HL Deb 28 April 1981 vol 419 cc1127-41

2.58 p.m.

Lord Lyell

My Lords, I beg to move that this Bill be now read a second time. I should first remind your Lordships that this Bill deals with a number of different subjects. It also deals with the subject of Lloyd's. I am a member of Lloyd's. The Bill deals with the supervision of insurance companies generally. Two of the clauses in the Bill touch upon Lloyd's. However, these two clauses do little more than repeat the provisions of the Lloyd's (General Business) Regulations 1979 and also the Insurance (Transfer of General Business) Regulations 1980. They only apply to Lloyd's as a whole some financial and other requirements that the Bill in earlier clauses applies to insurance companies. Having said that, I hope that your Lordships will see no difficulty in my speaking on behalf of the Government to the Bill.

Before I turn to the main provisions of the Bill, it might help if I were to set out the context in which we are bringing forward this legislation. Most existing primary legislation particularly concerned with insurance companies was consolidated into the Insurance Companies Act 1974. The method of insurance regulation set out in that Act has four main aspects. First, a system for authorisation: that is, determining that a company wishing to enter the industry has the resources and the integrity to meet obligations which are uncertain and may arise far in the future; secondly, a system of scrutiny, for verifying that the company continues to have adequate financial reserves available at all times to meet possible claims; thirdly, a system for intervention to protect policyholders where there are signs that a company is nevertheless running into difficulty; and, finally, provision for the winding-up of an insurance company. Fortunately this is a very rare occurrence.

The 1974 Act is the result of more than a hundred years of regulation. In part, developments have been in response to cases where failures of insurance companies have caused great harm to policyholders. The most recent noted failures influencing our legislation substantially were the collapse of Fire, Auto and Marine in 1966, and of Vehicle and General in 1971. But regulation in the United Kingdom can still be best characterised by the phrase "freedom with publicity". The industry is free to decide the nature of its policies and its premium rates, in contrast to the situation in many other countries. And there has not been Government direction of the investments of insurance companies in this country. Control in our legislation over entry into the market has not been aimed at restricting competition but at ensuring a company's ability to withstand it for that reason. I believe that the United Kingdom's approach to supervision has been a factor encouraging a healthy and diverse industry with the versatility to expand the range and volume of its business both in this country and abroad.

The role that the industry plays in the United Kingdom and overseas is of great importance. The security offered by our insurers meets the increasing needs of both private individuals and the business community in a complex society. In 1979 there were some 150 million personal life and general insurance policies in force in the United Kingdom. Four out of five households had life cover of some form, three out of four households had household insurance, and over a half of the households had motor vehicle insurance. The great variety of cover offered to commercial bodies includes transport insurance, cover against fire and other damage and a wide range of liability insurance. And of course a substantial proportion of United Kingdom pension provision is made through insurance companies.

At the end of 1979 there were 823 authorised insurance companies, some big, some small, and there were 404 syndicates at Lloyds' providing these services. While the figures may overstate the degree of diversity—some insurance groups, for example, comprise a number of separate but scarcely independent companies—they indicate that the market in insurance is a genuinely competitive and free one.

The importance of the industry is reflected in other ways. Employment was around a quarter of a million in 1979. Among its wide spread of investments are substantial holdings of company securities. And of course its net foreign exchange earnings have for many years been vitally important to the economy. In 1979, which was the last complete year for which records are available, those earnings amounted to £957 million, roughly half the total net earnings of "City" institutions.

I should like now to turn more directly to the Bill. Since 1973 Brussels has been an important influence on our insurance legislation. Freedom of establishment and the freedom to provide services are rights laid down by the EEC treaty. As noble Lords will have seen from the Explanatory Memorandum to the Bill, the prime objective of this Bill is to give effect to two European Community directives which cover most of the provisions needed to make effective the right of establishment for life and non-life insurers in the Community. The implementation of the 1976 directive has been largely accomplished through regulations made under the European Communities Act. Because of the way in which these regulations have overridden the 1974 Act, this has led to an undesirable degree of complexity in insurance legislation.

The Bill covers comprehensively, either directly or through regulation-making powers, all the requirements of both life and the non-life directives; it extends them as appropriate to insurance undertakings outside the scope of the directives, and introduces a number of other innovations. The result is simpler and more logical legislation, which will in addition permit a further simplifying consolidation covering the Bill itself, the 1974 Act, and the Insurance Companies Act 1980. Noble Lords may recall that this last measure extended Great Britain insurance companies legislation to Northern Ireland.

Implementation of the 1973 directive by regulations has led not only to complexity, but also to a distortion in the structure of insurance companies law. For many years United Kingdom supervision of insurance treated direct insurance and reinsurance similarly. But so-called pure reinsurers—that is, companies engaged solely in reinsurance—are outside the scope of the directives, and hence could not be covered by the regulations under the European Communities Act. This Bill reinstates a broadly uniform régime.

While the changes to United Kingdom law necessary to implement the directives are substantial, they do not involve a radical reconstruction of the supervisory framework which I outlined at the beginning of my speech. There are differences between our system of supervision and the approach of some of our European partners. While their approach is reflected to some extent in the directives, I believe that this Bill demonstrates that it is possible to marry the two together without changing that fundamental characteristic of "freedom with publicity".

Earlier I mentioned four aspects of supervision—authorisation, scrutiny, intervention and winding-up. I should like now to turn to the provisions of the Bill as they affect three of these. Winding-up I shall leave aside—the Bill contains no amendments to the winding-up provisions in earlier legislation.

Part I of the Bill is concerned primarily with conditions for the authorisation and the termination of authorisations of insurance companies. It replaces completely Part I of the 1974 Act and the classification and authorisation regulations made in 1977 to implement parts of the non-life directive. Many of the provisions are therefore familiar—for example, the exceptions for members of Lloyd's and certain other limited groups, the requirement to submit a business plan as a condition of authorisation, and the requirement that directors, controllers and managers be "fit and proper persons". Almost equally familiar are the arrangements applied to general business companies by the regulations made under the European Communities Act and extended by the Bill to life companies and, where practicable, to reinsurers. I have in mind particularly the different arrangements which apply to companies depending on whether their head office is in the United Kingdom, or another member state or outside the Community.

I should like to comment on two other changes to the controls on companies wishing to enter the industry which reflect national policy and are not part of the implementation of the directives—the one on extension of the "fit and proper persons" powers, the other relating to benefits in kind.

The 1974 Act provides that the Secretary of State shall not authorise a company if it appears to him that controllers, directors and managers are not fit and proper persons for those posts. These are important powers which have on occasions proved controversial, leading in one instance to proceedings before the European Commission on Human Rights. I am glad to say in that case the action of the Secretary of State was upheld. I should stress they are not arbitrary powers—the Secretary of State is always open to challenge in the courts if the rules of natural justice are not followed. This Bill applies the powers for the first time to the general representative that a company from outside the United Kingdom must appoint, and to those underwriting agents who can commit a general business company to a significant part of its business. Such agents are designated in the Bill as "main agents". Underwriting agents accept risks, issue policies and handle claims on behalf of insurance companies. Larger companies often use them to handle parts of their general business, while smaller and foreign owned companies may use them to write the whole of their general business in the United Kingdom. Such agents can have just as significant an effect on the fortunes of an insurance company as managers. Although cases where underwriting agents have acted discreditably or incompetently are rare: there have been some instances where policyholders' claims have been put at risk. In saying this, I am not making in any way a general attack upon underwriting agents; but it is anomalous that companies should be answerable for the fitness of managers but not of their main agents. I should emphasise that there is to be no power to intervene directly against main agents. The Secretary of State will, however, be able to intervene in the affairs of an insurance company that has appointed an unfit main agent as it can when an unfit manager has been appointed.

I said that the "fit and proper persons" provisions would apply only to the main underwriting agents. The Bill as introduced in another place left the dividing line between "main agents" and other underwriting agents to be drawn in regulations. Noble Lords will see from Clause 7(6) and Schedule 3 that this line is now drawn in the Bill itself. Speaking broadly, a main agent is an underwriting agent with authority to write more than 10 per cent. of the company's general business in the United Kingdom. As my honourable friend the Parliamentary Under-Secretary of State for Trade indicated in another place, these are important powers and it is desirable that the Bill should settle as far as possible which agents are now to be subject to them. A transitional provision is left to be settled by regulations, and this is an exemption for existing agents authorised without limit whom experience has shown are not accepting 10 per cent. of a company's business.

I mentioned benefits in kind. I should draw the attention of noble Lords to subsection (5) of Clause 2 and to Clause 16. These provide the Secretary of State with the power to make regulations so that insurance companies offering insurance contracts that provide for benefits in kind rather than money, and offering no other insurance contracts, may be exempted from the requirement to be authorised and indeed from the supervisory régime imposed by Part II of the 1974 Act. It is our intention in the first instance to use these powers to exempt organisations offering only roadside assistance and vehicle recovery insurance. There are two main reasons for this. First of all, the system of scrutinising insurance companies is basically financial and has little relevance to monitoring the ability of a body such as the Automobile Association or indeed the Royal Automobile Club to provide assistance to a member whose car has broken down. And, if we take no power of exemption, the bodies concerned will be forced to incorporate and restrict their activities to insurance business. In some cases this could result in an unjustified financial and administrative burden.

One other aspect deserves comment. The Commission of the European Communities has recently submitted for consideration within the Council machinery a draft directive on assistance insurance which would require the supervision of certain transactions providing for benefits in kind. This includes vehicle recovery insurance such as AA Relay and, when linked to it, roadside assistance. It is, I am afraid, too early to speak of a possible conflict between the regulations we intend to make under these provisions in this Bill and a draft directive whose underlying principles have yet to be appraised. The provisions of that draft have yet to be scrutinised by a working group of the Council of Ministers, and are open to amendment.

I turn now to scrutiny, which I have suggested is largely financial scrutiny. The main changes introduced by this Bill are to be found in Clause 21, which inserts four new sections into the 1974 Act and deals with financial resources. New Section 26A is concerned with solvency margins—that is, the required excess of assets over liabilities intended as a cushion in times of unexpected financial stress. On the general business side the net result is little change. General business companies were first required to show a solvency margin in 1946, and since the 1977 solvency regulations have been subject to the directive's solvency requirements. The main change is for life companies, which for the first time will be required from 1984, the end of the transitional period allowed for in the life directive, to show a solvency margin. Until now we have relied on the prudent valuation by the appointed actuary of a company's long-term insurance liabilities. The only formal requirement has been that the actuary must certify that the company's assets exceed its liabilities. New Section 26A imposes an obligation on all companies to maintain a solvency margin or in some cases margins, but leaves the detailed calculations to regulations. Those regulations will follow the 1977 solvency regulations for general business companies and the provisions in the life directive for long-term business.

This is perhaps a convenient place to comment on Clause 7(2), which concerns partly paid shares in insurance companies. We do not believe that it is desirable that insurance companies should rely on the unpaid portion of partly paid share capital to meet their solvency requirements. While the directives permit one half of any share capital not paid up to reckon towards the assets representing the solvency margin once 25 per cent. of the total share capital has been paid up, this does not mean that member states are under an obligation to allow companies to issue partly paid up capital. There is no guarantee that shareholders would answer a call for capital promptly. Some might not have the means, and others, interpreting the call as a sign of weakness, might be slow to answer that call. It would not be right to take retrospective action against existing unpaid share capital; thus Clause 7(2) provides that companies that do issue partly paid shares after the commencement of the section may not be given an authorisation. Clause 11(2) permits intervention if an authorised company issues such capital.

Clause 21, by adding a new Section 26D to the 1974 Act, also provides a new power to allow the Secretary of State to make regulations to meet the requirements of the directive on what is called in the Bill the "form and situation of assets "and in the directives "matching and localisation ". By "matching" is meant the matching of the currency in which a liability has to be met by assets expressed in that currency. The objective is to prevent changes in exchange rates placing an unnecessary strain on a company's resources. Let me give a brief example. A United Kingdom insurance company that entered into substantial business in the USA and covered its possible obligations by investing in property in the United Kingdom and elsewhere in Europe might have to sell some of that property and convert the proceeds into dollars to meet the claims in the United States. The adequacy of the investments in such a case depends on the exchange rate at some future and uncertain date. Matching avoids this uncertainty. It is no more than good practice to cover substantial risks arising in foreign currencies by investments in those same currencies.

The principle of localisation is also basically simple. It is the requirement for assets to be located in a particular country, most obviously in the country where the insurer is established. The object is to allow checking and control of an insurance company's assets much more easily.

But, while these concepts appear straightforward, their expression as a legal obligation is very complex. The directives do not cover all the details which we feel need to be settled before precise rules can be laid down in our legislation. As with the detailed solvency requirements, it is entirely appropriate that the detailed rules should be left to regulations. The process of consultation about those regulations is already well under way.

The other important aspect of supervision to which I referred is intervention. The approach in the directives tends to be to relate a specific form of intervention to specific failures. It is less flexible than the present approach in this country. Some modifications to our existing powers are necessary. The main change, found in Clause 23, affects the grounds on which we can require a company to place assets in trust. We shall no longer be able to impose this requirement because the company is newly authorised or because there has been a change of controller. The other significant change is the recasting of the power to "stop" an insurance company—that is, to prevent it from entering into new contracts—which has been up till now in Section 29 of the 1974 Act. A directive-style provision for the withdrawal of an authorisation in respect of new business is found in Clause 11 of the Bill. It has, however, been possible to modify the existing powers of intervention to take account of the directives without radically altering our approach to intervention or weakening our powers to take appropriate action where we believe policyholders' interests are at risk.

I have spoken for some time, but I should like, if I may, to comment briefly on other aspects of the Bill. Clause 15 restricts the business of insurance companies to insurance business, subject to one minor exception. If a company carries on other business, then the pressure to invest funds in that business may be great, even though the assets involved are unsuitable to cover the company's insurance liabilities. Taking that further, losses on the non-insurance side can result in insolvency, with partial or total loss of cover for policyholders. In fact, separation of insurance business from other business is already almost complete in the United Kingdom. Clause 15 should not present companies with any great difficulty.

Clauses 17, 19 and 20 affect life companies, and they modify Sections 14, 24 and 25 of the 1974 Act. These clauses are concerned with improving the control over the movement of assets from the long-term business fund of a life company to the shareholders' funds and with protecting the rights and expectations of policyholders.

Clause 17 requires annual rather than triennial valuations. This is already the practice of the great majority of companies, but the clause also places a new obligation on companies to establish a separate surplus arising from a particular part of the business where policyholders' rights relate to such a part of that business. Clauses 19 and 20 remedy technical deficiencies in Sections 24 and 25 of the 1974 Act, and they also improve the protection of the interests of long-term policyholders. A number of useful and improving amendments were made to the Bill after its introduction in another place, but none that made a major change to its structure or, indeed, its effect. There will be few, if any, proposals from the Government for amendments to the Bill here, in your Lordships' House.

This is a significant and a worthwhile measure. While it takes us several steps further down the road towards a free market in insurance in the Community, it should not be seen simply as legislation at the behest of Brussels. As I hope that I have explained, the Bill includes items that do not flow from the directives, and it would be wrong to suppose that without these directives the United Kingdom would have taken no steps in their direction, although I would not pretend for a moment that we should have gone in exactly the same direction. The Bill also provides for a much needed simplification of the legislation governing insurance companies, and for that reason I commend it to your Lordships' House. My Lords, I beg to move.

Moved, That the Bill be now read 2a.—(Lord Lyell.)

3.23 p.m.

Lord Bruce of Donington

My Lords, we on this side of the House will do everything we can to facilitate the passage of this Bill trough your Lordships' House, subject always, of course, to more detailed scrutiny and some arguments that may conceivably arise on the Committee stage. We are able to do so for two reasons. The first is that when the Bill was considered in another place any political differences arising on the Bill were most difficult to perceive. As I read them, the proceedings on Second Reading were most harmonious and that harmony was rendered even greater when the Bill went to Standing Committee D in another place where, so far as I can see, there were no divisions; there were no political divisions that were reflected in the Lobbies; a number of constructive suggestions that were made from all sides of the Committee appeared to receive sympathetic consideration; some of the amendments were withdrawn and others were adopted, and on others the Government promised suitable action. That is the first reason.

The second reason is, of course, the felicitous manner and the very comprehensive terms in which the noble Lord opposite addressed us on this, the Second Reading of the Bill in your Lordships' House. Consequently, it will be unnecessary for me to follow in detail any of the ground that he has covered, because I am largely in agreement with his own explanation of the terms of the Bill and of its relevance, save only perhaps for this. In his concluding remarks the noble Lord was at pains to point out that the Bill would probably have been necessary in any case and that, aside from its implications for the domestic market, there were, of course, certain EEC matters that had to be taken into account. In another place the real purpose of the Bill was, of course, fully set out in his honourable friend's statement on Second Reading: The main reason for the Bill, as hon. Members will have realised from the explanatory memorandum, is to give effect to two European Community directives harmonising certain features of the supervision of insurance undertakings within the Community ".—[Official Report, Commons, 2/2/81; col. 103.] Therefore, whatever other items there are in the Bill—items with which we ourselves are in entire agreement—the main purpose of the Bill is to follow the EEC directives. In this connection I have a number of questions which I should like to put to the noble Lord.

The directive which lies at the root of the present Bill is, of course, No. 79/267/EEC, published in Volume 22 of the Official Journal of the EEC on 13th March 1979. This stipulates in Article 40 that: Member States shall amend their national provisions to comply with this directive within 18 months of its notification and shall forthwith inform the Commission thereof. The provisions thus amended shall, subject to Articles 33 to 36, be applied within 30 months from the date of notification". It is thus quite clear, and I make no critical point of it, that if Article 40 of the directive were to be complied with, this Bill ought to have gone through both Houses of Parliament before 15th September 1980. Consequently, we are a little late. Nor do I make any complaint of that. I well recall the circumstances when the EEC issued its VAT Directive No. 6, which was to come into operation on 1st January 1978. This country introduced the VAT regulations in the Finance Act 1977, so it was only this country and Belgium that had, in fact, complied with the VAT directive by 1st January 1978. At the time I left the European Parliament in July 1979 there were still three member states which had not ratified. Therefore, I do not reproach the Government in any way for being a little late.

But I must ask the noble Lord what other member states at this stage, talking as of today, have passed through their respective Parliaments legislation on the lines that is today before your Lordships' House, in compliance with the directive. I may prove to be very wrong and if I am, I apologise in advance, but I doubt whether quite a number of countries have as yet gone as far as Her Majesty's Government. However, it would be nice to know who at this stage still has to fulfil this particular obligation.

The reasons for my asking this question are very clear; because, of course, there has been in existence for a long time—in fact, since 1973—a draft directive which has sought to establish freedom of establishment of insurance institutions throughout Europe. I have referred to this on a number of occasions, and when I had the honour of addressing your Lordships' House on this subject over a year ago, your Lordships will recall that the original draft directive which gave the freedom to establish insurance institutions and to trade across national boundaries in Europe had been unduly delayed by quite deliberate frustration and quite deliberate obstruction in the European Parliament for four years; and that it had also been frustrated by deliberate action at Council and at other levels, the main reason, of course, being that the French and the German insurance companies were scared stiff of British insurance competition in the non-life market in their respective countries. I think that many of us on both sides of the House took a pretty dim view of that.

The second question therefore follows from that. In answer to a Written Question in another place on 19th March, the Chancellor of the Exchequer stated—and this is quoted from column 177 of the Official Report: After discussing the draft insurance services directive, which will give insurers freedom to operate across frontiers within the Community, the Council confirmed the importance it attaches to making this freedom effective. Officials were instructed to prepare a report on the main issues for discussion at the May Finance Council". The question I have to ask the noble Lord is: has any further progress been made so that British insurance institutions can have the freedom which was originally provided for under the treaty itself and which other members of the European Community, for quite selfish reasons, have declined to bring into operation in order that the very free and competitive conditions can in fact apply and benefit the British insurance market?

It will be easily seen that this question is also linked to the first question that I posed. This may be entirely untrue and may be falsified by the answer which the noble Lord will in due course give me, but it might be that two member states have not gone so far with this directive as we have and that itself might be used as a further excuse for postponing the coming into operation of the directive, which provides for the freedom of services and the establishment of services across frontiers which was envisaged at the outset, some nine years ago. I should therefore be very grateful if the noble Lord opposite could reply to that point.

I have only one other point to make because I find myself in so much agreement with the explanations which have been given by the noble Lord, Lord Lyell, and indeed with the purposes of the Bill. This point does concern the nature of an amendment that was put forward in another place and which does seem to me to embody a point of principle. Your Lordships will recall that it was proposed in another place to introduce a new Clause 14 which would provide for actuarial intervention—and here I am not quoting exactly from the amendment involved—to ensure that a report was made of changes of policy carried out by individual companies. It will be appreciated that an insurance company can change its policies in one of two ways, or can undertake actions which may have an adverse effect on its existing policyholders in one of two ways.

An insurance company can embark upon a type of life insurance business on terms which are really financially unsound in themselves. In other words, it can conclude a bad bargain with those to whom it offers life insurance. That is one way. In that case the intervention of an actuary—and I do well bear in mind that they do now report every year—might well be desirable. If for example an actuary comes across instances where, notwithstanding the maintenance of the existing solvency margins (and British companies by and large maintain higher solvency margains than do companies on the Continent), he thinks that the newly-issued policies are being issued on terms which he regards as themselves financially unsound from the actuarial standpoint, then he ought to be in a position to report specially upon it.

The other aspect of unsoundness which might affect the policyholder arises on the type of investments that the company makes. It may well be that certain insurance companies occasionally act injudiciously in regard to the selection of investments which they make with the policyholders' money they receive. This is a matter of some consequence. The insurance market is a fairly considerable investor and this is not only a question of the individual policyholder being involved; it is also a matter of public interest. The amendment that put was forward in another place was rejected—I believe in part because it was thought that the role of an actuary ought not to be too far extended in this regard. Whereas it would be quite feasible and proper for an actuary to report on the nature and trends of the business that was being concluded to the policyholders themselves, I should have thought it more the role of an accountant or an auditor actually to report on the status of the investments which the insurance company is making with the funds it receives. Of course that is a matter that can be pursued in Committee but it is for consideration whether as a note to the accounts, the insurance company's holdings as assets might well follow the classification which is reproduced in Table 3.46 in the appendices to the Wilson Report. Command 7937.

If the noble Lord, Lord Lyell, will turn to page 459, he will see that the holdings of insurance companies are classified by categories. The noble Lord will note, for example, that in the case of long-term funds some 22.3 per cent. of funds are held in property and some 7.9 per cent. in mortgages and loans—which makes nearly 30 per cent. in the property field. Some 26 per cent. of funds are held in UK listed ordinary shares and 25.4 per cent. in British Government securities. It is for consideration as to whether insurance companies might well be required to publish as an annexure to their accounts an analysis of their holdings by broad general categories, as set out in the Wilson Report. It would not reveal any competitive details that would be of advan- tage to any other insurance company, but it might be a matter of some public importance, and it might also provide a substitute for a more detailed investigation by accountants or actuaries as to changes in investment policy. From year to year, by comparing these holdings, one could gather in which way a company's holdings were going and which trends its investment policy was following. I just leave that suggestion for the Government's consideration.

As I have said, in view of the long explanation given by the noble Lord, Lord Lyell, I shall not go into any further details on the Bill because I should only be repeating exactly the information which the noble Lord has given to the House. In general terms we welcome the Bill: we shall as always subject it to diligent and detailed scrutiny, but for our part we shall do everything to facilitate its passage.

3.40 p.m.

Lord Banks

My Lords, I must begin by declaring an interest since I am a registered insurance broker, having registered under the Act which I had the privilege of piloting through its Committee stage in this House. I should like to join in thanking the noble Lord, Lord Lyell, for his thorough explanation of the provisions of this Bill. As he explained, and as the noble Lord, Lord Bruce of Donington, underlined, this Bill amends the law relating to insurance companies principally in order to implement the European Communities insurance establishment directives. But it is clear from what the noble Lord said that no substantial change is envisaged in the system of supervision now operating.

In its passage through another place, as the noble Lord, Lord Bruce, said, the Bill was not controversial so far as its contents were concerned. The discussion was only controversial in so far as Members took the opportunity to raise matters well beyond the confines of the Bill. I should like to welcome the tribute to the insurance industry which was paid by the noble Lord, Lord Lyell, because the importance of the service rendered to individuals, to families, to corporate bodies in this country and abroad, and the importance of the invisible earnings secured by the insurance industry for this country, cannot be exaggerated.

As the noble Lord, Lord Lyell, explained, the industry is controlled by the 1974 Act, which is now to be amended in certain respects by this Bill. That Act is also supported by the Policyholders Protection Act, about which we had some lengthy discussions in this House. The pension part of the insurance business is covered by further complicated legislation. But generally speaking the aim of the legislation has been, first, to see that adequate information is available to the Government to monitor what is happening in the industry, and secondly to ensure that sufficient safeguards are established for the policyholder. The industry has then been left free to run its own business in its own way. If it is clear that things are going wrong, the Government can intervene.

In Part I of the Bill, which as the noble Lord, Lord Lyell, explained deals with the authorisation of those carrying on insurance business, there are two significant changes which he singled out for mention. First, the Secretary of State is given the power to exempt companies offering only benefits in kind, and secondly main agents are to be subject to screening as to whether they are fit and proper persons. It seems to me that both these changes are desirable for the reasons which the noble Lord gave. Under Part II of the Bill, dealing with the regulation of insurance companies, stricter conditions are laid down for life insurance companies, including the solvency margin, but this should not prove a problem for companies transacting life business in this country.

The question of control by the Government of investment policies of insurance companies was raised in another place. The suggestion was made that the minority recommendation of the Wilson Committee should be applied to insurance companies; namely, that 10 per cent. of their investment should be compulsorily directed towards industry. I have doubts about the wisdom of that. In the discussions in another place it was argued in reply that the degree of insurance investment in industry is already far from negligible and that insurers are the best judges of their policyholders' interests, which must be paramount. Whatever the merits of the two arguments—and it is certainly right that the implications of the growth in institutional investing should be faced and discussed—this question is too wide to be settled by this Bill because it affects all kinds of institutional investments and not insurance companies only.

I should like to join with the noble Lord, Lord Bruce, in asking what the position now is with regard to the draft services directive. Has there been any progress since we considered the report of the Select Committee on insurance contracts in the debate we had in this House on 9th December last? I would venture to put another question about a matter not unconnected with the Bill although not actually covered in the Bill. Broker intermediaries are now covered by a statutory code of conduct, but I wonder what the Government's long-term intentions are with regard to non-broker intermediaries. The British Insurance Association and the Life Officers' Association have introduced voluntary codes and these are to be welcomed so far as they go, although they have been subject to some criticism. Have the Government any plans to give statutory backing either to these codes or to revised versions of them?

Another development in the insurance industry recently which is worth taking note of has been the establishment by a number of companies of an insurance ombudsman to whom complaints about matters affecting their company can be referred. This too must be welcomed, and I would certainly hope that eventually the industry as a whole might co-operate in this or a similar venture. May I say in conclusion that we on these Benches have no objection to the Bill in principle and we support its Second Reading.

3.46 p.m.

Lord Lyell

My Lords, I am sure that all of us are grateful for the benign and charming reception that this Bill has received from your Lordships this afternoon, and, especially in view of the detailed explanation which I gave, I regret that my preliminary comments were considerably in excess of the joint comments of these two experts, one of whom is a broker and another an eminent chartered accountant, speaking from the Liberal Benches and the Opposition Benches. But I thought it right, and I hope the House thought it right, that I should spell out the Government's views and reasons for bringing forward what appears to be a fairly straightforward Bill when one reads through it, yet a Bill which covers consolidation of at least two Acts, two directives, and other measures beside.

The noble Lord, Lord Bruce, was kind when he stressed that there was no political difference between any of us on this particular Bill either in another place or, we hope, here. The noble Lord asked me one or two questions. I particularly appreciated his comments in relation to Article 40 of the 1979 directive. If I quote him accurately I think he said that we are a little late. That may be the case, but he asked me whether I would be able to enlighten him or the House which other member states of the Community were dealing, or had dealt, with the directive as of today's date. I am afraid that I cannot give a complete and concise answer this afternoon. I shall pursue the point. May I inform the noble Lord by writing, and may I be allowed to send a copy to the noble Lord, Lord Banks, as he has contributed so kindly to the reception of the Bill this afternoon? I shall endeavour to see that he receives a copy of the information that I send to the noble Lord, Lord Bruce. I am given to understand that there was a verbal report from a member of the Commission staff in December 1980 which indicated that most member states had started but not completed the necessary legislation to implement the directive. Given the fairly obtuse expressions by, I concede, a member of the Commission's staff, or indeed by anybody involved in such dealings, I am sure your Lordships would appreciate that the legislation may well be under way in most of the member states but that this particular legislation may be in an uncertain form.

The noble Lord, Lord Bruce, and indeed the noble Lord, Lord Banks—and I believe quite rightly—had some fairly harsh things to say about the continuing delay in the progress of the draft insurance services directive. The noble Lord, Lord Bruce, and I—and indeed I think many other Members of your Lordships' House—have discussed this matter. Therefore, this will be a familiar—I would not say battlefield but place upon which we meet and discuss insurance directives. The Government share the impatience of the noble Lords, Lord Bruce and Lord Banks, over the tremendous delay there has been in agreeing the non-life services directive. Indeed, we would go so far as to say it is deplorable that nearly a quarter of a century after signing the Treaty of Rome we still do not have a free market in services which is as much a treaty right as a common market in goods.

With his great knowledge of European institutions, the noble Lord, Lord Bruce, will know that the directive has been in various corners, so to speak, of the Council's table since 1975. From time to time it has looked as though some member states were encouraging the onward progress of the directive, while on the other hand there were other member states which were positively anxious to postpone agreement indefinitely. Far be it for me to mention names, although the noble Lord, Lord Bruce, hinted at at least two of the member states concerned.

Lord Bruce of Donington

I did not just hint at them, my Lords; I stated them.

Lord Lyell

My Lords, I do not think the Government would flinch from saying that probably there might be others, so the blame might not be totally on those two or more member states. Be that as it may, many difficulties have been put in the path of the directive. It is a very welcome development that the Council of Ministers has taken a close interest in the directive. At the meeting of the Council of Ministers in March last, the Council of Finance Ministers confirmed the great importance of implementing the freedom of services and the need to make more rapid progress. Those terms we have heard in relation to all sorts of legislation, both in this House and elsewhere. Nevertheless, if the Council of Ministers uses such terms, then at least the onward march of the services directive is beginning to gather steam.

Lord Bruce of Donington

The noble Lord will be aware, my Lords, that almost identical terms were used over three years ago. This is therefore nothing new.

Lord Lyell

My Lords, have I not heard ex Africa semper novum? But possibly that was in the days when Rome's Empire stretched across the Mediterranean. However, I hope something new will come from Brussels. Later this year the presidency will pass to the United Kingdom, and it is to be hoped that the noble Lord's efforts here and his noble friend's efforts elsewhere, and indeed the main thrust of the Government's efforts in this matter, will not be lost in this year of all years. In March of this year the Council instructed the Committee of Permanent Representatives to prepare a report as a matter of urgency, and I recall mentioning that fact myself. Therefore I regret that there is nothing new for me to say from this Bench about the past two months. Nevertheless, as the noble Lord will be aware, the Government will have a major part to play in the presidency of the commission's institutions later this year and we shall be out to see that a timetable is adhered to and that final decisions are taken very soon. If there were a will on all sides to reach agreement on this directive, it could be reached quite quickly. I assure the House that pressure will be brought by the Government to agree upon the directive. I know this is a festering sore, but I assure the House that we have views equally as strong as those of the noble Lord, Lord Bruce.

The noble Lord, Lord Bruce, commented on the publication of the assets of insurance companies and how they were held, and he referred particularly to the Wilson Report. Despite the close discussions the noble Lord and I, along with others, have had over other measures, such as the Companies Bill, he might agree that this might not necessarily be the right vehicle for such detailed legislation, particularly as the Wilson Report is fairly fresh and its ideas are still under discussion. I will take advice on the points raised by the noble Lord and write to him. He also suggested there was to be a new Clause 14. I wondered about that as, glancing through the Bill, I noticed that Clause 14 dealt with offences.

Lord Bruce of Donington

I referred to Clause 44, my Lords.

Lord Lyell

I apologise, my Lords. I am sure it would be desirable that actuaries should act as an auditor might act when he is looking at the accounts of a company, and I hope that actuaries will continue to carry out their duties on an annual, not a triennial, basis. I understand that at present they examine the assets of long-term life companies on an annual basis in most cases, and the Government would consider it desirable that actuaries should continue to carry out their duties as they see fit on an annual basis.

The noble Lord, Lord Banks, believed we should leave the question of the direction of insurance companies' funds, pension fund investments and so on to the insurance industry. On that the Government agree with the noble Lord; namely, that the policyholders who have entrusted their money to the insurance industry and pension funds are the ultimate beneficiaries and that it is their interests which must be safeguarded most of all. We are grateful for the kindly reception the Bill has had from the noble Lords, Lord Bruce and Lord Banks. I have promised to write to Lord Bruce on certain matters and I shall let Lord Banks have copies of all the information I convey. 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.