Draft Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020
(4 years, 9 months ago)
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The Economic Secretary to the Treasury (John Glen)
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.
Anneliese Dodds (Oxford East) (Lab/Co-op)
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.
John Glen
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.
Draft Gambling Act 2005 (Variation of Monetary Limits) Order 2020
(4 years, 9 months ago)
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The Parliamentary Under-Secretary of State for Digital, Culture, Media and Sport (Nigel Huddleston)
I beg to move,
That the Committee has considered the draft Gambling Act 2005 (Variation of Monetary Limits) Order 2020.
It is a pleasure to serve under your chairmanship, Ms McDonagh—especially as this is my first Delegated Legislation Committee.
Section 99 of the Gambling Act 2005 imposes monetary limits on the per-draw and annual proceeds of any lottery promoted in reliance on a lottery operating licence. The order will increase the per-draw sales limit from £4 million to £5 million. As a consequence, the maximum prize limit will increase from £400,000 to £500,000 due to the rule that the prize must not exceed 10% of per-draw proceeds. The order also increases the annual sales limit from £10 million to £50 million.
In July 2019, the Government announced proposals to help society lotteries, which are fundraising lotteries run by charities and other non-commercial organisations such as sports clubs or local community groups. Last year, society lotteries raised over £330 million in support of a diverse range of charities—including hospices and air ambulances, on which so many people in this country rely. The current annual sales limit and per-draw sales and prize limits have been in place for some time. Indeed, the issue was looked at by the Digital, Culture, Media and Sport Committee in 2015, which led to the 2018 consultation. I am grateful to the Committee for raising this important issue.
I know that stakeholders on both sides have strong views; that is evident from the 1,600 responses that the Department received to its consultation. A key consideration in developing the changes being debated today has been the relationship between the national lottery and society lotteries. Together they raise around £2 billion a year, improving our communities in every constituency across the country. It is imperative that any changes enable both to thrive. As the Minister for both sport and heritage, I know at first hand that these sectors benefit considerably from funds raised by the national lottery.
The model of a single, large-scale national lottery has proved to be the most effective way to raise funds for good causes at scale. We heard through the consultation that many charities and other organisations value the funding they receive from society lotteries, and they often view it as complementary to national lottery funding. I assure the Committee that we have considered in detail the relationship between society lotteries and the national lottery. The final package is underpinned by independent, evidence-based advice from the regulator —the Gambling Commission. It has advised that the changes I am introducing today will preserve the balance in the sector and maintain the key distinction between the national lottery, which offers the largest prizes in support of many good causes, and society lotteries offering smaller prizes, with a focus on a specified good cause.
Society lotteries should have a clear focus on the charitable and not-for-profit purposes that they support. It is of the utmost importance that players know which causes they are supporting with their ticket and how much of their ticket price will support those causes. The Gambling Commission is currently consulting on additional transparency measures for society lottery licences. I want to take the opportunity to thank it for considering the issue, and I look forward to seeing its conclusions.
The most significant change is the annual sales limit increase to £50 million. For large charities operating at or close to the current limit, it is costly to add additional licences—even within an umbrella structure or a multiple society structure. For most societies, a £50 million limit would mean they no longer needed to hold more than one lottery operating licence, leading to cost savings and higher returns to good causes. The order includes transitional provisions to allow licence holders to benefit from the increased limit straight away on a pro rata basis, rather than having to wait until the beginning of the new calendar year.
For the vast majority of the sector, increasing the per-draw sales limit incrementally from £4 million to £5 million, combined with the new annual limit of £50 million, will provide both the headroom for future growth and the flexibility to increase the size and frequency of draws as the operators wish. Where individual per-draw lottery sales exceed £250,000, the maximum prize cannot be more than 10% of the proceeds of that lottery. The maximum prize limit will therefore increase from £400,000 to £500,000. The Gambling Commission will carefully monitor the impact of the changes, and the Government will keep an eye on progress, to ensure in particular that additional funds are directed to good causes and do not lead to an increase in administrative expenses.
To satisfy ourselves in that regard, the Government will review the impact of the changes 12 months after implementation by looking at new data and evidence that emerges over the course of the year. As part of that process, we will look again at the case for a £1 million prize, the link between sales and the maximum prize, and returns to good causes. Once we understand the impact of the current changes, we will look at the case for a £100 million licence and any additional conditions that may accompany it.
By increasing the limit and reducing burdensome administrative costs, we will enable society lotteries to raise even more funds for the causes that they support. Research published just last month by the Gambling Commission shows that both the national lottery and the society lottery sector are growing, with participation up 2%, so the overall funds raised for good causes is growing—I welcome that development. Society lotteries clearly bring tangible benefits and I look forward to seeing the impact of the changes. I commend the order to the Committee.
Catherine West (Hornsey and Wood Green) (Lab)
It is a pleasure to serve under your chairmanship for the first time, Ms McDonagh. I am pleased to speak for the Opposition on this important statutory instrument, which has the potential to be beneficial for good causes and the UK charity sector. I welcome the Select Committee’s report, which laid the ground for this important change.
On the face of it, the SI is not controversial, but we will abstain because of some points of concern, which I will lay out. The limits on proceeds for society lotteries were set more than a decade ago and it is only natural for there to be an update on guidance and regulations after such a long period, to enable society lotteries to continue their good work in the community and in benefiting good causes.
No one can deny that society lotteries have had a significant impact on good causes in the UK; the £330 million that they raised last year alone has helped to transform lives and communities in Britain and beyond. Members on both sides of the Committee will be aware of specific local funding that has been made available in their constituencies, which we all welcome. In a decade of austerity, the philanthropic urges of the local community have often been what has kept us all alive. In the past few years, society lotteries have grown significantly; the postcode lottery, to name but one, has seen a sales growth of a staggering 1,560% in the past decade. Clearly, that growth feeds into good causes and should be welcomed.
It is vital that any eventual Government review into gambling should include the requirement for large-scale society lotteries to publish a full breakdown of their operating costs and proceeds, so that they are held to the same standards as the national lottery. Stakeholders have some concerns about, for example, a lack of transparency and the payment of executive salaries in smaller charities that make the leap towards becoming bigger—due diligence is required there. On occasion, the Gambling Commission has not had the best reputation for sharp teeth, so we will watch carefully to see how the 12-month review period goes.
Transparency is needed on the level of advertising within some of the charities. When each of us places a bet or gets involved in one of the smaller lotteries, we all hope that that a big proportion of that money goes to a good cause rather than to an overblown executive salary or the advertising section of the charity.
Although I am keen to see charities receive increased funding, particularly after a decade of austerity, we need more protections and an even playing field between the larger players, such as the national lottery, and the smaller ones. I am yet to be convinced that the Gambling Commission is as robust as it needs to be, as has been demonstrated in a number of areas. The Government must redouble their efforts to protect the charity sector, smaller groups and, importantly, the general public who play the national lottery or smaller lotteries, so that there is an even playing field and transparency, and so we know broadly how much of the money placed into the lottery actually goes to the good cause and how much goes back to the charity.
In conclusion, I welcome the 12-month Government review, but we cannot fully vote for the statutory instrument due to our concerns about the big step that the Government are taking by increasing the amount that the charity sector can go up to without the necessary regulatory environment and protections.
David Linden (Glasgow East) (SNP)
It is always a pleasure to see you in the Chair, Ms McDonagh. I want to make it clear that the Scottish National party will not oppose the statutory instrument. Fundamentally, lotteries can provide money for good causes, but it is important always to consider gambling through the prism of public health. For too long, the liberalisation of gambling policy has been allowed free rein; so often, it is communities such as my own in Glasgow East that have paid the price. Thankfully, there is a unanimous view across the House that the liberalisation of the Gambling Act 2005 has been a disaster for many communities, so I am glad that there is a wider review of that legislation. It is a testament to the hard work of the hon. Member for Swansea East (Carolyn Harris), my hon. Friend the Member for Inverclyde (Ronnie Cowan) and the right hon. Member for Chingford and Woodford Green (Sir Iain Duncan Smith) that we have got to that stage, and I welcome it.
The statutory instrument will see local charities benefit from higher grants, which I very much welcome and the Scottish National party supports. The people’s postcode lottery was kind enough to send a briefing. I spoke earlier about the importance of grants for local charities; organisations in my own constituency have benefited, such as St Timothy’s primary school, Belvidere Village Community Group, Young Movers, the Parkhead Youth Project, the Men’s Health Forum and Connect Community Trust. They all do excellent work, and that is worthy of support.
However, in the ’17-18 financial year, 14 charities in my constituency submitted applications to the people’s postcode lottery, for amounts totalling over £130,000. Those applications could not progress—not because they were not of a very high calibre, but because of the current limits that this statutory instrument seeks to remedy. It is for that reason that the SNP will not oppose it, and I look forward to more groups in my constituency benefiting from funding from the people’s postcode lottery and other lotteries.
Nigel Huddleston
I thank the hon. Members for their comments. Let me give a little reassurance about the issues they raised. In our manifesto, we committed to a review of the Gambling Act to make sure that it is fit for the digital age; more details on the scope and timescales will be announced in due course. On transparency, the Gambling Commission is conducting a consultation on new transparency measures, which closes this Thursday. It is important that society lotteries demonstrate the highest levels of transparency, so the Gambling Commission consultation seeks views on guidance that will require society lottery operators to provide players with more information about their odds of winning a prize, how good causes are selected and the breakdown of lottery proceeds.
With regard to the potential increase in limit to £100 million, the initial increase to £50 million will enable us to monitor the impact of the sector and build on an evidence base, particularly with regard to the effect on good-cause returns. We want to be confident that the changes will increase good-cause returns across the sector, and that the regulatory framework is right for fundraising at this scale.
The national lottery is a uniquely important part of British society. Each year, it raises around £1.6 billion for good causes in the heritage, arts, sports and communities sectors. That amounts to an impressive total of £40 billion over the last 25 years. Society lotteries play their role, too—they raise over £330 million a year for good causes, and that is increasing year on year. It is right that we do everything that we can to support both sectors to grow and thrive, to optimise the valuable contributions they make to funding good causes across the country.
Question put and agreed to.