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Lord Kingsland: My Lords, I thank the Minister for his characteristically full reply. I am, of course, disappointed that he should consider that the first three amendments to which I spoke should demand a degree of precision on the face of the Bill which he is reluctant to concede. This is not the first time that the Opposition have been presented with that view and it will probably not be the last. I have come to accept that the Government are keen to maximise the discretion that the authority should have in these circumstances. Although the Opposition disagree with that approach, it appears that that is what the City will end up with.

So far as concerns the amendment to additional Clause 207A, I should like to look in full at the answer that the noble Lord gave before I tell him whether or not this is a matter that the Opposition intend to pursue at Third Reading. For what it is worth, my own view is this: I believe that the Government are running a very high-risk policy with Article 6.1 of the European Convention on Human Rights. Should the Government's interpretation prove wrong, it is almost certain that the Bill will have to be amended.

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Clause 207A provides an extremely useful cushion to the FSA to deal with situations which, if dealt with formally, might expose the inadequacy of the protection of the individual in the Act. Therefore, I ask the Minister to reflect on what he said about our proposal. Perhaps he will surprise me and come back at Third Reading with an amendment that reflects our own. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 161UA and 161VA not moved.]

[Amendment No. 161WA not moved.]

Clause 211 [Rights of the scheme in relevant person's insolvency]:

9.45 p.m.

Lord Hunt of Wirral moved Amendment No. 161XA:


    Page 110, line 21, at end insert ("; and


( ) for transferring to the scheme manager a right of recovery against that person").

The noble Lord said: My Lords, in moving this amendment, I should like to raise an important point about the financial services compensation scheme. In essence, as your Lordships will know, it is proposed to have the power to extinguish policyholders' rights to recovery and replace those rights with a claim under the compensation scheme. So the compensation scheme will have a new right to proceed as a creditor of the failed firm.

As many noble Lords will know, reinsurance contracts usually restrict liability to payments actually made by the insurer and I am concerned that the Bill's provisions will sever that link. The reinsurer would not have a contractual liability to the compensation scheme and its new right of recovery. Therefore, this amendment seeks to extend Clause 211 to allow rules to be made which transfer the liability of the insurance company in respect of the claimant to the scheme. That will be in addition to the power to extinguish the liability and confer new rights on the scheme.

However, the amendment seems to solve the problem. I should be very happy if the Government were to accept it and thus to ensure that the reinsurer would have a contractual liability under the compensation scheme. I beg to move.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Hunt, for moving his amendment, for writing to me in advance and, indeed, for the positive and constructive contribution which he has been making to the Bill on a number of occasions.

I have problems with the drafting of the amendment but I shall not weary the House with those problems unless the noble Lord, Lord Hunt, wants me to. Perhaps we can have a few words in private about that.

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However, I have a question as to whether the issue which he has raised needs to be addressed. On balance, we do not believe that it does. We reached that conclusion by looking at Clauses 211 and 213 together. Clause 211 deals with the rights of the compensation scheme manager in the event that compensation is paid out to the customers of a firm which is unable or likely to be unable to meet its liabilities. For most firms, that does not raise any issues in connection with reinsurance contracts because they are not relevant to most types of business.

The issue here is effectively confined to cases of insurance company insolvency, as the noble Lord recognised. In practice, however, we believe that it will almost certainly be necessary and desirable for the scheme manager to take measures under Clause 213 where an insurance company is in financial difficulties.

Under Clause 213, the FSA will be able to make provision for the scheme manager to take measures to avoid the inconvenience and expense of allowing insurance companies to become insolvent by effecting the transfer of policies to another insurer or by providing assistance to the relevant insurer to enable it to remain in business, so allowing for a more orderly and less expensive run-off of the liabilities on its policies. Indeed, that is what the Policyholders Protection Board does at the moment.

Those measures are important. The administrative costs of liquidation for insurance companies can be extremely high because the run-off of insurance liabilities can last for several years. Not only does liquidation push up costs, it can also mean inconvenience for customers, who may face substantial delays as the liquidator seeks to calculate the insurer's overall liabilities and so determine what can be paid to individual claimants.

Where assistance under the compensation scheme is given to the insurance company under Clause 213, that will enable the insurance company to pay its policyholders itself. There will be no need to rely on the provisions in Clause 211 and therefore there is no doubt that the insurer can claim against it reinsurers.

So it is difficult to envisage the circumstances which would, in practice, give rise to the problem which is raised by this amendment. I hope that that reassures the noble Lord and, indeed, the Association of British Insurers and that he will not feel it necessary to press the amendment.

Lord Hunt of Wirral: My Lords, I thank the Minister for that response. The amendment arises from the concern about the effect on reinsurance contracts and he has given some reassuring words which I should like to consider and I know that the Association of British Insurers would also wish to read what he said. In those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9 May 2000 : Column 1478

Clause 224 [Determination under the compulsory jurisdiction]:

Lord Saatchi moved Amendment No. 161YA:


    Page 118, line 18, leave out subsections (4) to (7) and insert--


("(4) The ombudsman's determination shall be binding on the respondent and the complainant and shall be final.
(5) The ombudsman's statement must--
(a) give the ombudsman's reasons for his determination; and
(b) be signed by him.").

The noble Lord said: My Lords, there are four amendments in this group. They all make distinct and different points so, perhaps tediously for your Lordships, I am obliged to describe them in turn. They all deal with what we perceive to be anomalies in the crucial ombudsman scheme. I must also confess that Amendment No. 161ZA has been tabled incorrectly. It should relate to line 13 on page 118 and not to line 37.

Clause 224(2) states that,


    "A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".

That sounds fine. However, our concern with that formulation is that it would enable the ombudsman to uphold a complaint even though a firm had observed all the FSA's rules and all the relevant legal provisions. We believe that that could be unfair to firms. It would also remove the level of certainty that firms need when devising their procedures under this regulatory regime. Therefore, this amendment proposes that the ombudsman will uphold a complaint only when the respondent has breached a rule or failed to satisfy a legal obligation or duty owed to the complainant.

Amendment No. 161YA repeats an amendment that we tabled in Committee. I shall explain again why we believe that the current provisions in subsections (4) to (7) of Clause 224 are unfair and should be amended in this way. At present, most of the existing ombudsman schemes include a provision along the lines of the current wording of subsections (4) to (7), which provides that the ombudsman's determination is not binding on the complainant but is binding on the respondent. The difference is that those schemes are voluntary schemes. They are not compulsory as is the scheme under this Bill.

There is a significant difference in principle in relation to voluntary schemes where the authorised person can choose to have the benefits of the scheme, knowing that the price that he has to pay is that any determination will be binding on him and not on the complainant. However, we believe that it is different where the authorised person has no choice about whether to join the scheme or not. It must be remembered that the complainant's position is already well protected, not least because the complainant chooses whether or not to refer a complaint to the ombudsman in the first place. We believe that if he decides to use the ombudsman scheme, he must accept that the ombudsman's determination will be binding on him.

9 May 2000 : Column 1479

Amendment No. 161B relates to Clause 225(3) which provides that the ombudsman may award compensation of the same kind as a court can award for breach of contract. The issue here is that there are two different kinds of damages recognised by the law. The first is damages in negligence which are designed to place an investor back in the position he would have been in had he not been given poor advice. Typically, that is achieved by a return of the contribution that has been paid, plus interest to the investor where an unnecessary life assurance policy has been sold. That is the measure of compensation normally awarded to retail investors under the existing Financial Services Act.

By contrast, an award of damages in contract is intended to put the investor back into the position he would have been in had the contract been performed; for example, if an investor has been sold an investment with a guaranteed 9 per cent return, a court would compensate for any under-performance by requiring the firm to pay the guaranteed growth rate.

Under Clause 225(3), in most cases it will be appropriate for the ombudsman to award damages in negligence rather than in contract. It seems to us that the clause, as drafted, suggests that the ombudsman should award damages only in contract. Therefore, as indicated by our amendment, we believe that it is highly desirable for the words "or negligence" to be inserted at the end of the clause to make it clear that the ombudsman should award whatever compensation is appropriate in the circumstances and not necessarily compensation based only on breach of contract.

I turn now to the last in this group of amendments, Amendment No. 161C. This amendment amends Clause 226 which is concerned with the ombudsman's power to award costs. Again, Clause 226(3) provides that,


    "Cost rules may not provide for the making of an award against the complainant in respect of the [company's] costs".

However, under subsection (4), these rules can provide for an award in favour of the company where, in the opinion of the ombudsman, the complainant's conduct was "improper or unreasonable" or,


    "the complainant was responsible for an unreasonable delay".

In our view, this does not appear to be balanced. Authorised persons are bound to participate in the ombudsman scheme, but they have no redress even where the complainant acts improperly or unreasonably or has been responsible for unreasonable delay. Amendment No. 161C would allow the ombudsman scheme rules to provide for an award against the complainant in respect of the respondent's--the company's--costs in the same circumstances as already provided for in subsection (4). I beg to move.


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