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Lord Joffe: The intention is that policyholders would be consulted. But if the impasse suggested arose between the shareholders and the policyholders, at that stage the policyholders would have the right to apply to the court to protect their interests.
Lord Donaldson of Lymington: I support what was said by the noble Lord, Lord Grabiner. This amendment speaks of rates. Let me say I have no life insurance policies, but things may have changed since the days I took out with-profits policies with satisfactory results. I was always under the impression that my only right was a contractual right. If I looked in my policy, I would certainly be guaranteed a basic return--that is what I was after--but thereafter it would depend expressly, in contractual terms, on what bonuses were declared by the board.
Unless the animal has changed considerably, this amendment will leave me in exactly the same position as I was over the years; that is, I could go to the courts and say, "This company is going bankrupt", or, "This company is not going to meet its obligations", which were merely for the basic amount.
Lord Stewartby: This amendment, in its present form, will not do, as a number of noble Lords said. But the thought behind it is important. I hope that one of the consequences of this short debate will be that the FSA will look at this area and see whether there are steps it can take to encourage greater transparency.
There is no doubt that the with-profits element, whether of a life policy or a personal pension fund, is determined in an arbitrary fashion. I strongly support any measures which make it clearer on what basis the figures are plucked out of thin air, not only to judge whether the resources of the company--whether it is an incorporated business or a mutual--were being reasonably allocated between different types of claimant on that fund, or the other comparison with the outside world as to how it was genuinely performing in relation to its competitors rather than just on the figures for a specific year.
There seems to be a gap which has widened in recent years between the information available to other sorts of investors who have benefited from a lot of initiatives by the FSA and its related bodies (a general encouragement in advertising and accounts to provide more information so that investors know where they stand) and this corner of an old system which remains unduly obscure and where it is difficult for any with-profits element to have any idea whether or not it is being fairly treated. Therefore, although I do not support the amendment, I strongly support its message.
Lord Elton: The answer of the noble Lord, Lord Joffe, to my question with the comments of the noble Lord, Lord Grabiner, show that the effect of the amendment is merely to produce a piece of machinery which in some cases, but not all, will bring to court matters which otherwise may not have gone to court. As I understand it, it is a way of enabling policyholders to realise that they have a means of testing rights which they might otherwise not have.
Many of the people we are talking about are not sophisticated policyholders and one has a great deal of sympathy with what the noble Lord, Lord Joffe, is trying to do. But this points in the direction more of some sort of ombudsman or referee rather than yet
Lord McIntosh of Haringey: I should declare an interest, first, as a policyholder with Sun Life of Canada and with Scottish Widows, both of which propose to demutualise. I voted against demutualisation in both cases. I was overruled and shall be receiving cheques and/or shares in due course. So my conscience is clear.
I shall make a long boring speech and then summarise it in five or six points for the noble Earl, Lord Onslow. Of course, there can be conflicting interests between shareholders and policyholders. This amendment relates to a specific type of life insurance where policies are described as being "with profits". Commonly, "with profits" policies are insurance policies with a savings element. There is an expectation that bonuses will be paid from time to time, usually annually, depending on the performance of the fund in which the premiums have been invested. These bonuses go to increase the benefits that will be payable to the policyholder at maturity.
Current industry practice in shareholder-owned life offices is generally to distribute surplus in the fund in the proportions: 90 per cent as bonus to with-profits policyholders and 10 per cent to shareholders, although there are some exceptions. In the case of mutual life offices, all the surplus will be distributed to policyholders as there are no shareholders. However, to ensure fairly steady returns to policyholders year on year, the insurance company does not each year distribute the whole of the year's profits earned by the business. Like prudent companies in other walks of life, it creates a reserve for undistributed assets within the with-profits fund. That is called the "estate" or, in certain circumstances, the "orphan estate".
In some cases, the estate has been allowed to grow up over a long period of time and has been passed on from one generation of policyholders to the next. That is called an "inherited estate"; that is really what the orphan estate is. The estate may reach a point which exceeds that considered necessary for the efficient management of the business. We were given some figures and they are pretty big figures. In such circumstances, the company may wish to manage down the level of estate by distribution to policyholders and shareholders.
The question is: who does the undistributed sum, the inherited estate, belong to and how should it be distributed? Although inherited estates have been built up over many years, the status of the funds within them and the appropriate basis of attribution are clear. However, in a small number of shareholder-owned offices this is not so. Over the years, policies and practices in these offices may have changed so that there are doubts about the respective interests of shareholders and policyholders in relation to the attribution of surplus.
The guiding principles in relation to the attribution between shareholders and policyholders of assets from a firm's inherited estate are those set out in a statement on 25th February 1995 by Mr Jonathan Evans who was then Minister for Consumer Affairs and responsible for insurance matters within the DTI. The Government have since confirmed their agreement to those principles.
Where there is lack of clarity over the origins of the inherited estate, the regulator (whether the DTI, the Treasury or the FSA on behalf of the Treasury) has taken the view that the compatibility of any proposed attribution with these general principles needs to be considered in the light of the particular circumstances of the case. Therefore, in practice a dialogue takes place with the company over any proposed attribution. Before a final decision is taken, the regulator will also request a report on the proposals from an independent actuary and that policyholders are consulted.
This case-by-case assessment is conducted in the light of Section 45 of the Insurance Companies Act which enables the regulator to impose requirements on a company to ensure that the criteria of sound and prudent management are met. Those criteria include,
The Act contains further safeguards for with-profits policyholders. Sections 28 to 31A provide controls over transactions involving and distributions from the assets attributable to the with-profits fund. Section 2C provides controls over transfers of business between companies; and Sections 18 to 23 require insurers to submit annual returns to the Treasury incorporating a valuation by an appointed actuary and to make copies available to any policyholder or shareholder who asks for one.
I listened most carefully to what the noble Lord, Lord Joffe, said about the lack of transparency on the part of life insurance offices. We must consider whether the provisions in the 1982 Act, which seem, on the face of it, to answer the complaints that he made, are actually being implemented. This is a matter that I should like to consider between now and the next stage of the Bill.
The Bill will provide for the continuation of the existing protections under the Insurance Companies Act 1982. Clauses 129, 134 and 330 will enable the FSA to make rules that maintain the existing statutory safeguards in the interests of with-profits policyholders. Indeed, I understand that the FSA proposes to reproduce these in its draft interim prudential rules contained in Consultation Paper 40a. The FSA will be able to use its guidance power under Clause 148 to continue and, if necessary, supplement the existing advice and information that has been given.
Part VII of the Bill will also provide a statutory framework for the transfer of with-profits business between companies to replace Schedule 2C to the 1982 Act. Finally, the FSA will be able to impose particular requirements on an individual insurer for the purposes of protecting consumers, including of course policyholders. So the Bill will--I put it no higher at the moment--in no way reduce the existing protections available, and the FSA will be able to intervene to protect consumers using its Part IV powers.
However, the noble Lord's amendment would go further and require the FSA to make rules requiring insurers to consult and account to policyholders--I must say that I would pay more attention to the phrase "account to" than I would to "consult"--on each and every appropriation to shareholders, and other decisions that could adversely affect the rights of policyholders. Again, I listened to the debate about whether policyholders have rights that go beyond contractual rights. Clearly, this is a very difficult issue.
Clause 129 would give the FSA powers to make such rules if they appeared to be necessary or expedient for the purpose of protecting policyholders. Similarly, Clause 148 would allow the FSA to issue individual or general guidance consisting of advice or information to that effect.
However, there is a balance to be struck in deciding what degree of protection is appropriate for with-profits policyholders given the FSA's general duties in Clause 2. In particular, the FSA will need to have regard to the principle that the burdens that its rules or regulatory guidance would impose should be proportionate to the benefits. For example, in the ordinary course of events, the distribution to shareholders of their share of the surplus should be unexceptional. Similarly, it would be unusual to require an insurance company to consult policyholders about operational decisions such as asset allocations and investment decisions, which may obviously affect their investment but will usually be within the company's own discretion both as a matter of company law and under its contracts. To require companies to do this would force them to reveal commercially sensitive information about their business, which could potentially prejudice the interests of both shareholders and policyholders.
Where insurance companies will owe duties to their policyholders, as they do currently, will be in relation to their policies and the actual bonuses that they declare. Companies are already required to provide an annual notice to their policyholders setting out the bonuses allocated to their policies, as well as explaining the background to the declaration.
Therefore, we do not think that the Bill should require the FSA to make rules which would make insurance companies accountable to their with-profits policyholders for operational decisions or decisions relating to shareholder distributions. This does not, of course, prevent the FSA adding to the existing requirements in response to particular problems that may arise. However, we believe that it should be a
Perhaps I may sum up my response for the benefit of the noble Earl, Lord Onslow. First, the Bill will certainly enable the FSA to carry on providing the sort of protection that it has in the past in relation to orphan assets. Secondly, the powers will be at least as wide and effective as those available under the Insurance Companies Act. Thirdly, we believe that those powers give a perfectly adequate regulatory response to the potential difficulties. Fourthly, the general presumption of a 90 per cent/10 per cent split will not change as a result of the Bill, but the formula must be able to take into account particular factors in some cases; for example, where there is a transfer of business and something on which a court might rule. Fifthly, the ability of the FSA to obtain independent actuarial reports on the funds and liabilities is an important tool of regulation.
I apologise for the length of my reply, but this is clearly an important issue. The fact that the noble Lord, Lord Joffe, has raised the matter has been widely welcomed by Members of the Committee. It is important for us to continue to reflect on the adequacy of the protection that is already provided. In the mean time, I hope that the criticism that has been made about the "warm wording" of the amendment will encourage the noble Lord, Lord Joffe, not to press the matter. We are certainly prepared to discuss these issues with him at any time between now and the Report stage.
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