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Powers To Provide Financial Services Or Services Relating To Land

Volume 98: debated on Wednesday 4 June 1986

The text on this page has been created from Hansard archive content, it may contain typographical errors.

Amendment proposed: No. 424, in page 43, line 40, after 'Part', insert '1A or' — [Mr. Donald Thompson.]

With this it will be convenient to take the following amendments: Government No. 425.

No. 106, in clause 33, page 45, line 3, leave out 'a class 1' and insert 'any'.

No. 107, in line 6, at end insert—
'(1 A) Where, in relation to subsection (1) above, any insurance or other financial services are provided other than by the Society or its subsidiary, the Society or its subsidiary may not make any charge or increase in the mortgage rate in respect of that service.'.

No. 108, in line 18, at end insert—
'(3A) Where a Society or its subsidiary offers to provide a service in relation to an advance to any person, the Society or its subsidiary shall inform that person in writing that he is free to make his own arrangements to obtain that service.'.

No. 109, in line 19, leave out 'or (2)' and insert '(1A), (2) or (3A)'.

No. 110, in line 24, leave out '(2)' and insert '(1A), (2) or (3A)'.

Government Nos. 311, 312, 426, 313 and 314.

No. 315, in schedule 8, page 182, line 30, at end insert—
Insurance Services
8A. The power to provide insurance services is available only to a Building Society or its subsidiary which is for the time being registered or listed under the Insurance Brokers Registration Act 1977.'.

Government Nos. 316 to 320, 403, 428, 322 and 323.

I begin by declaring an interest as parliamentary adviser to the British Insurance Brokers Association, a body of which I hope the insurance subsidiaries likely to be set up as a result of this legislation will in due course become members. In the meantime, the purpose of amendments Nos. 106 to 110 and amendment No. 315 is to establish a basis for the insurance services likely to be provided by the insurance subsidiaries stemming from this legislation that is as fair as can reasonably be attained.

The effect of amendment No. 315 is that building societies wishing to become insurance intermediaries would have to be registered or listed under the Insurance Brokers Registration Act, which would require them to observe the standards laid down in that Act, to which those now trading under the title of insurance brokers have to subscribe.

Paragraph 4.16 of the Green Paper, Cmnd. 9316, made the following proposal:
"Any further exterision of building society activities … would need to be subject … to the standards of behaviour expected of the insurance services industry."
Paragraph 4.19 stated that those new activities
"would be subject to the regulatory regime for the particular service",
which for insurance broking currently takes the form of the Insurance Brokers Registration Act 1977. Regrettably, that proposal has not been translated into the Bill. In the meantime, the conduct of insurance subsidiaries of building societies in so far as it relates to life and investment assurance is being taken care of as the Financial Services Bill proceeds through the House, but other insurance in which the building societies have traditionally dealt — for example, householders' comprehensive, buildings and contents and related forms of insurance—will remain unregulated unless amendment No. 315 or something very similar is absorbed into this Bill.

A concern that I have frequently heard expressed is that because building societies have a high reputation among the public there may be a tendency to assume that as there is undoubted expertise in house purchase and mortgage arrangement in the smallest branch office of a building society the same level of expertise will be available on insurance matters, but that does not necessarily follow. It is questionable how much training building society managers can claim in this area. From my own experience, I know that in a number of areas building society managers are not always able to assist in the way that could reasonably he expected of people registered under the Insurance Brokers Registration Act. It is a question not just of arranging an insurance and choosing the correct market, but of dealing with claims as and when they arrive. Under the present set-up, building societies cannot necessarily be expected to have that expertise.

9.30 pm

If the amendment were acceptable to the Government, the insurance subsidiaries of building societies would have to register under the 1977 Act and be prepared to conform to its standards. That would be a means of directing to the consumer an implication of competence which would greatly strengthen consumer protection.

In regard to amendment No. 106, clause 33 prohibits a building society from making the provision of a primary advance conditional on the use by a borrower of other services by the society. The effect of the amendment would be to extend that prohibition to any advance or loan. The provision in clause 33 that a building society cart no longer insist on the borrower insuring his house through the society does not go far enough. The prohibition should apply also to second mortgages. For example, under the Bill as it stands, if a borrower obtained an unsecured loan of, say, £5,000 to buy a car, the society could insist that he insured that car with an insurer of its choice through its insurance department or subsidiary. This is an area of possible conflict to which the House should give attention in the discussion of this part of the Bill.

The reason for amendment No. 107 is to prevent a building society charging the borrower when he wishes to make his own arrangements rather than use the services offered by the society. Following pressure by the Office of Fair Trading, building societies permit the use of the client's own insurance intermediary, but one of the less reputable practices of many building societies over the past few years has been to charge for the privilege. Some extremely well-known societies do so. For example, the Cheltenham and Gloucester charges £25 to enable a borrower to make his own insurance arrangements. The Newcastle charges £25. The Portsmouth charges £15 per annum and if a borrower insists on making his own insurance arrangements it increases the mortgage repayment rate. The Skipton charges £25. The Town and Country charges £23. Many hon. Members will question the morality of having to pay for the privilege of seeking the best insurance market for one's personal insurance needs.

The effect of amendment No. 108 would be that a building society would have to make it clear, whether in the application form or elsewhere in its literature., that the borrower is free to make his own arrangements for insurance or other financial services, if he so wishes. No doubt some societies draw that freedom to the attention of borrowers, but a great many do not. I have with me literature from the Halifax, the Abbey National, the Nationwide and the Cheltenham and Gloucester, and none of it states clearly and specifically that there is no obligation to place the insurance relevant to a mortgage through the agency of the building society.

As we come close to the end of the consideration of this important legislation in this Chamber, the House should give its attention to these extremely important matters. The Government may have better ideas about how to achieve the same objective. I hope that the Minister will recognise that what is sought by insurance intermediaries is fair competition. It would be an exaggeration if I said that existing insurance intermediaries welcomed the prospect of building societies engaging in their sphere of commercial activity, but if there is to be such competition —as must be accepted—it should be fair.

I hope that I have been able to draw to the attention of the House a few areas in which I contend that the competition is not fair. Therefore, I hope that my hon. Friend the Minister will be able to indicate to me that he is prepared to accept the amendments or in some other way to achieve the objectives that underlie them.

Before I deal with the amendments of my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) I shall deal briefly with Government amendment No. 311, which gives the building societies wider powers to set up and run personal and money purchase occupational pension schemes. The amendment gives effect to the proposals which my hon. Friend the Economic Secretary to the Treasury outlined on 7 May, and will ensure that building societies can play a full part in the provision of personal pensions.

Amendment No. 315 requires building societies or their subsidiaries to register under the Insurance Brokers Registration Act 1977 and to become subject to regulation by the council. My hon. Friend's amendment recalls one which he tabled in Committee on the Financial Services Bill. That amendment would have required all insurance agents who sold general insurance, other than company representatives, to register with the Insurance Brokers Registration Council. I hope that my hon. Friend will not be greatly disappointed when I say that the Government are no more disposed towards amendment No. 315 than they were to that amendment, for much the same reasons.

We start from the general proposition that there should be no prohibitions restricting competition by limiting those who can take up any given area of commercial activity. Nor should we impose statutory burdens on businesses, unless there are good reasons for them. A case must be made for the sort of changes that my hon. Friend proposes, and the Government believe that the case has not been made.

As my hon. Friend recognised, in the case of life assurance, building societies, like other intermediaries, will be regulated under the legislation. I do not think that there is a point between us there. On general insurance, the original proposals in the Green Paper have not been implemented. The larger societies may well choose in future to form subsidiaries, registered with the IBRC, as the clearing banks have done, but to require such registration does not seem justified, and the Financial Services Bill Committee was not persuaded that there were problems in general insurance which could be solved only by statutory regulation. Still less am I aware that there is a real problem with the building societies. As my hon. Friend will know, we are promoting talks within the industry with a view to improving self-regulation on the basis of consensus.

We are not persuaded that all insurance intermediaries should have to register with the council, nor do we think that the building societies should be singled out and made an exception to that view. That would be to discriminate unfairly against them.

The building societies probably could not qualify. They would not necessarily have qualified or experienced insurance brokers on the board, so they would have to set up subsidiaries to register. That may be possible for larger building societies, but for smaller and medium-sized societies there would be considerable trouble and expense in dividing operations in that way. Some may simply decide not to offer insurance services, which would be disappointing, because competition would be reduced and the consumer would be deprived of a convenient outlet for an important service. Neither consequence would be welcome to the Government, which is why we are inclined to resist amendment No. 315.

Amendment No. 106 seeks to extend the prohibition on tying services from cases where the societies are making a class 1 advance to cases where they are making any category of advance. As my hon. Friend knows, clause 33(1), which prohibits services from being tied to a class 1 loan, was the subject of a great deal of debate in Committee. The provision was inserted to buttress the general competition and fair trading legislation in view of the dominant position of building societies in the first mortgage market. In Committee it was argued strongly that it was discriminatory to apply prohibitions to building societies and not to other mortgage finance institutions. My hon. Friend's amendment would extend that disparity of treatment to cover services related to any loan, not just a loan on a first mortgage.

I do not think that this extension can be justified in its sole application to building societies where they do not have the dominant position in respect of second mortgages or unsecured lending. If one went down that path, it would be discriminating against building societies entirely without grounds for doing so. For that reason, the Government are not disposed to advise the House to accept the amendment.

While it is important that first mortgage borrowers should be protected by an anti-tying provision, I can see the force of the argument that it is wrong to provide a statutory obligation of that sort only in respect of building societies. My hon. Friend has said that he is prepared not to bring into effect this provision if societies adopt an effective code of practice which contains such an obligation. In a recent speech to the annual conference, the chairman of the Building Societies Association said that the association was now prepared to consider such a code of practice if the clause were not activated. The Government welcome that statement. The terms of such a code might be a more appropriate place for these additional protections, and I hope that the societies and the BSA will now give the matter full consideration. I am sure that they will bear in mind what my hon. Friend has said.

Amendment No. 108 would require a society to point out in writing to a borrower that he can make his own arrangements to obtain a service in connection with a loan. That might be a little bureaucratic. It would impose a requirement applying, not just in connection with a first mortgage loan, but with any advance. It would involve a society in the rather cumbersome and costly process of writing to any borrower to whom it wished to provide a service. Again in Committee there was a complaint that the existing provisions unjustifiably discriminated against societies and this would be a further step in what would be regarded as discriminatory treatment. Therefore, the Government are not minded to accept this amendment either.

My hon. Friend mentioned a number of societies which imposed charges on their members where they decided to opt out. I am sure that his listing of the societies will have had a salutary effect on injecting a greater degree of competition. I do not think that it would be right to ban that sort of charge. There are cases where a society would face additional administrative costs through a borrower going elsewhere and some charge would be legitimate. For example, if a borrower insured the property with an outside insurance company, the society, as lender, would have to check the policy to safeguard its security. That would be an extra expense for the society, and it seems legitimate for that extra cost to be reflected in the charges that it makes.

The answer to my hon. Friend lies in an increasingly competitive mortgage market where building societies have to react to competition and remove these discriminatory charges. Indeed, removal of the differential on endowment mortgages is a recent example of such competition working and of the building societies removing a differential charge. Therefore, I hope that my hon. Friend will not find it discourteous if I advise the House to reject his amendments. I feel that he may have been aware in advance that the Government were not able to go down this path.

It comes as no major surprise that the eloquence to which my hon. Friend the Parliamentary Under-Secretary paid due testimony did not persuade him to accept even one, let alone the total number, of the amendments that I tabled. At least in this respect the Government are proving consistent, because that was the response I received when I proposed a similar amendment in Committee on the Financial Services Bill. Nevertheless, I am mildly encouraged by one or two of the remarks made by my hon. Friend in asking the House to reject the amendments. I cannot but feel that when he tries to justify the imposition of a charge by a society for allowing a consumer freedom of choice to arrange his insurance in the best market available he is flying in the face of the competitive society about which I believe he and I are united in many other respects.

I hope that my hon. Friend is right that the names of the societies that I read out—by no means an exhaustive list—will be shamed into accepting that the borrower must be given a far greater freedom of choice without the imposition of a charge. I am fortified in the knowledge that when the Office of Fair Trading has turned its attentions to this matter in the past it has considered that to be an anti-competitive practice.

If I have achieved nothing more this evening, I hope that I have moved closer to the time when there will be greater freedom for a borrower to arrange his insurances in the best available market without the imposition of a charge.

9.45 pm

Before I finally accept defeat, I wonder whether my hon. Friend can say something about Government amendments Nos. 312 and 316. They are not entirely clear in their import. Can my hon. Friend say whether I am correct in suspecting that the amendments are calculated to enable building societies to move into commercial insurance, as distinct from covering domestic arrangements, such as the contents of a house, a house, and even a motor car that is purchased by way of an unsecured loan? I do not suggest that the Abbey National or the Halifax will be prone to go into the aviation or marine markets once the legislation appears on the statute book.

In the interests of achieving the fair competition to which I referred and to which my hon. Friend responded, it would be helpful if we were a little clearer in our minds that the area of insurance activity that it is envisaged the building societies will move into more forcefully than they have done in the past is that part of the insurance market that relates primarily to what I shall call domestic risks. Perhaps my hon. Friend can clarify the meaning of amendments Nos. 312 and 316, and confirm that the area of insurance activity he envisages is as I have suggested.

I hope that I can give my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) the assurances that he seeks. Amendment 312 involves no change in policy. It simply clarifies what is involved. It does two things. First, it makes it clear that building societies can act as agents either for the person seeking the insurance or the person providing it. In other words, the society can act either as an independent broker or as a tied agent for a company. Under the requirements that will be imposed for financial services authorisation, it will be necessary for building societies to make it clear in which capacity they are acting.

Secondly, the amendment makes it clear that building societies can offer advice. Many society customers will be looking to the society for advice on their insurance needs, whether the society is an independent intermediary or a tied agent. Schedule 1 to the Financial Services Bill provides separately for the function of advising on investment business and arranging for its provision it is advisable for consistency and the avoidance of doubt to make it clear that the power available to building societies extends to both.

Amendment No. 316 provides that a society's insurance services must be provided primarily, rather than exclusively, to individuals and corporate borrowers within class 2. We do not see that as a means for building societies dramatically to change the nature of the insurance business. However, a building society may acquire an insurance broking business which has some small business customers on its books. That would not be possible without the amendment.

Likewise, someone with a building society loan on his house, who arranged the insurance on it through a society, may wish to arrange insurance in respect of his business. Instead of forcing societies to turn people away, which would make little competitive sense, it would be sensible to give them the flexibility to have a small amount of corporate business on their books. That is why the Government have responded in that way. In the light of what my hon. Friend has said, I accept that we need to watch to ensure that the nature of the amendment is not abused and that the building societies do not move to commercial insurance broking in a big way.

My hon. Friend's comments were helpful as far as they went. My hon. Friend used the word "small" twice in his response to my concerns about amendment No. 316. He talked about small business customers and later a small amount of corporate business. I am not aware that the word "small" can be defined in legislation. Indeed, it has clearly not been defined in the Bill. What would my hon. Friend consider to be a small business? What would he consider to be a small amount of business insurance in relation to the total that a building society's insurance subsidiary might transact?

In seven years as a Minister I have learnt not to give off-the-cuff advice on rather complicated legal questions. But the commission set up to monitor the building societies and the use of the powers will no doubt be interested in what my hon. Friend has said and will keep a close watch on it.

The legislation says that the societies' insurance services must be provided primarily rather than exclusively to individuals and corporate borrowers within class 2. We want the building societies to continue to provide a personal service to people who buy their houses, but, affixed to that, those people may run small businesses and may want to take out their insurance with the building society that insures their home. Without the amendment, building societies would not be able to offer that service. It is sensible to make that exemption, and that is the object of the amendment. I am reluctant to go further than that, but the commission and the Government will be keeping a watch on this provision to ensure that it is not abused.

The House has been debating Government amendment No. 424, so there is no need for the hon. Member for Brentwood and Ongar (Mr. McCrindle) to withdraw his amendments which have been spoken to but not moved.

Amendment agreed to.

Amendment made: No. 425, in page 44, line 21, at end insert 1A'.— [Mr. Ian Stewart.]