
My Lords, I will start by declaring my interest this afternoon. I am what might be called a prudent individual policyholder. I say "prudent" for the simple reason that I am not a risk-taking person. The only time I risked any money was ten shillings, in old money, on a horse in the Derby. He failed to get anywhere near the winning post, and I moaned so much about losing my ten shillings that my husband gave me another ten shillings to quieten me down. So I am not a risk-taker. Neither am I an expert on insurance. I should like to be debating the Bill about which the noble Lord, Lord Reigate, spoke—the Foolish Virgins Protection Bill. I might be able to contribute some expertise on that!
I say that I am knowledgeable about prudent policyholders, and I want to base my comments on that kind of person. At this stage in the debate, there is probably nothing new that can be unfolded. The only new thing about my comments is that I shall be speaking in skirts, and all 261 the other speakers have spoken in trousers. I suppose that one could congratulate the Government on their proposal to protect policyholders, but in my view this Bill does not do that justly and fairly. But the Government have a problem—the publicity that goes with the falling down of policyholders, whether motor insurance or life assurance. I should have liked to see legislation to prohibit the kind of management practices that lead to difficulties, rather than penalise individual policyholders. I should have welcomed Government legislation of that sort, but it would have been legislation to make insolvencies less likely in the future.
It is not for me to apportion blame. As I said previously, I am not a betting or a speculative person. Perhaps the life I lead is such that one has to be quite sure of one's ground before taking false steps. But why should ordinary people —and I include myself in that number —be penalised by the speculative fringe of insurance companies? People are promised extravagant benefits. The noble Lord, Lord Peddie, is a member—I think he might be the chairman—of the commission dealing with advertising, where what is called "bad advertising" is vetted. I should have thought that speculative insurance companies were making extravagant promises and could be the subject of some kind of control by the commission on advertising. Many com-panics now have to make quite sure that when they advertise they do so honestly. We even have the provision that it has to be a genuine "sale" in retail stores. If there is this kind of jurisdiction over misleading advertising in the retail section, why should it not also apply in the field of insurance?
I agree with other noble Lords who have spoken that this Bill will ensure that rescue becomes general. There is a general consensus of opinion throughout the country that if anything goes wrong the Government will step in and see that we are all right. Why become prudent if you have the Government backing you up? As has been said, cutprice trading is being encouraged and policyholders are not really bothering to ensure that they choose a wise and prudent company.
Like everybody else—like all women anyway—I like a bargain, but there are few cut-price bargains to be had in the 262 insurance field. If there is an appreciable risk that an insurance contract might not be honoured in the event of a claim, why bother to insure at all? The whole essence of insurance is the security one has when one puts money into an insurance society. To my mind, the idea of insurance is the avoidance of worry and uncertainty, and people who go in for speculative insurance obviously know that that does not conform with what we recognise in this country as the certainty of insurance. I say again that it is unfair to ordinary policyholders in traditional insurance companies to have to pay levies to protect those investors.
Like the noble Lord, Lord Houghton of Sowerby, who spoke about Clause 16 and the purely speculative people in the insurance field who benefit from misleading the public, I would ask: where do these people go? They benefit from what might be called misdemeanours which operate on the gullible public. But we do not find them slumming in some downtown bedsitter in this great City of London. They do very nicely out of these speculative gains and get out while the going is good, leaving it to the policyholder to carry the can. Why should the can be carried by the other policyholders who are getting less profits from recognised insurance companies? Therefore, I cannot support the Government in their proposals in this Bill to levy millions of pounds on policyholders, the great majority of whom are ordinary people like myself, in order that dubious fringe insurance companies. run by financial operators for their own benefit, can be kept in being. It seems strange to me that the Government are trying to prop up what in Birmingham we would call, for want of a better word, the "sharks" among us.
It is important for the Minister, when he comes to reply, to take cognisance of the fact that, as the noble Lord, Lord Reigate, said, from both sides of the Chamber this afternoon and from various angles there has been this opposition to a Government measure. As other speakers have said, it is not only Members who are speaking this afternoon, but the trade union movement itself who have very grave doubts about the proposals being brought forward. The noble Lord, Lord Reigate, rightly drew attention to the fact there is surveillance 263 by various people whom we recognise, and surveillance by the Department itself. I can fully understand a Minister being concerned when his Department comes under strong criticism from all forms of media. This Bill may in some measure relieve the Civil Service of responsibility. But the provisions are completely against the small saver. While I recognise that the Civil Service have a difficult task—there is the complex nature of the insurance industry and the complexities that arise from inflation—if I have to choose and register my sympathy it will be not with the difficulties of the Civil Service, but with the small saver and those people whom I have represented through the whole of my political career.
I would draw to the attention of noble Lords the fact that life assurance—as the majority of shareholders know it in this country—means the man who knocks on the door for the premium, fortnightly or monthly. That man creates a bond of friendship with the people from whom he collects. He becomes a source of information on all kinds of things that are going on, informing his customers not only of insurance. He is looked upon as a respectable person, whether he is the "man from somebody", or "somebody from somewhere else". I should have thought the Government would be more sympathetic with policyholders of this kind, because, in the main, they are investing their money in life assurance in order to use it in times of distress. That is why the majority of ordinary policyholders insure in life assurance. To put it simply, they recognise that at some stage they are going to die and must be buried.
They cannot rely on the Government to do that, because the £30 death grant goes no way these days to provide a funeral for anybody. I speak with a little experience, for only recently I lost my dear mother and I can say categorically that the cost of a funeral is at least £100 to £130. I am speaking about the kind of people whom I have met during the course of my political career. They invest in life assurance so that they can do their duty, and to their best for their loved ones when they pass on. They do not look on life assurance as some form of speculative deal that you make money out of by cashing in. They put in their 264 money week by week for collection by the man at the door, and they look on it as a safety measure. Why should these people be penalised because of the speculative so-called life assurance companies?
For longer than I care to remember, I have been involved with women's organisations dealing with consumer protection. Like other noble Lords, I think that prevention is better than cure. The Government are to be congratulated upon their consumer protection legislation. They have been admirable in trying to prevent many malpractices that go on. But I cannot see that this Bill does anything at all to improve consumer protection. The Bill provides no strengthening of any protective legislation. I can find nothing in it—and I have read the Bill closely—that will make insurance company failures less likely in future. All it means is that if failures occur somebody else will be bailing out. That to me is not good consumer protection. Good consumer protection means protection from abuses; in other words, prevention rather than cure.
I shall not be suggesting this evening that we should divide this House; but I feel that my noble friend Lord Houghton has perhaps thrown out a lifeline. I do not know how far the Government will go in accepting that lifeline; but I feel, in view of the many comments made this afternoon, that the Government have need to take cognisance of the very strong feeling in the House against this Bill. I would therefore add my voice to that of my noble friend Lord Houghton in asking: If this is the lifeline the Government are looking for, will they catch hold of it?
§ 6.17 p.m.
§ The Earl of LIMERICK
My Lords, those who are instinctively on the side of the minority, must by now be thinking of forming a Society for the Friends of the Policyholders Protection Bill. I find that I give one-and-a-half cheers for this Bill. I have sympathy with the purpose of it and I have a sympathy, certainly, with the Minister who has the task of winding up this debate. I have no interest to declare in relation to the insurance industry apart from that common to us all of being a policyholder in one way or the other. My interest is essentially that I was responsible for 265 introducing into this House the last legislation on insurance companies in 1973, and from that I retain some vivid memories.
I think the question which has been asked and is most relevant is whether this Bill is really necessary. Is insurance such a different business that it merits this type of protection for those who engage themselves in it? To that, unhesitatingly, I answer, "Yes, it is" essentially for the reasons just given by the noble Baroness, Lady Fisher of Rednal. People take out policies, perhaps in their young days, with companies that appear quite sound. But managements may change, and conditions may change, and they are looking to benefits to be derived 30 or 40 years later in circumstances which cannot fully be foreseen.
I think also that we have to compare our own highly successful insurance industry which does so much for us nationally with the insurance industries of other countries. If we look at the European companies we see that the statutory powers of regulation are powers to regulate premiums and powers to regulate terms of policies. We have always taken (and I hope we always shall take) a different view. We say that it is right to monitor the solvency of companies and the fitness of those who manage them. This allows for innovation and development, so vital if our insurance industry is to retain its pre-eminent position.
That said, in 1973 we had some sweeping new powers given to the insurance supervisors. These are not yet fully effective. In the usual way, it will be some months before they can be fully effective. One might assume that if they were adequate the powers of compensation which are set out in this Bill would never be required. Unfortunately, we live in an imperfect world, and it is inconceivable that there will not be some other case which would warrant this form of rescue. For that reason, I find I cannot oppose the principle of the compensation fund, nor does the insurance industry oppose the principle; they had devised a scheme of their own. I am puzzled by timing. Paragraph 1 of Schedule 2 states:No levy may he imposed by the Board under section 17 above before the beginning of the financial year ending with 31st March 1977.266 Does that mean there can be no levy before 1st April 1976? If so, why the hiatus? Or, is it anticipated that if, unfortunately, a rescue operation should become necessary in the interval, it would be bridged by the borrowing powers?
I have one other specific question: can it be confirmed that those whose pensions are secured under unfunded group life insurance schemes will be entitled to the same protection as individual life policyholders within the definition of protection in Clause 4? These and other points no doubt will be examined in Committee, but I believe that it will be helpful to have some guidance. I have three areas of doubt on this, and as they have been so widely discussed I shall do no more than briefly refer to them. The first concerns the sweeping powers which it is proposed to give to the Secretary of State, under Clauses 2, 3 and 4: powers which it is difficult to believe are necessary for the fulfilment of the purpose of this Bill.
The second area of doubt concerns the position and qualification of the Policyholders Protection Board which it is proposed to set up. This point will be well debated in Committee if, indeed, we reach that stage. The third involves the power of the Secretary of State to extend the operation of the Act by statutory instrument under Clauses 3(3) and 4(5), and this sweeping power of amendment under Clause 14. I do not wish to dwell on those matters because they have been thoroughly discussed; but I shall say something about Clause 16 and the rescue provisions which involve intervention before there has been a failure. This clause has met with considerable hostility in the insurance world, and that has been reflected this afternoon. I cannot understand why. If policyholders are to be compensated as to 90 per cent. of their claims in the event of a company failing, it must be logical to envisage that there can be intervention in order to prevent such a failure. Without Clause 16 there would be no such statutory provision. I realise that this can be done on a voluntary basis. What I fear is that if there was a statutory safety net, such as is provided in another part of this Bill, then in practice we should not see rescues taking place, and that companies who were invited to intervene would say, 267 "Why should we run these risks when there is going to be compensation in any case?" I have this nagging doubt that if the Bill were introduced without something comparable to Clause 16—and I think it has defects—it would be much more unlikely that a rescue would take place when there could be such a rescue to prevent all the difficulties and the heartbreak of failure.
There is also a difficult question of timing, and I take the point that the noble Lord, Lord Beswick, made in his intervention that the Bill states clearly that the interest of the shareholders is to be excluded. But this in practice would be difficult to do. It involves intervening at a rather precise stage when the interests of the shareholders are more or less extinguished, but before the company is technically insolvent. It would be helpful if, at a later stage, we can ventilate the question of how this might come about. I would be entirely sympathetic to such a provision if it can be shown that it will work in a practical way, and without giving, rise to the worst fears which have been expressed. I believe some such flexibility is, in principle, desirable.
It is also right to point out that this view, which has been much quoted against Clause 16 or some such provision, is not entirely universal to the insurance industry. I should like, with permission, to quote four sentences from the Annual Report made by Mr. Francis Sandilands of the Commercial Union. He had been discussing a statutory scheme and said:We also believe that the board administering the scheme should have discretionary power in suitable circumstances to assist a company which the Department of Trade believes to be heading for insolvency before it actually becomes insolvent, and that funds for this should be made available under the scheme. There are those within the industry who do not share this view and we believe it to be short-sighted. Moreover, it could be more expensive to the industry not to allow for this kind of flexibility, as the alternative to insolvency. We emphasise, however, that we only favour flexibility of this nature if the board administering the scheme has a majority drawn from the industry.I think it right to point out that there is another view within the industry, and one which I believe deserves further consideration.
I should like to express my anxiety on this point, and say that I believe that the 268 correct verdict on this question of Clause 16 is "not proven". I have sympathy with the Minister in his predicament. He will have noted that three speakers this afternoon have held Ministerial responsibility for supervision of the insurance industry. The noble Lords. Lord Darling of Hillsborough and Lord Brown, have spoken before, and we have all expressed varying degrees of anxiety about certain of these provisions. We have sweeping new powers under the 1973 Act which have not yet become fully effective. Is it really necessary for a Bill to be introduced in this form to carry out what was agreed to be right, to enable the regulatory authority to exercise a much tighter control over the affairs of these companies? I think this is an area which is not proven, and I hope that some way can be found of examining this subject more fully.
My Lords, I end by recalling the fact that we trod delicately through the minefield inseparable from discussing insurance legislation in this House during the passage of the Insurance Companies Amendment Act 1973, and I suppose my only claim to Parliamentary fame would be that in the passage of that Bill, which had some controversial clauses in it, we never lost a Division. The reason that we never lost a Division was that we never had one. If there had been a Division there would have been several occasions when we would have lost. At that time we took the Bill back, we consulted and thought again, and I believe that this is the right way to treat the subject in this House.
§ 6.29 p.m.
§ Lord ALLEN of FALLOWFIELD
My Lords, in listening to the debate and to noble Lords who have preceded me, I am reminded of the young man who was in rather a hurry to get to an unknown destination. In his great anxiety he stopped a passer-by and asked whether the directors in which he was going was the correct one. The answer was: "If I was going there I would not start from here". That can suitably be said about the Bill before this House. A unique experience for me has been the fact that, prior to attending this debate, I had a meeting with the Minister and have been the centre of a good deal of representation about the Bill itself.
269 My interest here is unlike that of many of your Lordships who have preceded me and who have declared an interest, basically from a company point of view, in the insurance industry. My interest is a dual one: first, from the point of view of the workpeople in the industry and, secondly, an interest in defending the policyholder. I feel that this Bill, particularly after hearing what has been said about it today, cannot hope to be of assistance to the companies, nor, in the long term, to the policyholder. It can, and will, work to the detriment of the workforce employed in the traditional companies: that is, if the Bill goes through in its present form.
Like other noble Lords, I welcome legislation which gives protection to the policyholders, and I welcome legislation also on a wider front, that gives maximum protection to the consumer. Like others, I would support any legislation which would in the future quite sincerely and understandably prevent disasters of the kind we have had in recent times in the insurance industry. But I suffer a good deal of hesitation in supporting legislation which does not deal with prevention rather than cure. As has been so clearly stated during this debate, legislation puts the cost of the cure on the lower income family, the ordinary policyholders, who are not associated with the cause of the problem which has given rise to this Bill.
We all know that the reason for this Bill is associated with the collapse of certain companies. I will not bore the House with details, but certainly the situation was highlighted by the failure of Nation Life and the London Indemnity Insurance Company. There is no doubt at all that the policies issued by those companies were designed to appeal to people whose primary concern was a more-than-average yield on their investment and people who were looking for overgenerous terms. One cannot easily accept that they were gullible and caught in a trap not of their own making. Those policyholders were certainly not from the category containing the many millions of policyholders who pay monthly or more frequent premiums to the traditional companies contracting industrial life business, or the policyholders with the ordinary branch policies associated either with the purchase of their house or the life of the 270 breadwinner. This is the kind of revenue which helped to contribute to the monumental standing at the present time of many of the traditional companies in the insurance world. The policyholders who participated in the non-traditional policies paid super premiums, in many cases running well into five figures, for policies which gave guaranteed bonuses and cash surrender terms grossly in excess of the policies issued by the traditional companies. When the terms and conditions of those policies were associated with the speculative property market and rising interest rates, the bubble burst.
I submit that the proposed legislation will not prevent similar happenings in the future. Therefore, to prevent such a situation arising in the future, steps are needed to prevent the issuing of these types of policy. In addition, there should be a more frequent oversight of the assets belonging to insurance companies, to ensure that the investments are maintained on a sound basis. Even if one takes the recent legislation associated with the Acts of 1973 and 1974, this in itself would not have prevented the recent disasters. That is why, in my view and in the view of many people in the insurance industry, both employees and employers, the emphasis must be on prevention rather than cure.
May I state what I believe to be the main objection to the Bill. This has been referred to by earlier speakers. My main objection refers to the cost to many millions of small savers who are paying premiums to established companies. In the proceedings leading up to this debate one has heard the story of costs running into more than £1½ million to some of the traditional companies if they are called upon to meet the levy which is envisaged in this Bill. The policyholders with whom I am concerned—and I am sure that many others share my concern—have not been associated with the kinds of policy purchased by the people who sought overgenerous terms. They have never been associated with single premium policies of £10,000, £20,000 or more. They have never been associated with policies guaranteeing to double their money in ten years' time, or guaranteeing excessive cash surrender terms on their policies. Their payments, as has been said by the noble Baroness. Lady Fisher, have been made to the traditional life 271 companies; and in 1973 their annual premiums amounted to £356 million, helping to finance a wide range of industrial, commercial and Government projects.
These policies have, in the main, been designed to take cognisance of the fluctuations in interest rates and, of course, in the stock market. The companies could face a possible collapse in the future. But if this type of situation arises, all the traditional companies and financial institutions will be in the same boat, and no amount of Government legislation will solve that problem. Therefore the question one may ask is: Who has priority for protection, and who is to pay for it? The proposed levy means that many hundreds of policyholders would be asked to contribute. Indeed, I think it is quite impossible for any traditional company not to set aside a contingency fund to meet the day when they may be called upon to pay the levy. That fund will have to be financed from another source—either from the policyholders or from the men and women employed in the insurance industry.
In my submission, that is wrong. I cannot accept that small savers should be asked to accept reduced bonuses or that overgenerous provision be given to the better-off policyholders. When I came to this House I had very strong feelings about the Bill. In the light of our proceedings, I, too, want to commend the suggestion made by the noble Lord, Lord Houghton of Sowerby, that the future of this Bill should be the one suggested for it in the speech, and particularly in the peroration, made by the noble Lord, Lord Reigate.
§ 6.39 p.m.
§ Lord MAIS
My Lords, I must disclose an interest on two counts. First, I am chairman of an insurance company, albeit a small one, but I am glad to say we do not operate in the life market. Secondly, I have a number of endowments of my own which I am glad to say are with a number of reputable companies. At this stage of the proceedings it is inevitable that one can hardly address your Lordships without a certain amount of repetition. I will do my best not to overtry your Lordships' patience. To my mind, in theory this 272 could have been a good Bill. In fact, it is not. It could have been a good Bill because it endeavours to protect the policyholder—and there is no one, I am sure, in your Lordships' House or anywhere else who would not subscribe to that aim or object. It is never pleasant at any time to lose money. To lose that which one had hoped to have provided for one's own retirement or for one's dependants is probably the cruellest thing that can happen to anybody; and any Bill or any measures which can protect people from suffering such a disaster must have the approbation of all of us.
However, this Bill, I would submit, does not achieve that end because it does not prevent the undercapitalised, inexperienced company from setting up shop. It does not prevent them from offering terms which appeal to the inexperienced, the ill-advised or greedy. We are not particularly concerned with the greedy, but we are concerned with the inexperienced and the ill-advised. It is to protect them that this Bill has seen the light of day. I personally should like to see a Bill which is directed much more to making it extremely difficult, if not impossible, for second-line insurance companies, particularly in the life business, to set up at all unless, after careful investigation, they are found to have adequate capital—not only adequate working capital but adequate reserves—and, above all, a proven board of directors and proven management. If companies which do not comply with those requirements are in business today, then I should like to see some form of legislation concerning them. I should not like to suggest that they be taken over, but at least an investigating team should go in and put their house in order. If this is not possible, then by one means or another the policyholders should be placed under the umbrella of a reputable and established company. I have strong views—and I am sure all of us in your Lordships' House have—that the last thing we want to do is to prop up the "wide boys"; and there have been plenty of those about recently. This is why at this moment we are in difficulties in this particular section of industry, as well as in secondary banking.
As the Bill stands at present, far from discouraging investors from putting their trust in companies without a proved 273 record, it encourages them to take a chance. They see an attractive advertisement. They fill in a form and in due course they doubtless receive an expensive brochure. They are offered better rates and, frankly, with the Bill in its present form, why should they not take them? If all goes well they will have nothing at all to complain about; if there is a collapse they are guaranteed against the greater part of their loss. It is rather like saying to the habitual backer of outsiders, who probably stands to win 100 to one, that if he collects his £100 that is splendid; if he loses the £1 the more prudent, the better advised or more lucky punters who backed better horses at shorter odds, will have a tax levied upon them in order to allow the habitual backer of outsiders to have another go. Such an arrangement, My Lords, would suit me personally very well, because I never seem to back a winner; but we are not speaking about backing horses but about people's life savings, which is a very serious matter indeed.
I view with deep concern the proposals of the Government to introduce some form of compulsory guarantee scheme for life assurance companies the cost of which will be met by means of a levy on all life offices. Life offices are in effect the trustees of the life savings of millions of policyholders, and as such should never be compelled to use those savings entrusted to them for the benefit of other companies which may operate under quite different rules and regulations and with very little ethics. At the same time, it seems unlikely that policyholders with any established life office that has a high proportion of with-profits policyholders would ever have cause to benefit from such a relief scheme, because its insolvency would probably be due to a total collapse of the economy of the country and there would be no funds anywhere to reimburse anybody. Therefore, well-organised and efficient concerns entrusted with people's money are being asked to support inefficient, badly-managed companies in which. regrettably, the foolish have invested.
I trust that we shall not divide tonight. I hope that between now and the next stage of this Bill wisdom will, perhaps, have prevailed. I go all the way with the suggestion of my noble friend Lord Houghton of Sowerby that this Bill should 274 be referred to a Select Committee. It is a highly complicated problem and the opportunity should be provided for the Government to seek advice and to take evidence from such experts as they may feel should give it. Likewise, the experts and many of the companies should be given the opportunity of stating their case to the Government. Before I sit down. I would remind your Lordships of one point. The insurance companies of this country are held up as an example of integrity to the whole world. Their contribution to invisible earnings is tremendous, and nothing should be done, least of all by Government, which would in any way at all prejudice their future or their results.
§ 6.48 p.m.
My Lords, like so many others of your Lordships I must declare an interest, and a very deep interest, in the insurance industry. I am chairman of one of the largest insurance companies and certainly the largest pensions company in England. I also have a whole variety of policies on my own life and on other people's lives and a great variety of policies, on which I appear to pay the most outrageous premiums, to protect myself against acts of others. Having said that, I think that my greatest interest in the industry has always been to try to ensure that the Legal and General, at least for one, should be able to meet every contract it has ever issued. At this late hour—at 10 minutes to seven, being the 20th speaker, after four hours of debate on a very little Bill —it is difficult to say anything original. I will try to keep my remarks as short as possible, and I do not think that any of them will have any originality whatsoever.
All I wish to say is that I believe that this is a wholly unnecessary Bill and that, as presented to your Lordships' House, it is a thoroughly bad Bill. I am not even sure whether the name of the Bill is right. It is called the Policyholders Protection Bill, but I believe that its proper name is the Department of Trade Protection Bill. The insurance Acts of 1973 and 1974, upon which this House spent many hours in Committee, are the true Policyholders Protection Bill. These measures give to the Government all the powers that they need to supervise and to control the operations of insurance 275 companies. Admittedly, not all of the orders and regulations under the 1974 Act which are required have yet been issued; but I would beg the Government to move fast on this because this is the instrument and the only instrument which, to my way of thinking, can possibly protect the policyholder.
The Bill which we are talking about today does not aim to control and prevent management abuses. This would be the greatest security for policyholders. On the contrary, this Bill almost encourages mismanagement and discourages the operation of judgment by prospective policyholders. Nobody would disagree with the object of the Bill as set out in the Explanatory Memorandum. It is admirable. But the Bill does not do that. All reputable insurance companies accept without reservation that it is totally unacceptable for an insurance company deliberately or negligently so to conduct its affairs as to mislead prospective policyholders or to prejudice their reasonable expectations under a policy. However, in the case of long-term life business, there must always be an element of risk—as, indeed, there is in all other forms of investment. There is no other form of investment that I know of upon which it is proposed to make a levy to protect people from their misjudgment or their stupidity. In the case of long-term business, this risk arises from the fact that the responsible companies, directors and management have to make judgments and take decisions about future experience and conditions in the future on, sometimes, a very long contract—frequently 25 to 30 years. However, these assumptions are based on contingencies which are so much less iikely than those that will actually occur as to make it almost impossible for a well-conducted company to fail, unless the economy of this country itself fails.
I said that the Bill which has been presented is bad. My reason for objecting to it and thinking that it is bad in its presentation is exactly what other noble Lords have drawn attention to time and time again. In no fewer than six places is the Secretary of State empowered to make Orders, albeit subject to Affirmative Resolution—but I think we all know the difficulties of this. These powers are designed to widen the scope of the scheme. They are powers to change the 276 amount of compensation. They are powers to change the classes of business to be covered and to direct the proposed Board in any of its functions. I do not believe this to be legislation. This is merely giving an incredible amount of power to a Secretary of State in a Government Department to administer ad infinitum in the future by means of one of the most obscure forms of government —the Statutory Instrument. I think that it should be resisted strongly in this case.
Although my noble friend Lord Limerick did not find it so objectionable, I find Clause 16 to be particularly objectionable. For the Government to support, with other policyholders' funds, companics which are in difficulties goes far beyond the bounds of consumer protection. It is too wide. If a company is in difficulties and is capable of being saved, it can be saved by the industry itself. Indeed, in the last 18 months a remarkable number of companies has been saved and sold, while still "going" companies, to other companies who are prepared to change the management and run them. We do not need a Board and we do not need Government to buy or help companies which are in difficulties. If the difficulties are such that no other company will consider taking them over, then they are far better in liquidation. the policyholders to be compensated in another way.
Once the power to rescue companies in difficulty is enshrined in legislation, it cannot be operated selectively. Political pressure will lead to virtual 100 per cent. intervention over the years, and this is not healthy. It is not healthy for the industry which we are talking about to have the knowledge that these companies are being maintained and are being interfered with, and that when they get into difficulties they can appeal to the Secretary of State. I am quite certain that it is better to liquidate them, get them out of the way and clear the Augean stables. Cut-price trading and irresponsible promises in regard to future benefits and redemption prices will, to my mind, be encouraged under this Bill. The eventual bill for compensation will have to be met by the prudent holders of policies with the responsible companies.
Schedule 1 gives no clue as to the nature of the Board and its members.
277 My noble friend Lord Aberdare drew attention to this point and also my noble friend Lord Derwent. It is fair to say that the noble Lord, Lord Beswick, has admitted that there is an omission in this clause, in that an undertaking was given in another place on 7th March that the Government would ensure that the majority of this Board was drawn from experts within the industry. And we are dealing with a highly technical industry.
I have said that the Bill is unnecessary. I still believe that the industry offer is a good and a workable offer. It would be simpler and cleaner. All that would really be needed would be a short enabling Bill, and I believe that this can still be worked out. I hope that, if this Bill reaches Committee stage, it will be drastically amended and curtailed to ensure that it achieves its objective, with which I wholly agree, but which I believe it does not achieve in any way. I hope that this Bill never reaches the Statute Book if it remains a charter for the unscrupulous and the foolhardy.
§ 7 p.m.
§ Lord BELSTEAD
My Lords, those of your Lordships who have considerable experience of this House will, I expect, be hard put to it to remember a debate in which such a range of knowledge and experience has been concentrated into such a comparatively short space of time. I think that this debate is a good argument for starting some major Bills in your Lordships' House. I venture to take part only to try to draw some conclusions from what has been said from this side of the House, and perhaps my speech will at least have some curiosity value as I am proud to be able to bracket myself with the noble Lord, Lord Allen of Fallowfield, and the noble Lord, Lord Houghton of Sowerby, in being able to declare no interest as a director or former director of an insurance company or as a member of Lloyd's, my only interest in this debate being as a grateful holder of policies of insurance.
It is said that beauty is in the eye of the beholder, and I suppose it is only natural that the Government should look with some degree of tenderness upon this legislative infant. However, my impression is that to every other noble Lord who has spoken distance, so far as the 278 Bill is concerned, would lend some enchantment to the eye. It is a fact that, taken as a whole, the Bill has not attracted a single friend in the whole House. This is a tragedy, considering that we are debating an industry which is vital to our balance of payments and to the level of savings in this country. However, suppressing the urge to throttle this child at birth, may I briefly remind your Lordships of the area of agreement which it is perfectly true lies within this Bill, and try also to identify briefly the main points of controversy.
The Government are introducing this as a consumer protection measure, and of course there is no gainsaying the fact that the protection of a policyholder should be, and as I understand it has been in the past, one of the primary considerations of insurance legislation. When one considers that some 70 per cent. of householders insure their house contents, that for countless couples life assurance is the mainstay for their older age and that insurance covers every possible type of business risk, it is not, surprising that the protection of policyholders should be a matter of common concern—and, I agree, of Government concern as well. Surely, as the noble Lord, Lord Mais, said, there is no difference on that as a matter of principle. The divergence of view, as the noble Lord, Lord Houghton, said, stems from how that protection is best to be achieved.
The Government are aware that the British Insurance Association and the life associations would like to see a scheme introduced which would need legislation only to require the companies to make the contributions. In his opening speech the noble Lord, Lord Beswick, as I understood him, asserted that the insurance companies' concept of a bureau had been that it would be non-statutory. I must say that that is not my understanding. Certainly, going back to early this year, I have always understood that the industry made it clear that they believed that the role of a bureau, far from being voluntary, ought to be defined in legislation, and therefore, as my noble friend Lord Aberdare said, should be a statutory body. That is as may be. The point I should like to make is that I think the industry's proposal has the advantage of maintaining the primary responsibility for 279 sound commercial standards where it has rested in some cases for hundreds of years —namely, with the insurance industry itself—while the Government, with the co-operation of industry, would be taking another step along the road of policy protection.
In considering a simple proposal of this sort, may I venture to recall the broad effects of the immediately previous legislation to which the noble Lord, Lord Banks, the noble Lord, Lord Darling of Hillsborough, and of course my noble friend Lord Limerick referred? Many of your Lordships will know much better than I do that, building on the Act of 1967, the amendment Act of 1973 took extra powers for the Secretary of State to intervene. I think it altered the financial standards required for insurance companies, and sought further to safeguard the assets of companies carrying on longterm business. It also altered the functions of the Secretary of State in securing that the management of companies does not fall into unsuitable hands.
After hearing the wealth of detailed knowledge which there has been in this debate, I—probably too obviously—feel rather like Mrs. Malaprop in that I have a "supercilious attitude to accounts". But I believe I am right in saying that, in broad terms, those were some of the main effects of the 1973 Act under which regulations are still being made. Indeed, I believe I am right in saying that the regulations for quarterly returns, and for the notification of change of control of directors and managers—to give two examples only—have not yet been completed. Having heard the speech of my noble friend Lord Harcourt, I feel that the fact that the full intentions of the 1973 Act are not yet fully effective gives rise to the question which is absolutely basic to our consideration of this Bill: do the Government believe that the 1973 Act did not go far enough? If this is the Government's case, all I can say is that it seems rather precipitate. But if it is right to give that Act a chance to work, is there not a case for building upon the legislation of the past by establishing a relatively simple scheme to protect private policyholders?
If, on the other hand, the Government's real objective goes wider than this, then I would ask that the warnings which have been voiced, not on a Party basis 280 this afternoon but from all sides of the House, should be considered very seriously by the Government. In this respect, I would beg the Government to take into account the view which I think lies behind the words of almost every noble Lord who has spoken, but which was so clearly expressed by my noble friend Lord Aldington when he said that in the final analysis the efficiency of the industry is the real protection for policyholders.
It is Clause 16 of which there has been the most criticism, and arguments that this clause will encourage unsound commercial practice have been powerfully made. I, and many other noble Lords, listened carefully to my noble friend Lord Limerick and I hope that his word will also be taken into account by the Government. Perhaps I may mention my own worry about this matter. If, in addition to the regulations, there is to be a policyholders' scheme, surely it cannot be right to give such a general and indistinct power to prevent liquidations which are bound to bring pressures upon the Board. Perhaps I ought to be capable of comprehending this idea more clearly, but under the clause as drafted I find it difficult to understand what is to be the position of shareholders and management when a company is declared at risk. All that seems absolutely clear is that many policyholders will be encouraged by this clause to entrust their savings and earnings to unsound companies supported in a way by Government guarantee, and that all policyholders will of course be required to subscribe to these rescue operations.
The other clause which has been mentioned this afternoon as being a fundamental source of criticism is Clause 14. The obvious danger of this clause is that private policyholders may well find themselves liable to be required to give a wider protection than is envisaged in the Bill at the moment. To take such a wide power as this by Order could be to alter the whole character of the Bill, and I think this criticism extends especially to the Order-making power specifically written into Clause 4 for marine, aviation and transport to be brought subsequently within the scope of the Bill, if necessary by Order. At this, of all times, to draft legislation which will empower a Board to indulge in considerable expenditure of 281 other people's money under the powers of Clause 16 and under the Order-making powers elsewhere, is a prodigal approach, which has not secured support in your Lordships' House this afternoon.
The noble Lord, Lord Beswick, said at the beginning of the debate that the effect of the 1973 Act should be that the levy-making power would not be needed very often. I think all Members of the House were delighted to hear the noble Lord say that, and would certainly agree with it. But the trouble is that we have the rescue power and the Order-making powers, and it is really these which have been found to be unacceptable.
§ Lord BELSTEAD
My Lords, that may very well be. The difficulty is that we have Clauses 14 and 16 and the other Order-making powers in the Bill, and other things besides. The noble Lord also said that it may well not be easy for a policyholder to discern whether a company is well run, and whether it is safe. That may very well be. I have heard this view put before, although I listened to the noble Lord, Lord Greenwood of Rossendale, and the noble Lord, Lord Aldington, putting the other point of view. What is certain is that, unquestionably, the costs will fall on those who entrust their earnings and savings to companies strong in management and prudent in the returns offered—characteristics for which British insurance has been famous over the years.
My Lords, quite a lot has been said this afternoon about how this Bill will affect the mutual companies. There would appear to be a particular burden on those with traditional with-profits policies. Insurance is a vital means of effecting national saving, particularly at this inflationary time. I think the House will listen carefully to any assurances that the noble Lord, Lord Winterbottom, can give that savings should not be jeopardised by the effects of this legislation. The House finds itself in some difficulty at the end of this debate. There is evidence to support the belief that the Secretary of State has not perhaps taken sufficient account of the views of people in the industry. It was noticeable that 282 when the debate on insurance took place in another place on 7th March, the Parliamentary Secretary assured the House that consultations were continuing, but in the very same breath he gave what he called the main outlines of the Government scheme.
My conclusion from the debate today is that the Government urgently need to proceed by agreement, and this includes agreement with the insurance industry. This could certainly be done by the setting up of a Select Committee, provided this was agreed through the usual channels. Despite the fundamental reservations to this Bill as it stands, there is a case for a simple Bill for policyholders' protection. In this, I believe the Government would carry the House with them; and, incidentally, would fulfil their policy set out in the gracious Speech last year. I hope this will be the Government's intention during the more detailed consideration which the Bill can now be given in your Lordships' House.
§ 7.12 p.m.
§ Lord WINTERBOTTOM
My Lords, I find this Bill a particularly interesting one, since I think for the first time in my appearances on the Front Bench I have found myself alone, except for my noble friend here, in putting certain proposals to your Lordships' House, and finding that all three sides of the House are against me. I am grateful to the noble Lord, Lord Belstead, for his sympathetic attitude, and also to the noble Earl, Lord Limerick, who, having suffered not quite so badly as he thinks I am going to, has won the 1973 medal with clasp for his earlier work in this area. Nevertheless, I am grateful for any expressions of sympathy at this stage. However, not only am I almost alone in this matter, but perhaps I am also almost alone in believing that there is a great deal to be said for this Bill.
My Lords, as some people have said, this Bill is not a Department of Trade protection Bill, or a Civil Service protection Bill. It is a Bill put to Parliament by Her Majesty's Government, and Ministers must stand by it and explain it. It is not here to protect anyone except the policyholders who may suffer due to the collapse of an insurance company. That is the function of the Bill before the House tonight. However, I 283 will not deny that the Bill is complex. difficult and, so it seems, controversial. although when I first read it I thought it seemed eminently sensible. However, wiser heads than mine have decided that it needs thorough discussion. After all, it is a House of Lords Bill, and in this House there is perhaps more expertise on this subject than anywhere else. There are at least 57 noble Lords who have direct personal experience of the workings of this most important market whose praises have been, I will not say sung, but stated clearly by the noble Lord, Lord Mais, and others. Because we have the expertise we as a House at the end of the day can produce a very good Bill indeed, as I believe we did with the Children Bill. Therefore, I am certain that noble Lords will welcome the fact that, as at present planned, substantial time is being given to the Committee stage of the Bill. I understand that I shall have to take it, and I shall come to this House with confidence that I can persuade noble Lords that the Bill is not quite so bad as they think it is. Nevertheless, we will have a good opportunity of discussing the Bill.
During the course of today's debate another point has been brought forward; namely, that a Select Committee should be set up to discuss the matter. I have listened with great interest to this point of view, expressed by several noble Lords from both sides of the House. I can give an undertaking that Her Majesty's Government will give serious consideration to the suggestion. Of course, as my noble friend Lord Houghton of Sowerby knows, he will have to put down a Motion, which I understand he can do at any time between the Second Reading and the Third Reading of the Bill. Naturally, any Motion put down by the noble Lord will receive the careful consideration of the Government. Having said that, I am going forward on the assumption that we will have a Committee stage. I should like to discuss simply the principles raised during the debate today. and to leave the detailed work to the Committee stage.
§ Lord ABERDARE
My Lords, I am sorry to interrupt the noble Lord, but if he is talking about a Select Committee, can he tell me whether this will be a 284 subject discussed through the usual channels? It would be very important that we should get some sort of agreement about it. Therefore, if it were to come about, and if the noble Lord, Lord Houghton of Sowerby, were to put down a Motion, we should no doubt be able to get through the business rather more quickly than if we needed another whole day's debate.
§ Lord BESWICK
My Lords, perhaps I may intervene here. If it came to that, it would be a matter for discussion through the usual channels. However, we must first discuss whether this is the most expeditious way of dealing with the Bill. There are many other noble Lords who possibly would think that we ought to try to deal with it first in this Chamber. What the noble Lord has said is a suggestion which will be considered.
§ Lord WINTERBOTTOM
My Lords, may I come to a discussion on the principles of the Bill. The noble Lord, Lord Belstead, was very fair when he stated that there was an argument on both sides for the two alternatives open to us, either to accept the Bill as modified after its passage through your Lordships' House, or to accept the proposals of the industry which, of course, as noble Lords have said, will in themselves require legislation. More simple legislation than this possibly will be required, but legislation will be required.
At this stage, I should like to list the differences between the two schemes. The similar features of the industry's scheme and the Government scheme are the following: United Kingdom policyholders, and, in the case of general business, only private persons would have been protected—that is common to both proposals. In a liquidation, claims would have been made to 90 per cent; that is agreed between both sides, except for third party claims where insurance is compulsory, which would have been guaranteed in full—this is again common—and excessive benefits under life policies which would have been scaled down as appropriate. The scheme would have been financed by a levy calculated on a similar basis to both schemes.
The Government have been listening to the industry. Some proposals on more detailed points have been incorporated in the Bill. For example, it is now 285 proposed to exclude MAT insurance and reinsurance, which is falling in with the wishes of the industry. The major differences between the two which made the scheme unacceptable to Her Majesty's Government are the following: the bureau proposed by the industry's scheme would have been non-statutory, and its commitments would have rested on agreements between itself and the Secretary of State, terminable on one year's notice on either side. That means that someone who took out a life insurance policy would thus have no guarantee that the scheme would last until his policy matured. Secondly, it would have been impossible to extend the Bill later to types of insurance initially excluded. Thirdly, there would have been no option for the bureau to intervene before a liquidation; and, fourthly, there would have been a number of complex and controversial changes in the winding-up rules. It is likely that we may wish to suggest changes in these rules, but only after a thorough study has been carried out by the Department and the industry jointly. We believe it would be unwise to rush into changes which might later be regretted. That is the difference which lies between the industry scheme and the Government's proposals.
May I say that perhaps the reason why Her Majesty's Government have gone ahead with this legislation instead of waiting for the industry has been stated most clearly in the Daily Telegraph of 6th May. The Daily Telegraph says, and I agree with it because of my direct experience:The insurance industry had a major opportunity to anticipate Government intervention with a voluntary industry schme after the collapse of the Vehicle & General, a member, as the public was continually reminded at the time, of the British Insurance Association. The opportunity was not taken. When life companies began to run into trouble no Government, whatever its political colour, was likely to spurn the chance the BIA had dropped.So in fact it is the dilatory attitude of the industry that has forced upon Her Majesty's Government this legislation, which is pleasing no one but which we believe is necessary.
Now, working on the principle that attack is the best form of defence, may I say that as I listened today—and I am the last person to impute to any noble 286 Lord intentions which may not exist—I sensed that here we have a vested interest having its afternoon sleep disturbed. We have heard a great deal of talk today about rather rash companies, imprudent companies, insufficient capitalisation? et cetera, but we have not heard directly about innovation. The noble Lord, Lord Aldington, said that the insurance industry as we know it grew and prospered before the period of regulations. It was during the day when there was a certain piratical element in British industry. At that time—and I do not know, because I was not alive at the time—when the British insurance industry was born. I am pretty certain that there were failures. But, nevertheless, in the very dynamic period of growth of the British economy, I am certain risks were taken, some of which succeeded and the companies are now here today as established prudent companies, and others failed. Indeed the noble Earl. Lord Limerick, stressed the need for innovation.
So just because a company is starting and some people are coming up with new ideas, it does not mean automatically that they are imprudent or in fact dishonest. I believe that we must allow the possibility of new companies coming into being which will in fact challenge the established companies, because they have new ideas and new approaches to insurance policy. May I say that if the powers under the 1973 Act are used and the proper supervision takes place at the conception of a new company, then surely we cannot complain if a new approach to techniques of insurance comes into being. This is just an aside in the general argument. Do not let us assume that everything that is new, everything that is dynamic. is automatically dishonest or incompetent.
§ Lord ALDINGTON
My Lords, if I may intervene, the noble Lord has misunderstood me. I was never saying anything of the sort. It would be wrong to think that the great days of the insurance industry were days of taking unpardonable risks or anything like it. The noble Lord may like to know that in the group of companies of which I have the honour to be Chairman, Sun Alliance of London —the oldest one of which is more than 250 years old—this is the first year that we have ever had to raise new capital.
287 Is that some guide in his mind to the risky nature of their business, or rather to the sound management? I would leave it with him.
§ Lord WINTERBOTTOM
My Lords, I merely said that the noble Lord had pointed out that there had been a period of growth and expansion without supervision. I hope that if we do have supervision it will not prevent innovation just because established practices and methods override new ideas.
May I turn to one or two other points that have been made in the course of the debate. May I straight away answer the questions the noble Earl, Lord Limerick, put to me, because I am most grateful to him for his helpful and constructive speech. First of all, all life policyholders are protected and not just private persons, as in non-life business: all are protected. There will be no levy before 1st April 1976. The Board, if it should find it necessary, will have to borrow until then. There is this very important point about whether the management or the shareholders of a company which is in default would in fact be able to benefit from such a default. May I draw the attention of noble Lords to the short analysis of the clause in the Explanatory Memorandum, which I think makes it quite clear. It is Clause 16, and it says:The Board may arrange for the transfer of the business to another insurance company or may give assistance to the company at risk in cases where changes in management, control or membership have occurred provided that the Board ensure so far as is reasonably practicable that the existing members of the company will not benefit as such from any assistance so given.I do not think that this Bill encourages profligacy: neither profligacy in management, nor, shall we say, imprudence in people applying for policies. The people who will suffer, assuming that they fail for reasons of incompetence, will be the people who are responsible. The whole object of this operation is to protect the policyholder.
If we turn for the moment to the policyholder, there is some sort of assumption that the policyholder must in fact be more careful in the way he decides with which company he shall insure, and must possess, apparently, a degree of knowledge which is very difficult to achieve. 288 Normally I think most of us under these circumstances would go to an insurance broker, but unfortunately, not all insurance brokers are, shall we say, as scrupulous as their insurance companies. I hope that the profession as a whole will forgive me, because I know many of them have given me personally a great deal of help and good advice. Nevertheless, there is nothing to stop a broker advising a client to take out a certain insurance policy because he himself receives rather better terms from that insurance company than from some other. So the insurance broking profession is not really a safeguard of the individual.
In my view, the only real safeguard is the actual supervisory powers that are proposed under the 1973 Act—and these, as I understand, are to be strengthened, because not all the regulations within that Act have been carried into effect—and that supervision on an actuarial basis will take place quarterly rather than at a longer interval. I believe that is the first safeguard that exists. Otherwise I do not see how the average individual, the simple individual mentioned by my noble friend Lady Fisher, can possibly judge between the comparative safety and value of various policies. It is a most difficult problem. For this reason we believe that a Bill of this type, which covers the individual who has neither the time nor the specialised knowledge to protect his interest, must include the sort of protection that can come only from the advice given, and the control provided, by a supra industrial body of whatever type. This Bill is intended to protect individuals who may be as shrewd as any of us but who have no access to the knowledge that the profession possesses. Failure of companies need not come through incompetence or dishonesty, but simply because we live in a difficult and changing world. The individual is protected by what is a comparatively small levy on the industry as a whole. Everyone is talking as though from "Day One" the levy is imposed on all policies. It is not. The levy is imposed only if there should be a failure.
§ Lord PEDDIE
My Lords, is that not slightly misleading? The levy is certainly imposed on policyholders when the occasion arises. That point should be made clear.
§ Lord WINTERBOTTOM
My Lords, I may be misusing the English language, but that is what I thought I said. A levy would take place only when a failure in some insurance company has occurred. It will be general over the industry. It is not as if a levy was made from the day when the Act came into being. If and when the various safeguards—the supervision and the power to assist—which we are trying to bring about fail, then the individual policyholder is protected to the degree of 90 per cent. of non-statutory insurance and to 100 per cent. of statutory insurance.
I honestly cannot see that this is the road to ruin. It strikes me as a prudent course of action, and a very proper one for the Government to take. It is on this basis that I commend the Bill to your Lordships. I beg to move that the Bill be read a second time.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.