§ 4 p.m.
The Earl of Gowrie
My Lords, I beg to move that this Bill be now read a second time.
This is a short and relatively technical Bill to protect the position of some 300,000 members of friendly societies. It removes doubts about the position of policies which had been taken out in good faith, but which the Government are now advised are open to legal doubts. It restates the ways in which the limits on the size of friendly society policies are to be applied so that the same problem will not recur for the future. In so far as that restatement changes the law from what it was generally thought to have been hitherto, it does so in a way which favours the members and the societies.
The Government were first advised in May of this year about these doubts. The main problem was that the brochures advertising contracts, issued by some 11 societies founded since 1966, purported to confer benefits which were almost certainly greater than the statutory limits on tax exempt contracts, and different in their nature from the types of contract permitted by the rules of the societies concerned.
Doubts had also arisen about the way in which limits should be applied in the case of friendly societies generally in the case of assurance contracts in which the benefit was linked to investments and as to whether the surrender value of an annuity should be counted against the limit on gross sums. My honourable friend the Economic Secretary to the Treasury therefore announced at the end of May that the Government would introduce legislation to protect the position of the savers concerned who had entered into the contracts in good faith. Most of the provisions which my honourable friend announced will be included in the 1985 Finance Bill. This Bill includes only those provisions which could have no place in the Finance Bill.
Clause 1 removes doubts about the enforceability of past contracts issued by the 11 societies registered since 1966 on account of additional terms being imported into the contracts by the way in which the contracts were advertised. The clause secures this by enabling such additional terms to be disregarded for the purpose of determining compliance with the statutory limits on friendly societies' tax exempt life insurance business and in determining the validity of any contract to which the clause applies.
Clause 2 deals with the lesser problem identified for societies generally. Both in respect of past contracts and future ones increases in the value of a contract due to investment linking are to be disregarded for the purpose of the limits, in the same way that declared bonuses are already disregarded. The clause also ties the limits to the sums assured, and so avoids the need to take account of surrender values.
1126 The doubts about the method of application of the limits also arose on the limits on the size of taxable contracts which societies could write. As those limits on taxable business have outlived their purpose, the clause deals with the problem by abolishing them with retrospective effect.
This Bill is entirely helpful to friendly societies. The representative bodies of the friendly societies and the societies particularly affected were consulted on its terms. The Friendly Societies Liaison Committee has stated that they support the Bill. I commend it to the House.
§ Moved, That the Bill be now read a second time.—(The Earl of Gowrie.)
§ Lord Stoddart of Swindon
My Lords, I should like to thank the noble Earl for the clear and concise way in which he has explained the Bill to the House. There is very little I can say about the Bill, which, as the noble Earl said, is in the main a technical measure, except perhaps to say that we welcome it. Unfortunately, there are few Bills initiated by this Government that we can welcome and support. So perhaps we should rejoice this afternoon in being able to say that in respect of this Bill we can be thankful and are thankful for small mercies.
In the matter of the protection of small investors, in particular, we would like to see the Government being much more positive and active in protecting the small savings of ordinary people from the depredations of smart and "bent" money manipulators. Perhaps in winding-up this debate the Minister can comment on this aspect.
However, this measure, as the noble Earl pointed out, is designed to protect the interests of policyholders and to remove any doubts as to whether certain friendly society contracts are enforceable at law. The Bill has been welcomed and supported by the friendly societies themselves and, I feel sure, by their policyholders, many of whom had doubts about the legality of contracts into which they had entered arising from over-enthusiastic or misconceived advertising of the benefits that could, in law, be derived from such contracts.
Clearly, the sooner the Bill passes into law the better it will be for all concerned. So far as the Opposition are concerned, we shall place no impediment in the way of the swift passage of the measure through all its stages in this House.
§ Lord Banks
My Lords, I must begin by declaring an interest, since I am an insurance broker specialising in life assurance and pensions. I, too, should like to thank the noble Earl, Lord Gowrie, for his clear exposition of the contents of this Bill. If I understood him aright, there are two main provisions. Some tax exempt friendly societies had, in promotional literature, described benefits in such a way as would take the policies that they were offering outside the permitted limits for tax exempt policies, and doubts about the validity of the contracts had consequently arisen. In the Bill this is solved by excluding promotional literature from consideration. Then there was the problem of what to do about unit linked policies, where an increase in the value of the units would 1127 increase the value of the policy beyond the limits allowed. The Bill treats the extra value in the same way as bonuses are treated on with-profit policies issued by tax exempt societies; that is, conventional with-profit policies.
Both these provisions seem sensible to me in the circumstances and I support them. However, I have one query and one general comment. The query is this. At present, while a tax exempt policy can be surrendered before its first 10 years are up, the surrender value in those circumstances, in view of the tax exempt status, must not exceed the premiums paid. The investor is not entitled to receive the income earned on his contributions. Some societies have sought to get round this by putting the income accrued into a separate account, accruing further income until the end of the original 10 years; it would then be paid over to the policyholder who had surrendered the policy some years earlier but had received only the return of his premiums. Some doubts have arisen about the legality of that procedure. The question I want to ask is whether the Bill legalises that arrangement or whether these doubts are for the moment left unresolved.
The general comment I make is simply this. Friendly societies have had a number of ups and downs in recent years. Tax exempt societies received a boost in 1980 when the sum assured limit was raised to £2,000. Then they began to comply with ordinary life assurance. The policies were of a size—and because of the tax exemption—to be of interest to higher rate taxpayers, in spite of the restriction which exists on the investment itself and new societies came into operation for commercial reasons rather than for traditional self-help reasons.
However, in the Budget this year the sum assured limit was reduced to £750 from the £2,000. This limited the appeal of these contracts and made them less profitable to offer since they had to be in small units. As a result of that, it is likely that friendly societies will not grow to the degree that seemed possible before the Budget. Some may indeed drop out of the market. However, I believe that the remainder will still have an important role to play. In one sense they have a wider market, since no longer does a policyholder have to be married or have a dependent child. I think the friendly societies now need a period of quiet, without Government interference. I hope that after the passage of this Bill they will get it.
§ 4.10 p.m.
§ Lord Graham of Edmonton
My Lords, I rise briefly to support my noble friend Lord Stoddart, who spoke from the Labour Front Bench, in saying kind words about the speed of the Government once they recognised, and it was drawn to their attention, that inadvertently a number of very small people in this particular field could very well be placed at a disadvantage. I do not have a direct interest to declare, other than that as an active member of the Co-operative movement. I am always interested in consumer affairs, particularly any concerning the Co-operative Insurance directly referred to in the Bill. I wish also to congratulate the Government on what is perhaps one of the most lucid explanatory memorandums to a Bill that I 1128 have seen for some time. All that one wants to know about what the Bill sets out to do is contained in the first paragraph of the explanatory memorandum.
As the noble Lord, Lord Banks, has said, the friendly societies' movement, which has, and deserves to have, the cleanest of bills of health, suffers from time to time from the unfortunate, inadvertent activities of some individuals. I believe that the Minister is right to be ever-vigilant in these matters. We are not talking about people who have large sums of money and who are taking risks. We are talking about very small people who have something very real at stake.
I should also like to echo the words of the noble Lord, Lord Banks, in drawing the attention of the Minister to the shock that ran through a number of organisations arising from the life assurance premium relief changes in the Budget earlier this year and to the fears that are running round at the moment as to prospective changes that the Chancellor may make in his Budget next year. I hope that the Minister will take fully on board the point that the friendly societies' movement, especially in respect of the matters with which we are now dealing, is doing a first class job for people in general.
I should like to ask the Minister whether he has any news on the activities of Mr. Gower. I do not mean Mr. David Gower, who this morning gave a report of a dismal event as captain of the English cricket team, but the gentleman who lends his name to the Gower Report on the protection of investors. My noble friend Lord Stoddart made reference to the general need for this. The Minister will, of course, be aware that on 16th July his right honourable friend the Secretary of State for Trade and Industry initiated a very good debate on the first part of the Gower Report, leaving the second part, which will substantially take the form of a draft Bill, taking account of these matters, to come forward later. I would be grateful if the Minister could give some indication of if and when—not how—we are likely to see something in writing about the next stages of the Gower Report.
The Minister does not, I think, need to be reminded of the Latin tag caveat emptor. In this sense, all those involved in this particular sphere of our commercial life need to understand how to look after themselves. I should like to repeat that I am grateful, as, I am sure, are many Members of your Lordships' House, to the Minister and to his colleagues for quickly seeing that protection was needed and for providing it in the Bill.
§ 4.14 p.m.
The Earl of Gowrie
My Lords, I was rather startled, while waiting for the Second Reading of this Bill, to hear the Opposition Front Bench describe the sale of British Telecom shares to the public as one of the greatest scandals of the century. It is nice to return to the ecumenical and sunlit uplands of debate on this measure, which has at heart in the same way, I should have thought, as the previous and larger measure, the interests of small savers and people involved in friendly societies. I am grateful to all three noble Lords who have spoken for the general welcome that they have given to the Bill. May I say to the noble Lord who spoke from the Opposition Front Bench that the Government are considering the recommendations of 1129 Professor Gower. This may also be of interest to the noble Lord, Lord Graham of Edmonton. The Government will be publishing a White Paper shortly. I hope that the noble Lord, Lord Stoddart, will be reassured by that.
I can confirm that the noble Lord, Lord Banks, who has great expertise in this area, was absolutely right in his analysis of the Bill. Indeed, in his description the noble Lord was as clear as the noble Lord, Lord Graham, kindly indicated was the explanatory memorandum. On the 10-year query, if I may put it that way—the noble Lord, Lord Graham, also raised it—this is, of course, a tax matter which is not dealt with directly in the Bill. We are in the season where Ministers have to be more than usually careful as to anything that can be read into their remarks in favour, or in disfavour, of tax changes. The Minister's task is made all the harder by the fact that he, like most of his colleagues, has not the slightest idea what the Chancellor has in mind at any given point. We spend; and the Chancellor has to raise the money that we spend. However, I shall make the representations that have been asked of me.
As I say, this is not the most bitterly fought measure that we are liable to see in the coming parliamentary year. Acknowledging that allows me again to thank all noble Lords who have spoken for the safe passage that they have wished for the Bill.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.