HL Deb 10 November 1975 vol 365 cc1623-31

[Nos. 2 to 7]

Clause 11, page 7, line 20, leave out subsection (1) and insert— ("(1) Subject to subsection (1A) below, in this section "future benefit", in relation to any long term policy of a company in liquidation, means any benefit provided for under the policy which has not fallen due to be paid by the company before the beginning of the liquidation. (1A) Any bonus provided for under a policy shall not by virtue of subsection (1) above be treated as a future benefit within the meaning of this section unless it was declared before the beginning of the liquidation.".)

Clause 11, page 7, line 28, leave out from ("arrangement") to ("every") in line 29 and insert ("in pursuance of subsection (2B) below for securing continuity of insurance for").

Clause 11, page 7, line 32, leave out from ("liquidation") to end of line 35.

Clause 11, page 7, line 36, leave out subsections (3), (4), (5) and (6) and insert— ("(2A) Subject to subsection (2C) below, the duty of the Board under subsection (2) above to secure continuity of insurance for any policyholder extends only to securing that the policyholder will receive ninety per cent. of any future benefit under his policy, subject to and in accordance with the terms corresponding so far as appears to the Board to be responsible in the circumstances to the terms which would have applied under the policy. (2B) For the purpose of securing continuity of insurance for any policyholders of a company in liquidation in accordance with subsection (2) above, the Board may take such measures as appear to them to be appropriate—

  1. (a) for securing or facilitating the transfer of the long term business of the company, or any part of that business, to another authorised insurance company; or
  2. (b) for securing the issue by another authorised insurance company to the policyholders in question of policies in substitution for their existing policies.
(2C) Where a long term policy of a company in liquidation contains terms relating to matters other than future benefits under the policy the duty of the Board under subsection (2) above to secure continuity of insurance for the policyholder in question extends also to securing that the policy after any transfer of business in which it is included or (as the case may be) any policy issued in substitution for the policy in question contains terms relating to those matters which correspond so far as appears to the Board to be reasonable in the circumstances to the terms first mentioned above. (2D) During any period while the Board are seeking to make arrangements for securing continuity of insurance for any policyholders of a company in liquidation in accordance with subsection (2) above, it shall be the duty of the Board, subject to sections 13 and 14 and subsection(9) below, to secure that ninety per cent. of any future benefit under a long term policy which would have fallen due to be paid to any of those policyholders during that period is paid to the policyholder in question as soon as reasonably practicable after the time when the benefit in question would have fallen due under the policy (but subject to and in accordance with any other terms which would have applied under the policy). (2E) Arrangements made by the Board in pursuance of subsection (2B) above shall not be required to cover any future benefit under a policy in so far as any sums have been paid to the policyholder in pursuance of subsection (2D) above by reference to that benefit.".)

Page 8, line 36, leave out from ("secure") to ("above") in line 38 and insert ("continuity of insurance for any policyholder of a company in liquidation in accordance with subsection (2)".)

Page 9, line 2, leave out ("his policy") and insert ("the future benefits under his policy or of such of those benefits as may be specified by the regulations").

Lord BESWICK

My Lords, I beg to move that this House doth agree with the Commons in their Amendments Nos. 2 to 7 en bloc. Perhaps also we may consider Amendments Nos. 16, 17, 18 and 21 to 28 inclusive. My noble friend Lord Peddie has a Motion to disagree to the Commons Amendment No. 7, and no doubt we shall deal with that when that arises. So far as the group of Amendments is concerned, their purpose is basically to simplify the drafting of Clause 11 and to make completely clear what benefits are to be secured by the Board for policyholders under the clause. The Amendments to Clauses 12, 13 and 14 are consequential to the changes to Clause 11.

The concepts in Clause 11 are difficult to express because they largely concern the securing of payments to policyholders to which they have no legal right. In law, the policyholders' insurance cover ends on the day the order is made for the winding up of the insurance company. The main purpose of Clause 11 is to give the Board the duty to simulate continuance of a policyholder's life assurance cover, albeit at 90 per cent. of its original level, so that his expectations are not seriously affected by the company's failure. The Government felt on reflection that the text agreed to by your Lordships contained some uncertainties and repetitions; hence the attempts to improve it by these Amendments. The Life Offices Association were consulted throughout and they agreed with these Amendments. I beg to move.

Moved, That this House doth agree with the Commons in the said Amendments.—(Lord Beswick.)

4.58 p.m.

Lord PEDDIE moved:

That this House do disagree with the Commons in their Amendment No. 7.

Lord PEDDIE

My Lords, I beg to move that this House do disagree with the Commons in their Amendment No. 7. I must say at the outset that I agree with the comment which my noble friend Lord Beswick made, that this Bill has undoubtedly benefited from the close scrutiny which has been given to it by both Houses. When it arrived in its original form it left much to be desired. While one will admit that there is some improvement, even now there is still a great deal which is capable of considerable criticism. I am conscious of the fact that we are approaching the end of the Session, and that any Amendments to the Commons Amendments will therefore have to be put down with a sense of considerable responsibility, recognising their significance and the timing. Therefore, I take the opportunity of emphasising that my Amendments are put down in a constructive sense, and are not intended to be destructive or in any way restrictive.

The Amendment which I am now moving to disagree with the Commons Amendment No. 7 concerns a technical point. Nevertheless, it is one of considerable practical importance. Subsections (1) to (6) of Clause 11 were completely redrafted by the Government in another place, and a number of consequential Amendments were made to the later subsections of Clause 11. Hidden among these was that which now appears as Amendment No. 7. But this Amendment is not, in fact, a consequential Amendment; it relates to a wholly separate point. Clause 11 relates to the life assurance policies of a company in liquidation, and places a duty on the Board to ensure that policyholders receive not less than90 per cent. of the value of their policies. The Board are enjoined to do this by endeavouring to secure the transfer of these policies to another insurance company or the issue of substitute policies by another insurance company. But if this proves not to be practicable then, under subsection (7), the Board must pay the policyholder a sum equal to 90 per cent. of the value attributed to his policy in the winding up.

Subsection (8)(a) then empowers the Secretary of State to make regulations requiring the Board, in such a case, to pay to the policyholder at his option, instead of 90 per cent. of the value of his policy in the winding up, 90 per cent. of his policy as determined by the regulations. This is a very curious provision, but it was explained at the Committee stage in your Lordships' House that in the winding up of Nation Life the method of valuation of policies laid down in the Insurance Companies Act had proved to be unsatisfactory in the case of some types of policy, which were apparently not envisaged when the relevant sections of the Insurance Companies Act were drafted. With this explanation, your Lordships' House accepted the sub-paragraph.

A Government Amendment in another place has now amended this sub-paragraph, so that the regulations would require the Board to pay the policyholder not 90 per cent. of the value of his policy, but 90 per cent. of the value of the future benefits under his policy. This is simply wrong, and the alteration appears to have been made, in my opinion, because of a misunderstanding. The financial difference is quite substantial. With a 10 year endowment assurance for, say, £10,000 at a premium of say, £800 per annum—a very popular type of policy today—the value of the policy after one year's premium had been paid would be about £750, whereas the value of the future benefits of that type would be about £6,000, assuming 6 per cent. net interest in each case. The difference arises because the valuation of the policy takes into account the fact that future premiums have to be paid in order to secure future benefits, whereas the value of future benefits is simply the present capitalised value of the £10,000 payable after 10 years from entry or on earlier death. "Future benefits" are defined in subsection (1) in Amendment No. 2 as, … any benefit provided for under the policy which has not fallen due to be paid by the company before the beginning of the liquidation. I should mention that Amendment No. 7 provides for the valuation to be of the future benefits under the policy or of such of those benefits as may be specified by the regulations. While this would permit the regulations to provide for certain benefits—perhaps optional ones—to be left out of account in the valuation, it would certainly not permit the regulations to provide for the valuation to take into account the future premiums payable, which of course it must do if it is to arrive at a correct value for the policy.

I am given to understand that the Department of Trade have attempted to argue that the regulations would apply only to the valuations of policies after the company had gone into liquidation, and that once the insurance company has gone into liquidation no further premiums can be payable on the policies. This, however, does not help. Amendment No. 7 specifically provides for the valuation to be of the future benefits, and "future benefits" are specifically defined in subsection (1) of Amendment No. 2 as benefits provided for under the policy but not due before the beginning of the liquidation. There is no escaping from this very clear wording, nor from the fact that it produces the wrong result, and, moreover, a result which is several times too large.

I must apologise for taking up so much of your Lordships' time on this technical matter, but it is a particularly important one from the financial standpoint. I believe that Amendment No. 7, if accepted, is bound to produce a result which is seriously wrong and which surely, therefore, cannot be allowed to stand. I beg to move that this House doth disagree with the Commons in their Amendment No. 7.

Moved, That this House doth disagree with the Commons in the said Amendment.—(Lord Peddie.)

Lord ABERDARE

My Lords, I have a great deal of sympathy with the noble Lord, Lord Peddie, and I should like to echo what he said at the beginning of his remarks. We owe a great deal to noble Lords in this House and to Members in another place, and not only to the noble Lord, Lord Peddie, himself, but also to noble Lords on the Government Front Bench, because of the fact that the Amendments which were before us earlier have been constructively considered, so that we now have a Bill which is considerably better than when it was first introduced. Moreover, such Amendments as are on the List today are intended to be constructive, although at this stage of the Session time is very much against us, and we can only hope that the Government will look with some sympathy on the suggestions that we are putting forward. On this Amendment, which is a purely technical one, if the noble Lord, Lord Peddie, is right in what he says, then it seems that he has raised a point of great importance. There is a very considerable difference between 90 per cent. of the value of the policy and 90 per cent. of the future benefits under that policy. I hope that the noble Lord, Lord Beswick, will be able to explain that this difference is not as wide as it seems to be from what has been said by the noble Lord, Lord Peddie.

Lord BANKS

My Lords, I wonder whether I might add a word or two to what the noble Lord, Lord Aberdare, has said. It certainly seems strange to me at first sight that we should talk about future benefits if no future premiums are to be paid. On the other hand, this subsection refers back to subsection (7), which refers to claims. If it means claims in the usual insurance sense, then these would be policies on which no premiums were paid in the future. It is conceivable that the benefit is to be paid out over a period of years, perhaps in the form of income with a lump sum at the end, and not merely something which is due to be paid in the year of the claim. It is possible that the noble Lord, Lord Beswick, can enlighten us as to the reason for this, and he may be able to explain that, after all, it does not raise the difficulty which the noble Lord, Lord Peddie, feared.

Lord BESWICK

My Lords, I am grateful for what my noble friend Lord Peddie has said, and also for what was said by the noble Lord, Lord Aberdare, about the constructive way in which the Government have dealt with the changes suggested and made to this Bill. I shall endeavour to deal with this Amendment in the same constructive fashion. Amendment No. 7 is a drafting Amendment. As my noble friend Lord Peddie said, there were many Amendments taken in relation to this point. Amendment No. 7 is designed to bring the wording of the subsection into line with the rest of the clause as amended, particularly the new subsection (1) which defines "future benefits" for the purposes of the clause. The Amendments to this clause were agreed to in Committee in the other place, and of course no objections were made then or until now.

My noble friend suggests that the phrase, "the value attributed to his policy" in subsection (7) necessitates retention of the same phrase in subsection (8). However, there is a special reason for continuing to refer to, "the value attributed to his policy" in subsection (7): the wording of that subsection must reflect the wording of the Third Schedule of the Insurance Companies Act 1958, which sets out the statutory procedures for assessing claims in a liquidation and refers to "the value of a … policy". Subsection (8), by contrast, empowers the Secretary of State to make regulations providing for a different procedure, for assessing the capital sum to be paid to the policyholder by the Policyholders' Protection Board.

The fear that has been expressed by my noble friend and by the noble Lord, Lord Aberdare, is that a value can be paid for a future benefit which does not take into account future premiums paid. But in providing for the calculation of a sum equal to the value of future benefits under a policy the regulations will obviously require that the policyholder's liability to pay premiums should be taken into account. My noble friend says that he had legal advice to the contrary. I can only say that the legal advice which I have received is as I have stated. It is certainly the intention of the Government—it was the intention of the other place—that no compensation by way of future benefits would be paid in this case unless future premiums also were paid. That is certainly the intention, and certainly the advice I have is that the words achieve that intention. Indeed, the reference to "future benefits" actually serves to narrow the potential scope of the regulations, as compared with the reference to, "the value of his policy" which is how my noble friend would have us leave the Bill. This Amendment ensures that the regulations may not provide for policyholders to be given compensation for rights to bonuses which have not been declared at the time of the liquidation: such provision would be possible under the wording of the subsection if unamended as I am suggesting in Amendment No. 7.

I would also remind the House that regulations under subsection (8) of Clause 11 will be subject to Parliamentary scrutiny and annulment. I suggest reference there to Clause 25(1). By virtue of Clause 25(2) regulations may only be made after consultation with the Board —a provision we added to the Bill on Report in response to views expressed earlier by noble Lords. I would find it absolutely inconceivable that that Board would agree to the payment of a value which did not take into account the payment or otherwise of future premiums. I hope that with that explanation it will be possible for my noble friend to withdraw his Motion.

Lord PEDDIE

My Lords, I thank my noble friend for those comments. It is quite true, as he says, that there has been no objection until now. It is strange but nevertheless true that this point was just not noticed. I am appreciative indeed of the assurances that he has given. He has indicated to the House that the regulations will take into account premiums to be paid. I feel that in the light of the very positive assurance that he has given some benefit has flown from highlighting this particular point by putting down the Motion. In the circumstances, and with the assurances that have been given, I beg leave to withdraw the Motion.

Motion, by leave, withdrawn.