The Committee consisted of the following Members:
Chair: Caroline Nokes
† Anderson, Stuart (Wolverhampton South West) (Con)
† Antoniazzi, Tonia (Gower) (Lab)
† Baldwin, Harriett (West Worcestershire) (Con)
† Butler, Rob (Aylesbury) (Con)
† Coutinho, Claire (East Surrey) (Con)
Cryer, John (Leyton and Wanstead) (Lab)
† Daby, Janet (Lewisham East) (Lab)
Davies, Geraint (Swansea West) (Lab/Co-op)
† Djanogly, Mr Jonathan (Huntingdon) (Con)
† Dodds, Anneliese (Oxford East) (Lab/Co-op)
† Fell, Simon (Barrow and Furness) (Con)
† Fuller, Richard (North East Bedfordshire) (Con)
† Glen, John (Economic Secretary to the Treasury)
Powell, Lucy (Manchester Central) (Lab/Co-op)
† Rutley, David (Lord Commissioner of Her Majesty's Treasury)
† Smith, Jeff (Manchester, Withington) (Lab)
† Sunderland, James (Bracknell) (Con)
Dominic Stockbridge, Committee Clerk
† attended the Committee
Sixth Delegated Legislation Committee
Tuesday 10 March 2020
[Caroline Nokes in the Chair]
Draft Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020
I beg to move,
That the Committee has considered the draft Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020.
It is a pleasure to serve under your chairmanship, Ms Nokes. The draft regulations serve two important functions. First, they set out information reporting requirements for motor insurers that will allow the Treasury to assess the benefits to consumers of the reforms set out in the Civil Liability Act 2018. Secondly, they will make a technical fix to the Risk Transformation Regulations 2017 by removing barriers to transactions in insurance-linked securities.
I begin by outlining the information reporting requirements, which constitute part 2 of the regulations. Motor insurance is the most commonly held general insurance product in the UK. Of the 26.5 million UK households in 2018, 20 million had an active motor insurance policy. It is therefore essential that consumers get a fair deal from their motor insurers.
As such, the Civil Liability Act 2018 made important changes to the compensation for whiplash injuries from road traffic accidents and to the way the personal injury discount rate is calculated. These changes were expected to generate savings, the benefits of which would be seen in the form of lower motor insurance premiums for consumers. Indeed, when the Act was introduced, the Association of British Insurers, which represents the majority of UK insurers, published a letter from its members—comprising 86% of its motor and liability insurance business—publicly committing to pass on savings to consumers.
The draft regulations are intended to hold insurers to account for that commitment. They will allow the Treasury to make an informed assessment of whether motor insurers have passed on any cost benefits arising from the Act. Insurers issuing more than 100,000 private motor insurance policies annually, which make up 95% of the market, will be required to provide a one-off data submission to the Financial Conduct Authority detailing their costs and premiums for the three years from April 2020. They will also be required to calculate counterfactual data showing what their costs and premiums would have been if the Act’s reforms had not been implemented. That data must be accompanied by a statement from a qualified auditor verifying that it meets the standards set out in the draft regulations. Firms may also provide relevant supplementary information to explain any figures provided.
Once submitted, the FCA will review and aggregate the data, before passing it on to the Treasury. We will use the information to assess whether any savings have been passed on, and an accompanying report summarising the findings will be laid before Parliament after 1 April 2024. The reporting requirements themselves have been designed to provide the Treasury with sufficiently robust data to make an accurate evaluation of the impact of the Civil Liability Act on motor insurance premiums while minimising the regulatory burden placed on insurers.
Part 3 of the regulations amend the UK’s regulatory regime for insurance-linked securities. The Risk Transformation Regulations 2017 established a tax and regulatory regime that enabled the UK to become an attractive domicile for insurance-linked securities special purpose vehicles. Insurance-linked securities allow insurers to transfer risk to capital markets, with their value linked to an insured loss event.
Insurance-linked securities are complex investments. Regulation 11 of the 2017 regulations clearly provides that only institutional or sophisticated investors can be offered insurance-linked securities in the UK. Regulation 157 prohibits offering insurance-linked securities to the public, and regulation 158 provides that an offer to the public includes any section of the public. That could be interpreted by some as including qualified investors, which was never the intention of the legislation.
None the less, the Government consider it important to remove any perceived ambiguity and make it clear that insurance-linked securities most certainly can be offered to qualified investors. That was the intention when the regulations were passed and it is my intention now. The regulations before the Committee amend the Risk Transformation Regulations 2017 to clarify that the definition of an offer to the public does not include an offer made solely to qualified investors. That puts it beyond doubt that insurance-linked securities can be offered to qualified investors.
Removing the inconsistency in the 2017 regulations will provide increased legal certainty to offerors of insurance-linked securities. I am not proposing widening the legislation beyond what was originally intended. The prohibition on offering securities to retail investors will remain. I am proposing clarification of an ambiguity that could deter the offering of insurance-linked securities in the UK to qualified investors.
The global insurance-linked securities market is significant in size and growing. The Government are committed to ensuring that the UK framework attracts new forms of capital to the London insurance market, and that London remains at the forefront of global financial innovation. For that to happen, it is important that our legislation be as clear and consistent as it can be. I therefore commend these regulations to the Committee. I assure the Committee that the Government are working closely with the sector and the regulator to ensure that the market works for everyone, through both the Civil Liability Act reporting requirements and the technical correction to ensure that insurance-linked securities transactions can be carried out effectively in the UK.
It is a real pleasure to serve under you in the Chair, Ms Nokes. This is my first time on a Committee that you are chairing, so thank you very much. I am also grateful, as always, to the Minister for explaining the regulations. As he mentioned, insurance is of course incredibly important for the City and the whole country. I understand that the UK insurance market is the fourth largest in the world; it is the largest in Europe by some way. We account for an estimated premium volume of just under £220 billion, according to the latest figures, which are from 2017. It is therefore essential that we get regulation right. In that regard, I am pleased that the Government seem to have listened to concerns set out by hon. Members and others, including consumer groups, and chosen to amend the Civil Liability Act 2018 to try to ensure that insurers pass on to consumers any savings generated from the changing calculation of the personal discount rate.
As the Minister mentioned, part 2 of this statutory instrument establishes that insurers should provide the FCA with figures on their premiums, as well as the total value of all claims. That information would then be crunched by the Treasury to work out whether savings are indeed being passed on to consumers. I have two quick questions on that. The regulations do not set out any penalties for non-compliance, so it might be interesting to understand what would happen if that reporting did not occur. I suppose the converse of that is this. Sometimes I sit in these rooms and wonder whether legislation is always the right way to deal with an issue. Has this matter come before the Committee because attempts to informally gather that information have not met with support from the insurance industry? It would be interesting to hear about that.
As the Minister also described, the third part of the instrument amends the Risk Transformation Regulations 2017. Those of course implement a comprehensive UK regime for insurance-linked securities business, in line with the requirements of directive 2009/138/EC—the Solvency II directive. As hon. Members will be aware, there have been various regulations relating to Solvency II. The directive was designed to codify and harmonise the EU insurance regulatory landscape. Part of that approach was the so-called protected cell company, which enables many separate insurance-linked securities deals to be managed by one company, with the cell structure ensuring that the assets and liabilities of each deal remain strictly segregated.
Given the complexity of these investments, it is critical that they are not offered to retail investors, as indeed was stipulated in the 2017 regulations. As the Minister explained, today’s amendment arguably corrects a defect in the initial instrument by allowing qualified investors to participate, without any concerns about legal ramifications, in this market. Obviously, this regulation introduces the concept of qualified investors and defines them more clearly.
Finally, it would be helpful to know from the Minister what kind of oversight is going to be undertaken to ensure that this concept is not gamed by any of those offering these securities. It is a complex market. Yes, it is growing, but equally it is important that we ensure that there is investor protection. I would be happy to have some more detail on that.
I thank the hon. Member for Oxford East for her typically constructive and well-informed scrutiny of this statutory instrument. She rightly asserts the value of the insurance industry to the economy and she asks two questions with respect to part 2.
On the issue of a provision for a penalty based on what the data may—or may not—show following the requirement, the Government believe that the highly competitive nature of the motor insurance sector will mean that insurers will have little or no choice but to pass on the savings to consumers, or risk being priced out of the market. If the data show clearly that insurers have made savings and are collectively not passing them on to consumers, we are satisfied that the FCA and the Competition and Markets Authority have the relevant powers to take action. Given the assurance that I referred to in my opening remarks about the intention of the industry to pass on the savings, clearly it would be an outrage if that then proved not to be the case.
The hon. Lady’s second point was about informally gathering the information in the first place. It was the Government’s original expectation that that would not happen, but in the other place there was scepticism about the industry’s willingness to deliver that, so an amendment was passed. In that context, it was thought wise for the Government to accept the amendment. This additional reporting requirement was a function of the view from the other place, which we looked at carefully.
The hon. Lady asked about the gaming of the term “qualified or sophisticated investor,” in part 3. It is a well-understood term within financial services. People can elect to declare themselves a “sophisticated investor”. It is not something that is generally seen to be a problem in the industry. Again, this is a technical change to bring absolute clarity in an industry in which there is a lot of legal action and activity. That was thought to possibly undermine the maturing and growth in the industry, hence the technical clarification we have made.
I hope that I have fully answered the hon. Lady’s questions and that the Committee will now be able to consent to the regulations.
Question put and agreed to.