§ 2.50 p.m.
§ Lord Davies of Oldham
rose to move, That the draft order laid before the House on 5th June be approved [22nd Report from the Joint Committed].
The noble Lord said: My Lords, I beg to move the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003, and, with the leave of the House, to speak to the three other orders which relate to these issues.
Before I turn to the orders themselves, it might be helpful if I set them out in context. The Government have already legislated to give the Financial Services Authority responsibility for mortgage lending and administration through the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which was laid before Parliament on 27th February 2001. That followed a wide-ranging consultation in the second half of 1999 and a further consultation in October 2000. Those provisions were due to be brought into force in September 2002.
However, the Banking Services Consumer Codes Review Group recommended that mortgage advisers and intermediaries should be regulated as well as lenders and administrators. In addition, the Government received representations from the industry and consumer groups calling for regulation of mortgage advice and advisers.
In parallel, it became clear that the Insurance Mediation Directive—the European Parliament and Council directive—was likely to be adopted before 1120 mortgage regulation came into force. That directive lays down rules in respect of insurance mediation, including that insurance intermediaries should be registered with a competent authority and comply with certain professional requirements. Most mortgage brokers also sell insurance and they would therefore have needed to be regulated by the FSA in any case.
In view of that, the Government announced in December 2001 that mortgage advisers and intermediaries would be regulated by the FSA. In addition, and in order to maintain a consistent and streamlined approach, the sale of general insurance products would also be regulated by the FSA. Brokers who deal in two or more lines of regulated business will deal with a single regulator, not several, and will be able to compete in European markets.
Since then, the Government and the FSA have worked closely with industry and others to design a regime that understands the market and is targeted precisely at maximising benefits to the consumer, and not loading industry and ultimately the consumer with unnecessary costs.
The purpose of these orders is to bring mortgage advisers and intermediaries and the sale of general insurance mediation within FSA regulation.
It might be helpful if I explain a little about decisions the Government have made following consultation on the Insurance Mediation Directive, which I know has been the basis for some critical comment. The Government's proposals to regulate various activities relating to the sale and administration of general insurance were published in a consultation document in October 2002. The Government received around 400 or so responses.
The directive requires the regulation of insurance mediation activities in relation to all contracts of insurance. However, insurance sold as part of a package, including travel insurance sold with a holiday, and some extended warranties that are contracts of insurance are exempt from the directive. Following extensive consultation, the Government decided not to regulate travel insurance sold with a holiday. That is because the consultation provided insufficient evidence of consumer detriment to warrant the extra costs of regulation, particularly for small independent travel agents.
However, the Government recognise that there are concerns about this market. For example, we have received evidence of some mis-selling from the Consumers' Association. The Government have therefore decided to hold a review of this decision two years after implementation of general insurance regulation in early 2007.
The directive requires the UK to regulate extended warranties, which are contracts of insurance costing more than 500 euros, or which are sold separately from the car, whatever the price. However, those costing less than 500 euros per annum are excluded from the scope of the directive when sold at the same time as the car. Some motor warranties cost more than 500 euros per annum and so will fall within the scope of the directive.
1121 The Government have decided that all motor warranties that are contracts of insurance—whatever their value—should be regulated by the FSA. That is to ensure a level regulatory playing field and to stop retailers manipulating more expensive warranties to make them appear cheaper simply to avoid regulation—for example, by increasing the price of the car or reducing the cover provided. Most respondents agreed with that proposal.
The Government have decided to await the outcome of a Competition Commission inquiry into non-motor extended warranties on domestic electrical appliances before taking a decision on whether non-motor extended warranties that are contracts of insurance should be regulated.
Except in those two areas, those who carry on insurance mediation activities will be caught by the FSMA regime. For many intermediaries, that will mean that they will require authorisation from the FSA. However, the appointed representatives regime will apply to insurance mediation. That will allow representatives of FSA authorised persons to carry out regulated activities without themselves being authorised, provided that the authorised person has accepted responsibility for their conduct.
Following representations during consultation, that regime will be extended in relation to general insurance contracts. As well as being able to arrange and advise on contracts of general insurance, appointed representatives will also be able to conclude contracts of general insurance as agents. They will also be able to assist in the administration and performance of contracts of general insurance. Those changes reflect market practice and should make it easier for firms and individuals to become appointed representatives, if they and their principals so wish.
I turn to the orders themselves. I apologise for the length of my speech, but these four orders are important and, by grouping them together, I have a substantial case to make and. no doubt, some significant questions to answer. The purpose of this package of legislation is to expand the range of activities for which authorisation is required from the Financial Services Authority to include the mediation of certain mortgage contracts and of all contracts of insurance. "Mediation" in this context means making arrangements for a sale, advising on a sale or potential sale or—in relation to insurance only—entering into a contract of insurance as agent for another person or assisting in the administration and performance of such a contract.
These statutory instruments are also intended to implement the directive on insurance mediation. I should also mention that the Government have laid two negative resolution orders before Parliament: the Financial Services and Markets Act 2000 (Misleading Statements and Practices) (Amendment) Order 2003 and the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003.
1122 I now turn to the specific orders. The first brings into the scope of the financial promotion regime promotions relating to the activities of arranging and advising on the provision of regulated mortgage contracts. The financial promotion regime restricts the communication of an invitation or inducement to engage in investment activity.
Entering into an agreement the making or performance of which by either party constitutes a controlled activity amounts to engaging in investment activity for those purposes. The controlled activities to which the financial promotions regime applies are specified in the financial promotions order. Such communications must be made or approved by a person who is authorised under the FSMA. In addition, the Treasury may under the order specify circumstances in which the financial promotion restrictions do not apply.
Promotions by authorised persons are not subject to the financial promotion restriction but instead are governed by FSA rules. However, the FSA cannot impose on authorised persons restrictions that are greater than those imposed on unauthorised persons. The order will come into force in October 2004.
The Draft Financial Services and Markets Act 2000 (Exemption) (Amendment) (No.2) Order 2003 extends certain exemptions in FSMA so that they apply to the newly regulated activities in relation to insurance mediation and mortgages. The order also provides that Partnerships UK is exempt in relation to the carrying on of regulated activities relating to investment services. Finally, the order removes the exemption of the Treasury task force.
The order extends the exemptions of local authorities and certain bodies involved with the provision of social housing to include the carrying on of regulated activities relating to the arranging of, and advice in relation to, regulated mortgage contracts and activities relating to certain insurance contracts. The order comes into force on 31st October 2004 for mortgages, and 14th January 2005 for insurance mediation.
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.1) Order 2003 gives the FSA responsibility for regulating the activities of arranging regulated mortgage contracts and advising on regulated mortgage contracts. It also makes various amendments to legislation made under the Financial Services and Markets Act relating to mortgages. Firms will need to be authorised or exempted in order to carry out the activities of advising or arranging regulated mortgages contracts. The order also makes consequential and necessary amendments to the Consumer Credit Act (CCA) to ensure that there is no dual regulation for the same activity.
A regulated mortgage contract is defined as a mortgage secured by a first legal charge on UK residential accommodation to be occupied by the borrower or their immediate family. Second and subsequent legal charges on property remain covered by the CCA. If approved, the substantive provisions of this order will come into force on 31st October 2004.
1123 It might be convenient to mention that, as many noble Lords will know, lifetime mortgage—mortgage-based equity release schemes—will fall within the scope of FSA regulation when the FSA takes on responsibility for regulating mortgages in October 2004. However, under current legislation, another type of equity release scheme, home reversion plans, cannot be brought into FSA regulation, as those are sale and purchase arrangements rather than financial services products. They fall outside the definition of a regulated mortgage.
However, the Government have had informal discussions with stakeholders on the regulation of home reversion plans, but they provided no evidence of consumer detriment at present in this market. However, there are widespread concerns about the potential for consumer detriment in the future. The Government announced on 5th June that there is a need for a more in-depth analysis of the costs and benefits of regulation and that there will be consultation in the autumn. I seek to emphasise that the Government have an open mind about this part of the market.
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 gives the FSA responsibility for regulating various activities relating to the sale and administration of general insurance products, whether carried on by intermediaries or insurers.
Part 2 of the order adapts the exclusions that already exist in the regulated activities order to ensure that they are compatible with the directive. In addition, the order creates new free-standing exclusions from the insurance mediation activities where permitted by the directive. For example, the order excludes from regulation travel insurance sold as part of a holiday package, implementing the equivalent exclusion in the directive. Article 11 excludes from regulation the provision of information in the course of carrying on a profession of business that does not consist of regulated activities. This order will also come into force on 3Ist October 2004.
The Government believe that regulation will provide major benefits to UK consumers in two large and important markets. Each year, UK consumers spend £26.4 billion on general insurance premiums and take out mortgage loans worth £219 billion. Consumer protection in those markets will be increased with regulation providing safeguards to consumers and introducing minimum standards of advice. Intermediaries selling a range of financial services products will have to deal with one regulator only—the FSA—rather than the current complex mix of statutory and self-regulatory arrangements. The Government and the FSA have been working closely with the industry and others to design a regime that understands the market and is targeted precisely at maximising benefits to consumers and not at loading industry and ultimately the consumer with unnecessary costs.
I am aware that the orders are not without some criticism and that there is an element of controversy to them. The Government's view, however. is that in this 1124 area, the case for regulation has been made. It should be recognised that the Government are approaching the matter as part of a coherent pattern, which ensures that there is reference to one regulator across the field. I commend the order to the House.
Moved, That the draft order laid before the House on 5th June be approved [22nd Report from the Joint Committee].—(Lord Davies of Oldham.)
§ Lord Sharman
My Lords, I am grateful to the Minister for giving us a full explanation of the arguments behind the orders. We could have saved him from having to make some of his speech. because he will recollect that when the Financial Services and Markets Bill was passing through the House the noble Lord, Lord Kingsland, from the Conservative Front Bench, and I argued strongly that the regulation of the provision of mortgage advice and services should have been included in the Bill. I am very pleased to see that three years on the Government have finally agreed with us.
In general, we on these Benches support the orders. However, as the Minister indicated, we have some reservations about them, and in particular with the very difficult issue of equity release reversion schemes. I understand that they do not qualify as mortgages within the meaning of the law and therefore cannot be covered. It surely is within the wit of the Treasury and its draftsmen to come up with some regulations in that regard. The Treasury's press release on the matter states:The home reversion market is estimated to currently be worth over £250 million a year and is growing rapidly. The target market tends to be"—I stress that these are the Treasury's own words —elderly, and sometimes vulnerable, people who have paid off their mortgage".It may well be that informal discussions with stakeholders show no signs of mis-selling, but I wonder how long before the pensions mis-selling crisis or the split capital trust mis-selling crisis we could have said the same thing.
To us on these Benches, it is simply not acceptable that the sale of what I will call quasi-mortgage products is not regulated when similar products just across what I may call the smart lawyer definition divide are regulated. Yet again, it will be the most vulnerable members of our society who are threatened as a result of the Government's lack of foresight. There is scope for a mis-selling crisis. Regulation should be about preventing mis-selling, not waiting until we have evidence that it is going on and then doing something about it. The Government should know that. On the back of pensions and the split capital crisis, it is essential that the loophole is closed rapidly.
My second reservation about the orders, as the Minister forecast, relates to travel insurance. As the Minister rightly said, travel insurance sold as part of a package will not be regulated. As I understand it, the situation will be reviewed in 2007. The ABI, the Consumers' Association and the General Insurance Standards Council oppose this. Their strong view, 1125 which we share, is that it should be included, to ensure consistent regulation and, in particular, consumer protection. The ABI has said that 60 per cent of travel insurance is sold through travel agents or tour operators. That begs the question: why bother, if we are going to regulate only 40 per cent of the market? If that 40 per cent is worth regulating, the other 60 per cent is.
Twelve million travellers a year purchase travel insurance. Some £300 million is spent on that insurance. I draw to the Minister's attention the Which? report published in April 2003, which said that every independent travel agent whom they visited was mis-selling insurance cover. I support the Consumers' Association position. It says:Under the regime, brokers and insurers who sell travel insurance direct to consumers will be regulated … their customers will have access to the Financial Ombudsman Service. It is not clear to what extent customers who buy their travel insurance as part of a package will be protected at all. While the Association of British Travel Agents (ABTA) does have a code of practice not all travel agents are ABTA members".How do consumers seek rectification of complaints about the way in which their insurance was sold? They have no access to the Financial Ombudsman Service. The Government should think again on that.
With those two significant reservations, we support the orders.
§ Lord Hunt of Wirral
My Lords, as this is my first opportunity to do so, I congratulate the noble Lord, Lord Davies of Oldham, on his promotion and his new responsibilities and wish him well in the future. Like the noble Lord, Lord Sharman, I welcome him to the debate on the Financial Services and Markets Act 2000. The Minister will understand that there is a long history here, to which the noble Lord, Lord Sharman, has already referred. On the back of many of the comments made by the noble Lord, Lord Sharman, I must say that it is a matter of regret on these Benches that the House is being asked to approve the orders. They contain legislation that is, to a substantial extent, unnecessary.
We are faced with a solution looking for a problem. For more than a decade, this Government and the previous administration resisted attempts in Brussels to adopt an insurance mediation directive. The reason, apart from the particular concerns that we are expressing this afternoon, is that there are no consumer protection concerns needing to be addressed. The measures will represent poor value for money for consumers, as they will pay the ultimate cost of implementation through higher insurance costs and reduced choice.
The official reason for the directive is that it will reinforce the single European market. In this case, sadly, cross-border traffic has never been great, although we need to redouble our efforts to secure a fairer market for UK-based companies. Also, there is no sign that legitimate demand has been frustrated by differing regulatory standards in member states. 1126 Putting it simply, general insurance broking has not been regulated by statute until now; it is a pity that it could not substantially remain so.
Given the directive, however, I join the noble Lord, Lord Sharman, in saying that it is doubly unfortunate that the Government should have chosen to make matters worse by implementing the directive in respect of travel insurance in an unfortunate way. This will be regulated now when it is sold as a stand-alone product by an insurer direct to consumers or through an insurance broker. But when it is sold as part of a holiday package, it is to be excused regulation.
It would be simple to argue that since the entire directive is unnecessary—I realise that I am saying that from these Benches only—the less its reach, the better. But by treating travel insurance in this differential manner, the Government surely have their priorities the wrong way around. Packaging products so that the buyer does not exercise choice is a prime cause of consumer detriment in many sectors and is surely well known to the authorities. By contrast, consumers buying travel insurance direct, either from insurers or insurance brokers, are more likely to acquire their insurance as part of a transparent process and often as a result of shopping around. Better value for money can often be achieved by this route. So I hope that the Government will reconsider their position. I shall come back to that issue in a moment.
I also reiterate the concern of the noble Lord, Lord Sharman, given the very strong representations made by a substantial lobby headed by the Consumers' Association, the British Insurance Brokers Association and the Association of British Insurers. Like the noble Lord, I quote from a letter to the Chief Secretary to the Treasury from all three bodies stating, quite simply, that the statutory regime which the Government are proposing,will act to the detriment of consumers".The Minister sought to deflect some of the criticism by saying, "Well, we know we may have got it wrong"—I, of course paraphrase—"But don't worry because we shall look at it in 2007". That may reassure the Minister but it does not reassure us.
Why is it a matter for reaching a different decision now? The bodies that are putting forward these views have consistently argued that all travel insurance, if we are to move down this road, should be included in the statutory regime. If it is not, an unlevel playing field will be automatically created for the providers; confusion will be caused to the consumers; and consumers will be denied proper protection. It is as simple as that. Insurance brokers and insurers will have to bear the costs of FSA regulation. Travel agents will not.
Surely, therefore, this would tilt the competitive playing field even more in favour of travel agents. Over time, it would surely lead to more travel insurance being sold without the backing of FSA regulation. That would be a perverse outcome. As I understand it, the Minister is saying that all travel insurance is not included in the FSA regime because there was no evidence of systematic mis-selling of travel insurance 1127 sold as part of the package presented during the consultation process. As the noble Lord has already pointed out, and as I think the Minister conceded in a comment when he said, "Well, there may be some evidence", the Consumers' Association and Which? magazine presented evidence during the consultation which indicated that out of 28 travel agents surveyed, only one checked for pre-existing medical conditions, as well as explaining what the policy did and did not cover.
In 1996. Which? magazine contacted 35 sellers of travel insurance, including travel agents and direct sellers, and found that only three explained details of the cover and only two mentioned any exclusions. A 1999 survey of Which? members revealed that consumers are twice as likely to be very dissatisfied if they have to make a claim on insurance bought through travel companies and tour operators than when buying from banks and building societies and other specialist advisers. So what is the evidence to which the Minister referred when he stated that there is insufficient evidence of detriment to consumers? It would he helpful if he could indicate the evidence that he has which balances or outweighs the evidence put forward so strongly by the noble Lord, Lord Sharman, and myself.
I have a number of other points to make, although I want to keep my remarks reasonably brief. A further anomaly in the outcome of the consultation process is that, while those to whom I have already referred want to see a level playing field, that is not a requirement of the directive. Therefore, direct insurers will be covered by regulation alone. But I am not sure whether the Treasury carried out a cost-benefit analysis before reaching that decision. Although the Minister did not use that argument, I understand that it is a point from Her Majesty's Treasury that the justification for not regulating travel insurance sold as part of a package lies on cost-benefit grounds. However, if the Treasury took the decision not to regulate the direct selling of any insurance products not required under the directive without any form of cost-benefit analysis, how can it justify that inconsistency? It would be helpful to know which cost-benefit analyses were carried out and what were the results.
Several other points which need to be raised have already been referred to by the noble, Lord Sharman. The Minister referred to the deferral of the decision on whether to regulate extended warranty products on domestic appliances. I understand that the decision is to be deferred until we have the results of the inquiry into the market being undertaken by the Competition Commission. However, that is disappointing and I trust that the conclusions of the Competition Commission will be available for further consideration of this issue as soon as possible.
I hope that the Government will reconsider their decision on travel insurance. They have spoken previously about a consistent and streamlined 1128 approach. Can we have that on the matter of travel insurance, and will the Government please think again?
§ Lord Davies of Oldham
My Lords, I am grateful to both noble Lords for their participation in this brief debate and for their kind welcome to what feels at the moment like a baptism of fire. In the past, I have been responsible for one or two orders that have not been quite as controversial and subject to challenge as those now before us. I am also mindful of what the noble Lord, Lord Hunt, referred to as a history of participation in these issues. It is a long record of real achievement on the part of the two Opposition spokespersons, while I come as an ingénue to the debates. However, I shall do my best to respond to the particular points that have been raised.
I turn, first, to the issue which has been presented most forcefully and on which the greatest anxieties were expressed; that of travel insurance. I had hoped to deflect those concerns in my opening remarks, but it appears that I met with a conspicuous lack of success. Now I must address them in rather more precise terms.
I do not consider the question of cost-benefit analyses in quite the terms expressed by the noble Lord, Lord Hunt. It is the case that something like 18 to 20 million travel insurance policies are sold each year. For the year ending April 2002, some 884 complaints were received. Of course, any complaint may be a pointer towards abuse and certainly suggests mishap, enormous inconvenience and detriment to the consumer involved. However, that figure indicates the measure of the issue and it will be recognised that, under the present statutory provisions, it is not possible to bring this tidily under the remit of the Financial Services Authority. Therefore there is good reason for further consideration of the issue. Once again representations made elsewhere have been presented with considerable force in the House and I respect those contributions.
As to the issue of regulation generally, the noble Lord, Lord Hunt, is uncharacteristically pessimistic about British potential and British achievements in stressing that regulation and complying with the European directive ought not to be a high priority in an area where the industry has had limited impact across frontiers in the past. That is certainly so, but we all recognise the speed at which we are moving into a new age. Modern technology facilitates transfers and arrangements in a much more felicitous way than in the past and there ought to be legislative provision to guarantee that those who sell insurance in Britain are in a fully competitive position across Europe.
We all know that this is a part of the drive towards the single market. It is one area where, because of its unique features, the industry lags a long way behind other industries. It is surely right that we should set in place a system of regulation which encourages our 1129 industry to expand its range. There is no doubt that guaranteed regulation which fits within the European directive is a step towards ensuring that.
§ Lord Hunt of Wirral
My Lords, I know that I am looking back, but my point is that we had in this country a system of self-regulation, particularly through the General Insurance Standards Council, which was envied throughout the rest of Europe. It is very sad that we are now moving towards statutory regulation.
§ Lord Davies of Oldham
My Lords, I hear what the noble Lord says and I recognise the value of the previous system of regulation. Although much admired, that does not mean to say that it meets the requirements of the new European single market. The new regulations clearly do.
I listened with great interest to what the noble Lord, Lord Sharman, said about the home reversion market. He is right; it is a growing market and there is a substantial amount of money involved. He is also right to point out that it affects the more vulnerable members of the community rather than conventional consumers because they tend to be elderly and, therefore, potentially more vulnerable.
He made the straightforward point that if we had total regulation against any conceivable ill, we would all be safer—but we would be paying a considerable price. The Government's case must be sustained. We recognise that it is a growing market on which we need to keep a close eye. There is a potential for abuse although we have not got evidence of widespread difficulties at the present time. I earlier gave an assurance that we intend to review the position and implement regulation if that unhappily proves to be necessary. I am conscious that, as ever with these issues, a measure of judgment is involved.
Another aspect of the cost benefit analysis is that it recognises that the travel industry has fallen on difficult times in the past couple of years. It goes without saying that there has been an enormous drop in the American market and that there are other difficulties.
Smaller travel agents seem to work on very tight margins indeed. A recent survey carried out by PriceWaterhouseCoopers indicates that they are operating on about 1.15 per cent of turnover. Therefore, additional costs of insurance, with regulation, would trim very tight profit margins. It is one of those industries which ranges from very substantial companies to a large number of small companies operating on very tight margins.
1130 It is a question of striking a balance between the inevitable and proper protection that the consumer merits and ensuring that the industry is able to pursue its objectives and provide the service that it does.
I understand the points that have been made and recognise that the debate will continue, particularly in relation to the home reversion schemes. I commend the order to the House.
§ On Question, Motion agreed to.