HOUSE OF COMMONS
Second Standing Committee on Statutory Instruments, &c.
DRAFT INSURANCE COMPANIES (CANCELLATION) REGULATIONS 1993
Tuesday 18 May 1993
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The Committee consisted of the following Members:
Chairman: MR. BARRY JONES
Bayley, Mr. Hugh (York)
Bell, Mr. Stuart (Middlesbrough)
Berry, Dr. Roger (Kingswood)
Bruce, Mr. Malcolm (Gordon)
Burden, Mr. Richard (Birmingham, Northfield)
Grylls, Sir Michael (Surrey, North-West)
Hain, Mr. Peter (Neath)
Hannam, Sir John (Exeter)
Hordern, Sir Peter (Horsham)
Hughes, Mr. Robert G. (Harrow, West)
Keen, Mr. Alan (Feltham and Heston)
Luff, Mr. Peter (Worcester)
Mans, Mr. Keith (Wyre)
Milligan, Mr. Stephen (Eastleigh)
Montgomery, Sir Fergus (Altrincham and Sale)
Mudie, Mr. George (Leeds, East)
Needham, Mr. Richard (Ministerfor Trade)
Sproat, Mr. Iain (Harwich)
Mr. R. G. James, Committee Clerk2 3 Second Standing Committee on Statutory Instruments, &c. Tuesday 18 May 1993
[MR. BARRY JONES in the Chair]
Motion made and Question proposed, That the Committee has considered the draft Insurance Companies (Cancellation) Regulations 1993.—Mr. Robert G. Hughes.]
The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. Neil Hamilton): The regulations that we are discussing today complete implementation of the second Council directive on life assurance. Members of the Committee will recall that the bulk of that implementation was achieved by regulations that the House approved on 12 January. At that time, I said that I would be laying separate regulations to implement the provisions of the directive concerning policyholders' cancellation rights, and those regulations are before the Committee today. The Committee may find it helpful to have a brief reminder of the purpose of this directive, which gives European Community insurers limited freedom to provide life insurance across borders within the EC. Full freedom is provided by the third life directive, which completes the single market for life assurance. The third directive must be implemented by 1 July 1994. Before the end of the year we shall bring forward regulations to achieve that aim. Today we are concerned primarily with the second directive and one article only of the third directive. Article 15 of the second directive provides all policyholders who conclude an individual life assurance contract on a service basis, with a cancellation period of between 14 and 30 days. Article 30 of the third directive extends that right to all life assurance contracts that are sold within the Community by EC insurers. It also allows member states the ability to exempt certain contracts where the "status of the policyholder" or the "circumstances in which the contract is concluded" are such that the policyholder does not need that protection. The implementing regulations before the Committee are in two parts. The Insurance Companies (Cancellation) Regulations 1993 amend the Insurance Companies Act 1982 by using powers under the European Communities Act 1972, and they require the Committee's approval. The Insurance Companies (Cancellation No. 2) Regulations amend the Insurance Companies Regulations 1981 by using powers under the 1982 Act. These were made on 19 April and laid the following day under the negative resolution procedure. I have already placed in the Library and in the Vote Office detailed notes explaining the effect of the cancellation regulations as well as notes on the No. 2 regulations. I hope that hon. Members will find those notes helpful. Those regulations apply only to non-investment 4 life assurance business. Insurance contracts that concern investment business are covered by cancellation rules made under the Financial Services Act 1986 by the Securities and Investments Board Plc. The SIB Plc will be consulting shortly on separate amendments to its rules to meet the requirements of the directive. The principal regulation is regulation 2, which amends the 1982 Act in several ways. First, it introduces a definition of an EC contract, to which the new provisions apply, and a non-EC contract, to which existing provisions apply. Secondly, it extends the new cancellation provisions to cover insurers providing services into United Kingdom from the EC and also to cover industrial insurance business, which has hitherto been exempt. Thirdly, it extends the cooling-off period for EC contracts granted under the 1982 Act from 10 to 14 days, commencing once the policyholder has been informed that the contract has been concluded. Fourthly, it allows statutory notice to be given to the policyholder rather than always being sent. That provision is especially important in the case of industrial assurance business and contracts concluded through Lloyds brokers, which will newly attract cancellation rights. Finally, it disapplies those provisions from residents of other member states, since they will be covered by rules that those states should have in place in compliance with the directives' requirements. The No. 2 regulations, which, as I said, are laid under the negative resolution procedure, complete the implementation of the cooling-off provisions. Those regulations will apply to all contracts covered by the Insurance Companies Act 1982 and have two main purposes. First, they amend the categories of contract exempted from the right of cancellation. Several categories of contracts that are currently exempted have been removed. In some cases, that is because they are redundant—for example, contracts which have since been brought within the scope of the Financial Services Act 1986. In other cases, exemption can no longer be justified under the terms of the directives. They include contracts involving payment of a single premium, contracts for permanent health insurance cover over five years, and contracts taken out by policyholders on the life of a third person. A few exemptions will still apply. They are, contracts that are not taken out by individual persons, contracts of term assurance of six months or less, contracts of reinsurance, and contracts taken out in relation to personal credit or consumer hire agreement under the Consumer Credit Act 1974 where the terms of the agreement are dependent on the existence of an insurance agreement. Secondly, the No.2 regulations revise the form and content of the statutory notice that was drawn up before the introduction of the Financial Services Act 1986. Those changes will make the notice more directly relevant to term insurance contracts as well as being as consistent as possible with the notice that the SIB plc requires to be issued for investment contracts. That should make the notice clearer for policyholders and easier for insurers to produce. Certain of the detailed requirements, such as print size, are being deleted as part of the Government's strategy of removing unnecessary regulation. 5 A separate statutory notice is included in the regulations for a few investment contracts provided on a services basis into the United Kingdom by insurers from the Community that, because of the way in which they are sold, are not covered by the Financial Services Act 1986. Both sets of cancellation regulations should come into force on the same day—20 May—as the Insurance Companies (Amendment) Regulations 1993, which were approved by the House in January, so all changes to the insurance companies legislation stemming from the implementation of the second directive will be introduced together. Later this year, I shall be laying regulations to implement the key third directives, which will complete the implementation of the single market insurance directives. For the time being, I commend the cancellation regulations to the Committee.
Mr. Richard Burden (Birmingham, Northfield): First, I apologise for my hon. Friend the Member for Middlesbrough (Mr. Bell) who should be occupying this place on the Opposition Front Bench. I do not know whether some sin that I committed in a previous life has brought me here for the first time, but my hon. Friend has an important royal engagement in his constituency, which prevented him attending. The extension of the rights envisaged under the regulations are welcome. Certain extensions are fairly illogical and, therefore, the provisions of the second and the third directives are generally welcome. I am also pleased with the inclusion of the provision that suggests that notices should be given to the policyholder rather than sent by post. It is not likely that the full rigour of the Opposition will come down on the Government this time, although I want to ask the Minister a couple of questions. I thank him for providing the notes that prompted my questions. First, I refer to the issue of statutory notices. At one level, the idea of deleting references to size or colour of type seems eminently sensible as it does away with unnecessary red tape. However, reading the regulations, there is a slight ambiguity. Under the original regulations, the provisions about how big and what colour the type should be were included because they referred to the statutory notice being possibly printed on two sides of a sheet of paper. That was not included for unnecessary bureaucracy but to ensure that when the policyholder received his or her statutory notice, he or she could see what was included. There was not, literally small print that could easily be missed on the second sheet. If my reading of the changes is right, they suggest that the notice must be on one side of a sheet of paper. If that is the case, I have no great objection to the deletion of the reference to type size. But if there remains a possibility of the notice being printed on both sides of a sheet of paper, the problem would remain. I hope that the Minister can clarify that point. My second question relates to exempting policies of less than six months' duration. That is a permissive part of the directive—such policies do not have to be exempted. In fact, it is probably fairly rare that life insurance policies of less than six months' duration are taken out. However, given that can happen, I do not understand the logic in saying that policies of less than six months' duration should be deleted. I should appreciate some clarification. 6 My third question concerns the Department of Trade and Industry press notice that gave details of a further exemption. It stated that the life framework directive "permits exemption from cancellation where the policyholder has had, for example, the opportunity for reflection on the policy terms before contacting the insurer." My reading of that may not be correct, but it seems to make it clear that the purpose of the regulations—the introduction of cooling-off periods of at least 14 days and of cancellation rights of at least 14 days—would not apply if it could be claimed that the policyholder had had the opportunity to reflect on the policy terms before contacting the insurer. If that is so, it is a problem. In financial services, more controversy is caused by people saying that they did not understand—or that they were misled about—the terms of insurance policies and life assurance policies than by anything else. I do not want additional arguments to arise about whether the policyholder had had the opportunity to consider the terms of the policy before contacting the insurer. The purpose of the regulations is to reduce red tape, but unnecessary arguments about unnecessary matters could get in the way of scrutiny of the terms of individual policies under dispute. I hope that the Minister will be able to reasure the Committee on those matters.
Mr. Hamilton: I am grateful to the hon. Gentleman and congratulate him on his rapid advancement. I shall try to answer his specific questions, although I am disappointed that the notes that were produced for the Committee's convenience have inconvenienced me with additional questions to which I must respond. However, that shows the Government's commitment to democracy; The form of the statutory notice is a result of the advance of technology. When the regulations that are to be replaced were introduced, computers were not used as commonly as they are today. The proposed changes will make computer printouts conform to our regulations somewhat less onerously. Therefore, the notice is to be in a modular form to allow insurers to make use of that new technology. Our proposals contain options that the insurer may or may not include, but the final version will be clear. The notice can be printed on two sides of a sheet of paper. It is important to understand that the form of the statutory notice will be shorter and clearer than that it is designed to replace. It will be more relevant to the problems that might have to be considered before entering into such a contract. The form is modelled on the SIB plc notice, and therefore, we already have experience of how that works in practice. I am unaware of any problems, but if the hon. Gentleman knows of any, I should be glad to hear of them and to consider any points that he has to make. The Consumers Association was also consulted about the change in the form of the notice and raised no objections. We are unaware of any dangers in prospect. If the hon. Gentleman knows of any potential difficulty, I shall be glad to consider any argument that he makes. The hon. Gentleman asked also why we should exempt contracts of term assurance of six months' duration or less. That provision is derived from article 15. Term assurance is now the main part of the contract that is covered by the provisions of the Insurance Companies Act 1982. The exemption is justified because term assurance provides cover while the contract is operative. 7 Without the exemption that we have selected in this case, the policyholder could benefit from free cover during the cancellation period. In contracts of that sort, there is no savings element—the policyholder does not lose profits if he surrenders the policy at any time. The dangers to which a policyholder might expose himself as a result of inadequate consideration of a contract, are not the same as in the more complicated contract insurance. As the hon. Gentleman said, we are providing a permissive power. However, in this case, we are justified in using our power to exempt such categories of insurance contracts. I hope that those responses satisfy the hon. Gentleman's concerns.
Mr. Burden: That was helpful, but the Minister did not deal with my final point, which concerned the exemption of policies when the policyholder has had an opportunity to reflect on the policy terms before contacting the insurer. Will the Minister answer that point?
Mr. Hamilton: I am not aware that there is an exemption in that case, unless perhaps I or the hon. Gentleman has misread the press notice.
Mr. Burden: Perhaps I have. The press notice stated: "Article 15 of the Life Services Directive gives cancellation rights to all individual contracts, except those of six months or less. It is amended by Article 30 of the Life Framework Directive which permits exemption from cancellation where the policyholder has had, for example, the opportunity for reflection on the policy terms before contacting the insurer. The regulations which have been laid maintain or revise some of the existing exemptions while withdrawing others." If the Minister is assuring us that, in such circumstances, there is no exemption, I am content.
Mr. Hamilton: If the hon. Gentleman examines article 30, he will find that such provisions can apply in circumstances "where, because of the status of the policyholder or the circumstances in which the contract is concluded, the policyholder does not need this special protection." We regard companies and public authorities as having a different relationship with insurers than do individuals. Such provisions also apply when the circumstances that surround entering into a contract give the insured full opportunity for prior reflection. The variety of circumstances are not defined. However, in drafting the regulations, we tried to reach a compromise. There should be proper protection for individuals, who 8 might not be sophisticated investors or who might not fully understand complex contracts of insurance. An individual may need independent advice and may need to consider exactly what he is signing, where circumstances in which such a contract is entered into make it difficult for him to arrive at a balanced view as to where his interests lie. However, where there is an opportunity for a full explanation of the terms and conditions of the contract and the dangers to which the individual might expose himself were he imprudently to enter quickly into such a contract, we tried to balance the dangers with the advantages. Even if he has a period of reflection, he can still cancel the contract of insurance, except in the four cases that are listed in regulation 71 of the Insurance Companies Regulations 1981, which is replaced by regulation 3 of the No. 2 regulations. If the hon. Gentleman refers to them, he will see the circumstances in which they apply.
Mr. Burden: I do not want to detain the Committee, but I still have a couple of concerns about that issue as well as in relation to the first point that I raised about the statutory notice. I am conscious of the Minister's assurance on the first of those, to consider any representations, and I hope that he will monitor implementation to ensure that policyholders do not fall foul of the small print. I trust that he will monitor also the situation where policyholders are argued to have had the opportunity for reflection. I hope that that will not create problems.
Mr. Hamilton: I can certainly confirm that we will monitor the way in which the regulations work in the months and years ahead. I am always open to suggestions from members on both sides of the Committee as to how we can improve the workings of such regulations.
Question put and agreed to.
Resolved, That the Committee has considered the draft Insurance Companies (Cancellation) Regulations 1993. Committee rose at eight minutes to Eleven o'clock.9
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
Jones, Mr. Barry (Chairman)
Hannam, Sir John
Hughes, Mr. Robert G.
Montgomery, Sir Fergus
The following also attended, pursuant to Standing Order No. 101(2): Hamilton, Mr. Neil (Parliamentary Under-Secretary of State for Corporate Affairs)10