§ 5.15 p.m.
§ Lord ORR-EWING
My Lords, I beg to move that this Bill be now read a second time. This is a Bill which is fairly simple and I think mainly non-controversial. It is to provide for registration of insurance brokers; it is to provide regulation of their professional standards; and it is, above all, to protect the public on the rare occasions when a broker undertakes something which might be called wrongdoing. All the four insurance bodies concerned with broking—and they make up something like 90 per cent. of the market, with an annual turnover of £4,000 million in 1975—support this Bill. Incidentally, I would add that the net foreign exchange earnings from this vast sum was in 1975 £452 million. This contribution for the whole industry, of which broking produces the dominant part, is the largest contribution of invisible earnings for the United Kingdom. So it is a very worthwhile industry and it has had remarkable success on a world basis in the last decade.
514 The Bill passed through the House of Commons, where it was sponsored by Mr. John Page, the honourable Member for Harrow West, and there it had the support of the Opposition Front Bench, it had the support of the Government Front Bench; there was a Liberal name on the original Bill, and a Scot. Nat. working on the Committee who also gave it support. So it is right and fair to say that it had all-Party support and Scottish National support as well.
Your Lordships might ask, why some regulation? Following an initiative by the Tory Government in 1973, in May 1975 the present Government requested the insurance broking industry to work out a scheme for self-regulation, as an alternative—and this is the point—to an imposed Government licensing scheme. I think many would prefer the self-regulating scheme rather than the latter. This scheme is designed to protect the public, and it is open to all types of insurance brokers, from the largest, with more than 4,000 employees, to the many small firms with just one person. There have been immense pains taken during its passage through the House of Commons and by those concerned with the drafting to ensure that the very small traders are catered for and are protected. Two out of the four bodies which make up the BIBA (British Insurance Brokers' Association) look after the wellbeing of small firms—they represent the small firms. Of the 1,868 firms within those two bodies 742 are run by a single trader. If you include also the firms with two or three people the number is over 1,000 out of the 1,800.
I would say that in terms of representation on the Council half the votes go to the two bodies representing the small firms, so the small firms' interest is well looked after by those two bodies. Equally, the Registration Council seems to be broadly representative; 12 people are nominated by the BIBA, and five nominated by the Secretary of State, and these have to include a lawyer and an accountant. Perhaps the Minister, when he replies, or at some stage during the passage of the Bill, will say whether the Government have given further thought to a consumers' representative on the Registration Council.
Meticulous care has also been taken so as not to exclude any person who has the necessary experience of broking. 515 Indeed, a special provision has been included so that an applicant cannot be prevented from trading under the description of "insurance broker" for two years after the Royal Assent is given to this Bill. This format is similar to that which has been in existence for several decades for solicitors. Solicitors have professional indemnity cover; under the Bill there is the same requirement. They have an annual levy for a compensation or guarantee fund; the same applies here. They have certain accounting rules; the same applies here. They have a self-regulating disciplinary committee; the same sort of motif is followed in this Bill. Therefore, I commend this sensible measure to the House, and I hope that it will be given a Second Reading.
§ Moved, That the Bill be now read 2a—(Lord Orr-Ewing.)
§ 5.21 p.m.
My Lords, first, may I compliment the noble Lord, Lord Orr-Ewing, on introducing this Bill today after its successful passage which he has described, through another place in the hands of Mr. John Page. Noble Lords would wish to know that although the Government did not inspire the Bill, they have welcomed and supported it through its various stages and we are convinced of its merits and readily commend it to the House. As the noble Lord said, it is supported by the British Insurance Brokers' Association and, moreover, in another place the Bill was widely welcomed, receiving active support on all sides.
The Government fully recognise the vital role played by the British insurance industry as a whole in our economy—not least its contribution to our invisible earnings. The Government are therefore concerned that the reputation of the industry, and of the brokers who play such an important part in its smooth functioning, should be enhanced. One aim of this Bill is to improve the status and professionalism of insurance brokers, and this the Government welcome. The whole area of intermediaries is one where there have been substantial developments over the last couple of years—developments for which much credit is due to both the Government and the brokers themselves.
516 It was my right honourable friend Mr. Peter Shore (who was then Secretary of State for Trade) who, in 1975, took the initiative in asking the four brokers' organisations to look at the problem of setting up standards for insurance broking. This gave the impetus to the four organisations to join together in the British Insurance Brokers' Council, which is now the Association—a step which the Government welcomed. This same initiative of the Government led to the drawing up of the Council's very constructive proposals last year; and this in turn has already produced two further developments. The Government produced their Consultative Paper on Insurance Intermediaries and we have the Bill that we are debating this evening.
The Government are not only concerned to maintain the health of the insurance industry, but also wish to give better protection to the policyholder. In this respect the present Bill is very much in line with Government thinking. In recent years the insurance companies legislation has been used progressively to tighten up supervision of companies and raise the standards of selling. Consumer protection is particularly important in insurance. For the man in the street insurance is a very difficult and rather unglamorous commodity; yet it is often vital to his welfare and can cost him a great deal of money. It is thus important that he should be persuaded to buy it and that what he is persuaded to buy is what he really needs.
This faces us with a dilemma. On the one hand, it is clearly desirable that a salesman should be familiar with what he is selling and, as insurance is so complicated and large sums of money are often at stake, this points to the insurance salesman having a certain minimum of training and experience as well as integrity. On the other hand, because insurance is essential to the citizen of today to enable him to protect himself and his family from the risks of everyday life, it is also important not to limit unduly the number of insurance sales outlets. We must be cautious in introducing controls therefore, otherwise the ordinary citizens may not buy the insurance cover which he ought in his own interests to have.
That is why the Government favour the step by step approach put forward in their 517 Consultative Paper and reflected in the provisions of the Bill. The Government's reaction to the proposals of the British Insurance Brokers' Council were set out in paragraph 11 of the Government's Consultative Paper, which states:The Government thinks that these proposals can provide the basis for a practicable and effective scheme of self-regulation, but the details need further debate and elaboration, and it is hoped that publication of the [brokers' consultative] document will stimulate this. The Government accordingly invites comment on the document's proposals … Full account will be taken of the comments received before the Government endorses any particular scheme".The present Bill was introduced very shortly after the Government issued their Consultative Paper. I should like to point out that our commitment to genuine consultations and our support for immediate legislation are not in compatible. As paragraph 13 of the Paper makes clear, the Government support for legislation on this subject has throughout been conditional on their restrictive provisions coming into force only after public consultation has been completed and the results taken into account.
Comments were called for by the end of March and I am glad to say that a large number of organisations and individuals have taken advantage of this invitation. In so far as they related to the regulation of brokers, the comments that we received fell into two groups. First, there were many comments on the regulation of insurance brokers that will have to be taken into account when considering the detailed rules made by the Council but which are not relevant to the Bill itself. For example, comments came from people who are concerned about the possible cost of registration, about the amount of working capital that will be required of registered brokers, and about the level of professional indemnity insurance that will be called for. But the Bill does not lay down any specific requirements in these areas; it simply provides for the Council to make rules after it has been set up. These rules will be subject to approval by the Secretary of State, and I can assure the House that before he gives his approval he will wish to satisfy himself that the Council has taken proper account of this sort of comment, and particularly of the legitimate interest of the small man in carrying on his business without the imposition of unreasonable burdens.
518 Secondly, there were comments concerning the provisions of the Bill itself. The Government have considered these carefully and in so far we have been able to do so, we have taken account of them in the Amendments already made to the Bill in another place. More generally, we were gratified to note that very few of those who wrote expressed complete opposition to the regulation of brokers. A large majority of comments accepted the case for some measure of regulation and for it to be done by the brokers themselves rather than by a scheme imposed from outside. Most of those who wrote were generally content with the framework provided in the Bill, subject sometimes to criticism of details and to the drafting of appropriate rules under the powers provided. Noble Lords will have seen that much is left to rules to be made under the Bill by the Registration Council. There will of course be ample safeguards built into this approach since the rules drawn up by the Council will have to be approved first by the Secretary of State, and then by Parliament.
There are several important matters on which the Government will want to satisfy themselves in considering the detailed implementation of the provisions of the Bill; for example, the code of conduct under Clause 10 will be of central importance. The first step towards protecting the policyholder, in the Goverment's view, must be to create a clear distinction between the two kinds of people who sell insurance. I mean, on the one hand those who are engaged by a particular company to sell that company's policies—that is what may be termed the "insurance agent"—and on the other, those who aim to meet the public's need for impartial, expert help in choosing what they need from all the different policies on offer. That is what is meant by "insurance broker".
In order to bring about this distinction, what is needed is to establish the insurance broker in the public mind as someone in whose expertise and integrity they may have full confidence. The Bill, in Clause 22, provides that in due course the name "insurance broker" will be reserved for those registered under the scheme. The Government's Consultative Paper accepts the case for this. If the public is to be able to make the necessary distinction easily then the registered brokers must 519 have a name to set them apart from others. There may be some who may dispute the need for any regulation at all, on the grounds that there is little at present wrong with insurance broking, or, that if there is something wrong the cure is worse than the disease. The Government do not accept this view. At present ordinary people, in buying insurance through intermediaries, often do not know where they stand. Virtually anyone can open an office and call himself an insurance broker, or adviser or consultant. At the worst a man who calls himself an insurance broker may in fact know little about insurance; he may have had no business experience; he may have no financial backing, no proper accounting procedures for handling his client's money; he may be intent on earning quick commission by pushing the policies of a particular insurance company without regard to his client's needs. But the man-in-the-street with an insurance problem has no way of distinguishing such a person from the experienced, sound and independent broker he is really looking for. This Bill will enable him to make that distinction.
Moreover, if a policyholder today has a cause of complaint against a broker who happens not to be a member of one of the established brokers' organisations, there is nowhere he can go for redress—except to the courts, and that may entail considerable delay and expense. If there is a body with which all insurance brokers must be registered, and if, as the Bill envisages, there must be a procedure for dealing with complaints, it becomes much easier for the policyholder with a legitimate complaint to have it satisfactorily dealt with.
Again, those who handle other people's money on trust should be under some form of supervision. This principle is already accepted in respect of credit intermediaries under the Consumer Credit Act 1974. It has been accepted for over a century in respect of insurance companies. There can be no reason to deny the same principle in the case of brokers who receive insurance premiums from policyholders and who sometimes handle money due to those policyholders by way of claims or benefits. The policyholder has a right to expect certain standards of honesty and sound management from all 520 who handle his money, and to be protected from the results of incompetence, fraud or insolvency if they occur.
My Lords, may I sum up. The Government have been encouraged by the discussions on the Bill during the last three months, both inside and outside Parliament. The Bill, as has been said, has been widely welcomed. It provides an adaptable piece of machinery for the effective regulation of brokers by a council composed largely of their own representatives but subject in certain respects to the safeguards of Government and Parliamentary approval. As I have indicated, the Bill is consistent with Government policy. It is sound and sensible in itself. It is drafted in a flexible and realistic way to deal with a complex situation and to allow for future developments. I should therefore like again to congratulate the Promoters of the Bill, and the noble Lord himself this afternoon, and to commend it to the House for a Second Reading.
§ 5.36 p.m.
§ Lord BANKS
My Lords, I must begin by declaring an interest, for I am a director of the life and pensions subsidiary company of a firm of Lloyd's brokers. I have in fact been involved in insurance broking in the life and pensions field for over 18 years, and occupied in life insurance and pensions business, both broking, and before that with two life offices for 26 years. Like the noble Lord, Lord Oram, I want to express support for the Bill, the Second Reading of which has been so ably moved by the noble Lord, Lord Orr-Ewing, this afternoon.
In recent years we have seen the regulation of insurance companies by the Insurance Companies Act 1974. We have seen safeguards and a safety net established for the policyholder in the Policyholders Protection Act 1975, an Act which embraces insurance brokers as well as insurance companies. But, as has already been pointed out to your Lordships, the position with regard to intermediaries has remained unregulated and unsatisfactory. In particular, the term "insurance broker", implying that the user of that description chooses freely from the market when giving his client advice, is open to anyone to use regardless of qualification, experience, character or financial stability.
521 There is a great need, in the words of the Explanatory Memorandum attached to the Bill,to establish a system of registration of insurance brokers so as to ensure that, for the protection of the public, the competence and conduct of practising insurance brokers are of a sufficiently high standard and that their financial resources are adequate".In other words, there is a need for insurance broking to be put on a professional basis. I am glad that it is going to be possible to do this by self-regulation. I welcome the fact that the Government have accepted the principle of self-regulation.
As we have been told, the Bill is founded on proposals put forward by the British Insurance Brokers Council, now the British Insurance Brokers Association, which is composed of four bodies of insurance brokers: the Lloyds Insurance Brokers Association; the Corporation of Insurance Brokers; the Association of Insurance Brokers; and the Federation of Insurance Brokers. As the noble Lord, Lord Orr-Ewing, pointed out, the last two are particularly significant, for they include many small brokers. The smaller insurance brokers have an important role of their own. Often they are prepared to handle risks which the bigger brokers think are too small for them to deal with, and in that respect the smaller broker can give a vital personal service. We must see that any financial burden placed on them in the Bill is not excessive, but all the signs are that they fully support the attitude of the four associations in the British Insurance Brokers' Association.
It has been argued that in introducing this measure of registration we are creating the possibility of the danger of a closed shop, but I do not think that is correct. Registration will be open to all who are able to qualify and any who are refused registration will have recourse to the appeal procedure to the High Court. And those who do not qualify may still remain in business, but they must not call themselves insurance brokers. Although they can carry on as agents for particular companies, and no doubt as agents for several companies, perhaps the position is just a little more complicated that it might have appeared from what the noble Lord, Lord Oram, said, in that one can have somebody continuing in business 522 once this legislation is established who is acting as an agent for a number of companies and not for one. However, he must not use the title "insurance broker".
Indeed, as I understand it the Government recognise that something needs to be done to deal with the position of agents, and I believe it is their view that agents should be dealt with through the companies which appoint them. It may be necessary to have some generally agreed rules for companies in dealing with their agents so that all companies will apply some rules, although the remaining rules which each company has may be such as suit their own particular needs. Those who use the term "insurance broker" will be qualified within the terms of the Bill, by experience or by academic qualification or by both, and it may be desirable although, as I understand it, this is not provided for in the Bill—to phase in a requirement for all new applicants for registration after a certain date, and perhaps under a certain age, to have an academic qualification such as the Associateship of the Chartered Insurance Institution.
However, all registered insurance brokers will be subject to the regulations designed to ensure financial solvency and stability, governed by the degree of professional discipline provided for in the Bill and guided by a code of conduct. I feel that that code of conduct will have to deal with, among other things, the question of doorstep selling. I am aware that that is dealt with in other legislation but, in so far as it is something in which some brokers take part, it will have to he covered very carefully in the code of conduct. Similarly, sales campaigns will have to come within the purview of the code; the degree to which policies of a particular company should be promoted in such campaigns will need consideration, along with the whole question of advertising and the content of advertisements.
There is no definition of "insurance broker" in the Bill. The British Insurance Brokers' Association has accepted the definition in the EEC Directive in which insurance brokers are described as:… persons who, acting with complete freedom as to their choice of undertaking, bring together with a view to the insurance or reinsurance of risks persons seeking insurance or reinsurance, and insurance or reinsurance undertakings, carry 523 out work preparatory to the conclusion of contracts of insurance or reinsurance, and, where appropriate, assist in the administration and performance of such contracts, in particular in the event of claim".That is a good definition. It speaks of persons acting with complete freedom as to their choice of undertaking, but it does not say on what they would base their choice; it does not say that their object should be to get the best terms possible for their clients. With that addition, I think the definition is excellent. I am sure that it is in the spirit of that revised definition that the Bill has been drawn up, and I hope the House will give it a Second Reading today.
§ 5.45 p.m.
§ The Earl of MANSFIELD
My Lords, I wish at the outset to congratulate my noble friend on the succinct and yet comprehensive way in which he introduced the Bill. It is a measure which will have important consequences and at the same time it is not without its difficulties, as can be gauged from the fact that, besides its Second Reading in the other place, the Bill occupied a Standing Committee for no less than three sittings and required two further appearances on Report before it finally gained its Third Reading. I should declare an interest, albeit an indirect one, in that I am a director of a composite insurance company. Although the Bill does not directly affect insurance companies, insurance companies are vitally affected by insurance brokers and therefore in turn they will be indirectly affected by the measure.
Although, as I have said it is a complex and technical Bill, it is nevertheless a Private Member's Bill and I suppose that in order to commend it to the House the sponsors should, in strict circumstances, satisfy your Lordships of two matters: first, that there is need for the Bill and, secondly, that its provisions go some way to fulfilling that need. So far as the need or justification is concerned, it is relevant to reflect that this measure is one more law which will, I presume, go on to an already overloaded Statute Book. It will provide one more set of regulations in a commercial activity which is the personification of initiative, enterprise and—as I look at the noble Lord, Lord Oram, dare I say it?—private enterprise.
524 This is certainly a consumers' Bill and one sometimes has the feeling that Parliament has swung from being perhaps far from heedful of the consumer interest to an almost over-solicitous desire to protect the citizen from his fellow. Nevertheless, the Government earlier this year produced a White Paper on insurance intermediaries, as they are called, and that term includes brokers. In Part IV of the Annexe to that White Paper the areas of concern were spelt out and for me at any rate provided conclusive argument that some form of regulation of brokers is essential.
Perhaps there are three facets to the argument which particularly struck me. First, a contract of insurance is usually technical and frequently complex. At the same time, while the broker will be an expert or at any rate sound like one, the individual who employs him or seeks his advice most certainly will not. In the result, it is difficult for the individual in such circumstances to assess not only the quality but indeed the honesty of the broker and the services he provides. Still more, importantly, is it difficult to assess the value of his advice. Secondly, even if the broker is doing his honest best, one is struck by the fact that a mistake or miscalculation on his part may have severe and indeed calamitous effects on the clients. Thirdly, financial failure by the broker, whether by fraud or honesty, may cause loss to the client who, at the moment at any rate, may be unable to recover his money. It is in the light of the White Paper and the recommendations that the Bill comes before your Lordships' House.
I am delighted that the regulation proposed is self-regulation from within and not regulation imposed by Statute from without. I must say that my opinion of the Government goes up a trifle at the fact that the industry itself will have the task of setting up the machinery and thereafter running it. Rather to my surprise, the Government seem to be agreeable to that course, which is at variance with other attitudes which the Government frequently adopt towards the regulation of private enterprise.
Nevertheless, there are still some areas of concern, some of which were ventilated by the noble Lord, Lord Banks. The Bill is limited in scope, in that it makes no 525 attempt to deal with other intermediaries such as agents. As I understand the position, insurance agents are an entirely different breed and will continue to trade and sell insurance although they will, in effect, be disbarred from calling themselves brokers unless they qualify for registration. Equally, brokers who are struck off or who fail to have themselves registered can continue to trade but with a different label. If the new arrangements are to have much impact or, indeed, useful effect, the public must be educated so that it knows the meaning of the term "insurance broker" and what standards and safeguards it implies.
On the other side of the coin, it would be unfortunate if the term "agent" came to be used in a second-rate or derogatory sense, because there are many agents—for instance, with insurance companies—who have high standards of integrity and expertise and who give an excellent service to the public. The line between the broker and the insurance agent is inevitably ill-defined and I suppose that, as the noble Lord, Lord Banks, pointed out, the answer will eventually be to have some form of further legislation. The difficulties of even the definition of the word "agent" are profound, still more so when one reflects where his legal liability or legal responsibility will lie.
Turning to the provisions of the Bill, I am not sure how far the criticisms by Richard Milner in the Sunday Times yesterday are justified. It may be a matter that my noble friend may care to pronounce upon when he replies to the debate. As I see it, if the Council refuses to register a person because it is not satisfied as to his character and suitability under Clause 3(2)(a), there is a right of appeal to the court. The Council would have to justify its decision, but I hope that my noble friend will confirm that the clause is meaningful and not a charade as was made out in the Sunday Times. To me at any rate, it seems that, if the Council fails to give its reasons for refusal of an application for registration, the subsequent appeal will almost inevitably succeed.
The matter of the consumer interest came up in the other place. A suggestion was made that there should be written into the provisions of the Bill the fact that the Secretary of State should, as it 526 were, nominate officially designated consumer interests to be members of the Council. Maybe that is a matter for the Committee stage of the Bill in your Lordships' House. I see the noble Lord, Lord Oram, nodding. I should have thought that in view of the Parliamentary timetable and the fact that the Bill has had a very thorough airing in the other place, it would scarcely be necessary for it to have a Committee stage at all. However, there will no doubt be one or two small points which will need clearing up. Subject to that, I believe that I am right in saying that all quarters of the House welcome the Bill, and certainly we on these Benches hope that it will have a fair passage.
§ 5.55 p.m.
§ Lord AUCKLAND
My Lords, I rise to congratulate my honourable friend the Member for Harrow, West for having piloted this Bill through another place, not, as has been mentioned, without rather more difficulties than a Private Member's Bill normally encounters. I must declare a small interest, in that, since 1948, I have spent most of my working life in Lloyd's, both broking and underwriting, although Lloyd's, because it is a corporation, is not directly covered by the Bill. Nevertheless, I join with others in welcoming the Bill, if only to convince those who are still sceptical about the insurance industry that the industry itself is prepared to put its house further in order where necessary.
I believe that one of the most important aspects of the Bill is the provision of adequate working capital. That is absolutely vital, particularly for the smaller insurance companies, for there have been cases—and they are widely known—where a claim has not been met through lack of assets to pay the claim. Of course, the role of the broker is all important because it is upon him or, on occasions, her, that the client, the consumer, the policyholder or whatever description one likes to use, depends. It is therefore essential that, at a time when the insurance industry is contributing considerable sums of money to invisible exports—something like £400 million last year, of which nearly 50 per cent. came from Lloyd's of London—the insurance broker should be 527 regarded as somebody who can be completely trusted. In my experience, the vast majority of brokers are so regarded.
I believe that one of the problems of the Bill will undoubtedly be the way in which the disciplinary committee will work, since this is a self-regulating Bill. However, I believe that, as has been said, with three long Sittings in Standing Committee in another place, together with quite a long Report stage and a Third Reading, these points have been adequately covered. To those who say that this is another example of consumer protection being taken too far, I would say this: insurance, wherever it is placed, is one of the most vital assets that a person has in his or her working life, whether it be on a house, a motor car or anything else. It is therefore essential that the insurance companies have the highest possible standards. In this country there is little doubt that the vast majority have these very high standards and this Bill can be warmly commended as adding to the value of those standards for the community.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.
My Lords, it would appear that the noble Lord concerned with the next Bill is not yet in the Chamber—I understand that he is now entering the Chamber, and that he will be with us shortly. I think that the noble Lord, Lord Orr-Ewing, has missed his chance to speak again on the previous Bill.
§ Lord ORR-EWING
My Lords, the list of speakers states that the noble Lord, Lord Oram, is to speak again and that I am to speak immediately after that, so having consulted my advisers I came back as quickly as possible. I apologise if I insulted the House by leaving my place during that period.