§ 11.30 a.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)
My Lords, I beg to move that this Bill be now read a second time.
The Bill before us this morning is a short and uncomplicated measure. It extends to the field of 947 insurance the Government's policy that in cases where a service is provided or an activity carried out in connection with an identifiable group, that group should bear the costs involved.
Moreover, the Government propose to apply this approach to other institutions in what might broadly be described as the financial services sector. The July 1984 Green Paper on building societies proposes that the Registry of Friendly Societies should recover its full costs from those societies for whose supervision it is responsible: building societies, friendly societies, industrial and provident societies. I may add at this juncture that the recovery of the costs involved in insurance supervision by means of fees is normal practice in most other European countries as well as in the United States.
Perhaps I may now turn to the provisions of the Bill itself. The central elements are all in Clause 1. This empowers the Secretary' of State to recover insurance supervisory and related costs from those who make the work necessary; that is, of course, the insurance companies and Lloyd's.
It has generally been accepted for many years that the insurance industry requires effective supervision. I do not think that I need detain your Lordships with an explanation of the details of the present British supervisory system, beyond perhaps noting that it should not be regarded purely as a constraint on the insurance industry. By maintaining confidence in the solvency of the industry, both at home and abroad, and providing protection for the policy-holding public, it helps to ensure public confidence in the industry. This, surely and quite clearly, is a benefit to insurers.
Clause 1 seeks to give effect to the policy by an amendment to the Insurance Companies Act 1982, requiring insurers to pay the Secretary of State such fees as he may prescribe. This includes the discretion to exempt certain categories of authorised insurers from paying any fee at all. In the case of insurance companies the fees are to be paid when they deposit the annual return, which is required by Section 22(1) of the 1982 Act. In the case of Lloyd's the fees are due when the council deposits its annual statement of business, which is required by Section 86(1) of the same Act.
The intention is that the system should come into operation from 1st April 1986. The level of fees is to be set by regulation, so as to ensure that, from that date, the total sum collected from the insurers in each 12-month period is, so far as possible, equal to the costs incurred by the Secretary of State in exercising certain functions relating to insurance companies and to Lloyd's during that period. The functions which are to be charged for will also be prescribed in regulations. The monies collected will be paid into the Consolidated Fund.
As your Lordships no doubt will see, this is an enabling Bill which leaves a great deal to subsequent regulations. This is because while the money framework of supervision is intended to be stable, changes necessarily take place within it and it is sensible to have flexibility in the implementation of 948 the scheme. The department is discussing with representatives of the industry how the powers which the Bill would give the Secretary of State should be exercised. Of course, the views expressed by the industry will be carefully considered by the department in drawing up future regulations.
Our present intention is that the functions to be specified would be those relating to what might broadly be described as the prudential supervision of insurers; that is, all the functions under Parts II and IV and some of the functions under Parts I and III of the Insurance Companies Act 1982. An annual insurance report is laid before Parliament every year and this gives an account of the exercise of the Secretary of State's powers under the 1982 Act.
It is also intended that the department should recover costs incurred in respect of consultation and correspondence with authorised insurers concerning the exercise of the functions I have mentioned and the costs of work undertaken in relation to legislation and European Community directives concerning authorised insurers. One point which is obviously of particular interest to the industry is the size of the fee to be charged. This, of course, depends on which of the Secretary' of State's functions are prescribed.
A concern expressed by the industry has been that the present proposals might involve them in signing a form of blank cheque to the Government, in that they would have no control over the costs on which the fees would be based. Clearly, it would be wrong for me to say that there will be no changes in the way insurance is supervised, but as I have just indicated, we have no plans for altering the present framework, though, doubtless, there will be changes within it from time to time.
The increased burden on the industry which would follow from any change which led to an increase in supervisory costs and therefore fees would be a factor which the Government would have to bear in mind before agreeing to that change. Furthermore, any increase in the level of fees or alteration to the list of prescribed functions would be made by statutory instrument, subject to the negative resolution procedure.
We estimate that on the basis of our present thinking as to what functions should be prescribed, the annual sum to be recovered would come to around £2.5 million on current costs. The department's initial preference was to apportion this cost by means of a flat-rate fee, and the main reason for this is that such a system is administratively simple. This, of course, has the added advantage of keeping costs low. The department's experience also shows that there is no direct correlation between the size of a company and the supervisory workload which it generates.
The proposal for a flat-rate fee has led to some comment from the industry. In the course of debate in another place—your Lordships will recall that this Bill was introduced in another place in January of this year—the Government gave a commitment to take into account the financial position of the smallest insurance companies when drawing up the detailed proposals for the charging system. I am happy to repeat this undertaking. The industry has put forward proposals of its own concerning the apportionment of 949 fees, and my department will, of course, take these fully into account. I should say, however, that for the reasons I have given the Government continue to have a preference for a relatively simple fee system.
The Bill before your Lordships is a modest one. It will, nevertheless, bring some small relief to the taxpayer by reducing public expenditure without imposing excessive burdens upon the insurance industry. I commend the Bill to your Lordships' House. My Lords. I beg to move.
§ Moved, That the Bill be now read a second time.—(Lord Lucas of Chilworth.)
§ 11.40 a.m.
Lord Bruce of Donington
My Lords, we on this side of the House are obliged to the noble Lord for having introduced the Bill in the way that he has. The noble Lord said that this is very largely an enabling Bill and that it will be followed by a whole series—we were not told how many—of regulations in amplification of its basic provisions. This House does not like legislation of this kind, particularly where the regulations by statutory instrument are subject to the negative procedure. It much prefers the affirmative procedure which, on questions of principle, gives rather greater opportunities both for notice of the items coming up and also for debating rather more widely.
In general, any measure which is brought by Her Majesty's Government and which reduces public expenditure is very welcome, and the noble Lord has said that he expects to get £2.5 million per annum by way of fees. All this is very good, and it is done, according to him, on the basis of the costs actually incurred. He mentioned also the costs of legislation, the costs of EEC representation and all the rest of it. Presumably, the costs of answering questions in this House would also come within the ambit. In general, I am a little distrustful of the Government's ability to carry out their operations on a cost-effective basis, and I sincerely hope that there will be some more effective checks as to the actual composition of the charge. I am quite sure that the noble Lord would not wish the charge to the insurance industry to be over-burdened by what some might call excessive overhead expenditure at ministry and Minister level and I hope that the noble Lord will be able to give us some reassurance on that.
But having said that, and having welcomed the addition to the Government's revenues, I am bound to point out to the noble Lord that inevitably, if the insurance industry is going to incur increased costs, whatever saving the fees may be to the taxpayer, the insurance companies will undoubtedly put up their premiums and so the eventual cost may well fall upon those seeking insurance. That is a matter of which I assume the Government have already taken some account and, in general, I would not dissent from the decision that they have made.
With reference to the clauses of the Bill, I wish to deal not with the position of the ordinary insurance companies, but more particularly with the position of Lloyd's. The noble Lord will know that under subsection (3) of the proposed Section 94A the Council of Lloyd's will be required to pay the fee that 950 may be prescribed. On referring to the original Act of 1982 and dealing with the point that is relevant to Lloyd's, one finds that the fee has to be paid on the rendition of the documents, accounts and so on required by Section 86(1) of that Act. The question that I have to ask the noble Lord—and I trust t hat he will be able to give some reply—is: what happens if no statement under Section 86 of the Act of 1982 is made?
If the noble Lord will go carefully through the Act of 1982, he will find that although Part II, which deals with the position as it affects ordinary insurance companies other than Lloyd's, refers to a whole series of offences which can give rise to a prosecution, and in some cases to imprisonment for up to two years, plus a fine, in the case of Lloyd's there are no penalties under Section 71. No offence, at any rate, under the Act of 1982, is created in the event of a failure to comply with Section 86, dealing with the rendition of the accounts or—and this is possibly more apposite, in view of the recent history of certain sections of Lloyd's—with Section 83, which lays down the requirements to be complied with by Lloyd's underwriters.
We on this side of the House must take just as much responsibility as Her Majesty's Government for the fact that there is no offence clause in that part of the Act relating to Lloyd's. This is in conformity with the Government's general attitude towards Lloyd's—that it should be a self-regulatory body.
Since Clause 1 of the Bill, at subsection (3) of the proposed Section 94A, refers to the amount that Lloyd's are required to pay by way of fee by compliance with Section 86 of the original Act, the next question that I have to ask the noble Lord is whether his department has, in fact, received these statements on a regular basis from the Council of Lloyd's. If it has received them, perhaps within a different context your Lordships' House might be tempted to ask what action has been taken upon them.
I am well aware that in raising this question I am treading on somewhat delicate ground, for which the noble Lord may not be prepared, and I am most anxious not to put him in a position where he does not have adequate time to consider what I am about to say. But it would be of advantage if he had further consultations with his department and then, if he thinks fit—because I have no desire to raise this matter in a way that is embarrassing to the Government—perhaps he would care to write to me about it.
While I am mentioning Lloyd's I wish to refer to the apparent delays that have taken place in dealing with the offences that took place in certain sections of Lloyd's, and on which it seems to take an interminable time to arrive at a decision as to whether or not some prosecution should be brought. I shall not enlarge any further upon that, because it would not be proper for me to do so. The matter may or may not be sub judice. But I should be grateful for some information and the House would also be grateful, in due course, for such information as the noble Lord thinks it proper to acquaint the House with, because I am quite sure that many sections are a little worried, as indeed are wide sections of Lloyd's itself, as to why offenders—and 951 there have been some grievous offenders in connection with Lloyd's affairs—have not been brought to account.
Having said that, and having quite deliberately used this occasion, which is the only occasion when one is able to deal with these matters other than by question and answer at Question Time, in this way, I express the hope that the noble Lord may be prepared to deal with the matter on the lines that I have suggested and in a way that he considers proper. But in the meantime, so far as this Bill is concerned, we on this side of the House are pleased to support its Second Reading.
§ 11.49 a.m.
§ Lord Banks
My Lords, I should like to join in thanking the noble Lord, Lord Lucas of Chilworth, for his explanation of the contents of this Bill. It is a modest Bill and I want to speak very briefly about it. We have been told that a flat rate is to be levied on insurance companies for the purpose of recouping the cost of the supervision of the insurance industry and that the amount to be raised in this way is likely to be in the region of £2.5 million. It is rather like the pupils being asked to pay the headmaster's salary.
The Government's policy is said to be that, where a service is provided in respect of an identifiable group, the cost is recouped from that group. So far as I am aware, the application of that policy in this case has not caused alarm and despondency among the insurance companies, but I think there is some substance in the fear, to which the noble Lord the Minister referred, about a blank cheque. We are told that there are no plans for change, but we know that plans can be changed very quickly and suddenly. These things can happen so quickly that it is not always possible for those affected to rally themselves in time to prevent it. Of course in the long run it is the policy holder who pays for any burden that is placed on insurance companies, but then the policy holder is the real beneficiary of the supervision, so perhaps that is fair.
The noble Lord the Minister referred to the flat-rate fee, and the Government say, as I understand it, that the size of a company however measured is not a reliable indicator of the supervisory work load. That may be true but I stir wonder whether it is entirely fair that insurance companies of vastly different sizes should pay the same, although the protection to which the noble Lord referred for the smallest insurance companies is to be welcomed.
In another place the question was raised as to how far the principle behind this Bill is to be taken. The question was asked as to how many other identifiable groups it will be applied to. It was even asked whether it might apply to the income tax payer who would be asked to recoup the Inland Revenue. But I suppose he does that already in a way, so perhaps that would not be necessary. Moreover, it would be wrong to invent a principle to justify a particular policy in a particular case, whatever the merits of that particular policy in that particular case. The noble Lord the Minister was able to point to other instances where the principle is being applied. I support the proposition that the Bill be read a second time.
§ 11.52 a.m.
§ Lord Lucas of Chilworth
My Lords, I am very grateful to both the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Banks, for their reception of this Bill. I have no great peroration to make in replying this morning. Perhaps the best I can do for your Lordships is to respond positively to the very few points that have been raised.
I understand the concern of the noble Lord, Lord Bruce of Donington, about enabling legislation and the way in which so much is left to regulation. I think that I ought perhaps to leave that comment exactly there with that understanding. I should say to the noble Lord, however, that we are envisaging only one set of regulations at the initial time and that the negative resolution procedure is already in the 1982 Act. When that measure was going through your Lordships' House perhaps he made the same comment then, and I would understand it.
The regulations will include such matters as Part I, Sections 11 to 13, the withdrawal of authorisation of an insurance company; Parts II and IV, which are concerned with the regulation through monitoring of their annual financial returns and use of intervention powers; the supervision of some industrial assurance business and the functions in relation to Lloyd's; functions in respect of prosecution of offences; work in connection with legislation and EC directives relating to authorised insurers—not, I hasten to add. Ministers' expenses or ministerial expenses—consultation and correspondence with authorised insurers and other supervisory authorities and other functions, whether statutory or not, which are exercised with a view to or for the purpose of considering the exercise of all the other functions.
We are, and have now been for many months, in discussion with the industry about these functions and no difficulties have so far arisen. The provision in Section 94A(3) for Lloyd's to pay a fee has been mentioned. It is consistent with general policy. The 1982 Act laid certain responsibilities on the Secretary of State in respect of Lloyd's. The long-term success of Lloyd's is in developing their own self-regulatory mechanisms. That is of great importance. It seemed right that the department should consider and at times comment on proposals which are under discussion there. We see this as part of the supervisory functions of the Secretary of State.
The noble Lord, Lord Bruce of Donington asked: what if the Council of Lloyd's fail to deposit their statement? Commensurate with that, he asked: have they in fact done so? Yes, they have done so, and we do not think it conceivable that Lloyd's would fail to comply with their responsibilities in this matter. Certainly no offence would be committed but if in the very unlikely and almost inconceivable event that Lloyd's would not comply, an order could be made in the civil courts.
The noble Lord, Lord Bruce of Donington, raised, and gave an explanation as to why he raised, other matters concerning Lloyd's. I understand why he has used this opportunity, because another may not occur. While we acknowledge the concern that has been expressed this morning in your Lordships' House and elsewhere, and also within Lloyd's themselves, as a 953 result of the underwriting losses that have recently been publicized, I can confirm that a resolution of the issues that these matters have raised is in fact a Lloyd's internal matter. As the press have shown, the Council of Lloyd's have already been very active on this front. The Council of Lloyd's made fairly substantial progress within the framework of the Lloyd's market and that work is still continuing. I would not wish to be drawn on the question of prosecution. I think that your Lordships' House will appreciate why that is so.
Lord Bruce of Donington
My Lords, I am grateful to the noble Lord for giving way. He implied in what he has just said that in the main this was a matter for Lloyd's themselves to resolve through their own disciplinary and financial procedures. Is he aware that the matter has been referred to the Director of Public Prosecutions? It is a question of when a decision will be made by the DPP as to what should be done.
§ Lord Lucas of Chilworth
My Lords, yes, indeed. I am grateful to the noble Lord for underlining that. I take note of what he says, but I do not think that he would expect me to prejudge any action or date of action by the DPP. Certainly he will be aware that my honourable friend the Minister for Corporate and Consumer Affairs, in the framework of the Financial Services Bill, has matters of this kind very much in the forefront of his mind. I should imagine that if there was any necessity, in the light of what has been going on in recent months, to revise the advice or the regulatory functions of Lloyd's an opportunity would then be taken.
The noble Lords, Lord Banks and Lord Bruce of Donington, raised the question of the premium increase. I am sure that both noble Lords recognise that the premium income of all the insurance companies—and there were some 850 of them, including Lloyd's, registered this year—is fairly colossal: about £122 billion was the total investment of insurance companies, or their market value, at the end of 1983. The investment income at the same time was some £8.4 billion. If one looks at the figure of £2.5 million spread over some 850 companies, it works out at about £3,000 for each of them. I did say—and the noble Lord, Lord Banks, acknowledged this was some slight relief for the taxpayer—it is hardly conceivable that that charge of £3,000 will be likely to find its way into a premium increase. But it is of course an increase on the companies.
It would not be our wish to let the control of the costs get out of hand to an extent that would have such a marked effect on the premium that the policy holder—who is the beneficiary of the supervisory' nature of the work for which we are now seeking payment—would grumble. I have given that indication of the fees as we see the situation at the moment. Any change would have to be discussed with the insurers before any change was made in subsequent regulations.
I believe that I have answered the main points and questions which have been raised. I assure both noble Lords, of course, that if on reading the Official Report I discover that I neglected to reply to any pertinent point then I shall write to both noble Lords and, as is 954 the custom in your Lordships' House, I shall see that copies of those letters are placed in the Library. I beg to move.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.