Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Flight

Committee stage & Committee: 3rd sitting (Hansard) & Committee: 3rd sitting (Hansard): House of Lords
Monday 2nd March 2020 Grand Committee

[Lord Flight (Con)]

My Lords, I support Amendments 43 and 44 in the name of the noble Lord, Lord Young. He made the point that equity release is a growing source of income for people later in life. I would say it more strongly than that: I can imagine it being the biggest source of income for such people in 20 years’ time. I understand that the financial advisers who advise otherwise on pension fund matters are not qualified to advise generally on equity release. That has been substantially cleaned up, as it were, over the past 10 years so it is not a problem, but if the dashboard cannot include equity release, it does not meet its objective of setting out what people have to live on in older age. We do not want to delay wider progress but if equity release is not included quite speedily in the dashboard, it will not do its job.

[Baroness Drake (Lab)]

My Lords, the purpose of Amendment 39 is to contain the delegated powers in the Bill so that they do not provide the power to authorise commercial dashboards to engage in transactional activities. Any authorisation regime to permit transactions should be addressed in a future Bill.

In a previous contribution, I sought to set out the policy still to be settled when the dashboard is focused on enabling individuals to view their pensions information in one place. When functionality is extended to the ability to transact on a commercial dashboard, the challenges and potential risks are even greater; there are multiple ways in which detriment to savers can occur. We should again remind ourselves that the dashboard project can extend to the whole of the UK pension system—public and private—embracing many millions of people. Allowing transactions over dashboards needs separate and clear consideration. It cannot be implicitly tucked into the delegated powers in this Bill.

Issues of private and public good will be impacted by whether the dashboard is fit for purpose when it comes to transactions: private good at the individual level and public good at the whole pension system level. I have yet to see the behavioural outcomes strategy associated with the dashboard. I assume the Government are not agnostic on the matter, given that the state supports the long-term saving system with some £45 billion of tax relief, so they will have a direct interest in knowing that the outcomes are good.

Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Flight

Committee: 1st sitting (Hansard - continued): House of Lords
Monday 21st November 2016 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I will also speak to other amendments in this group. This amendment would require a continuity strategy should a triggering event occur to set a cap on the charges that can be applied to members’ savings. Amendment 42 sets a similar requirement on an implementation strategy when a triggering event has occurred, and Amendments 28, 39 and 54 introduce an explicit provision that members’ funds cannot be used in whole or in part to pay for the costs of any wind-up of a failing master trust. That provision is to apply to the continuity strategy when a transfer-out and wind-up is triggered, and when an unauthorised master trust, on or after 20 October 2016, is subject to a wind-up. Indeed, all the amendments in this group in my name and that of my noble friend Lord McKenzie are probing to test the strength of the scheme members’ protection when a master trust fails.

The key function of the Bill in addressing weaknesses in the regulation of master trusts is to protect members from bearing increased—indeed, potentially unlimited—costs, so draining their savings pots when a master trust fails. The Bill introduces a prohibition provision, Clause 33, to protect members from funding increased costs in the event of a scheme failure. The prohibition is on both master trusts and the receiving scheme increasing charges, introducing new charges or charging a member for transfer during a specific period in which the scheme is at risk.

However, Clause 33 does not make it clear how and on what premise the charges it will be prohibited from exceeding will be set or determined in the first instance. To use my own simple language, members are protected by a prohibition from the imposition of additional charges above a charges baseline, either by the master trust or the receiving scheme on transfer in a triggering event, but it is not at all clear what that baseline is, how it is set or, indeed, if it is fair value. The amendments in this group seek a cap on the charges that can be applied to members’ savings should a scheme fail, underpinned by the provision that members’ funds cannot be used in whole or in part to pay for the costs of wind-up and transfer occurring as a result of a trust failing.

The parameters and restrictions on the use of members’ funds to meet the cost when a master trust fails need to be set out more clearly in the Bill. Such a restriction is too fundamental to leave to regulations and/or the Pensions Regulator’s discretion. To illustrate my point, the protection for members against meeting additional charges on wind-up and transfer in a triggering event are referenced in three main clauses. Clause 12 provides for a master trust continuity strategy, which is a requirement of authorisation, to set out how members’ interests will be protected if a triggering event occurs, including the level of charges that can apply. Clause 27 requires a master trust to submit an implementation strategy, which must set out how members’ interests will be protected when a trigger event actually occurs, including the levels of administration charges that will apply. Clause 33 sets out how the prohibition on increasing member administration charges will operate during the trigger event period, and provides that the Secretary of State may make regulations about,

“how levels of administration charges are to be calculated”,

and,

“how to determine … the purposes for which charges are increased or imposed”.

There is plenty of process here but nothing in Clauses 12, 27 or 33 informs what the actual quantitative level of member protection will be against increased charges on scheme failure; nor does the Bill say whether members will be protected from bearing, or will have to bear, any wind-up or transfer costs. Indeed, the level of protection for the member against increased charges on scheme failure can be revisited on three important occasions under different provisions in the Bill relating to triggering events. What is the Government’s policy on the considerations that will be taken into account when the Pensions Regulator authorises the level of administrative charges to be borne by the member on scheme failure under Clauses 12 and 24 and Schedule 2? Are there any circumstances in which some of the administration charges or transfer costs arising as a result of a triggering event can be passed on to the member, and what will be the limit on the charges that can be passed on to them?

In the current drafting, there seems to be no join-up with the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which incorporate the value-for-money assessment. There is nothing in the Bill to cover what happens if a scheme fails to comply with these regulations. Would it impact on the authorisation process or lead to the withdrawal of authorisation? It may be that these points will be covered off in new regulations, but it is unclear how regulations made under the powers in the Bill would knit together with the existing charges and governance regulations.

The regulations supporting Clause 12 on the continuity strategy, which sets out a requirement about the level of charges that will apply in a triggering event, are subject to the negative resolution procedure. I am conscious that we are bouncing this ball on negative and affirmative resolution procedure but, again, there is a prohibition on increasing charges and various incidents where the charges that cannot be exceeded are set out. Yet we have no sight of the draft regulations, so we do not know the Government’s thinking on this. Again, this is an appeal as to why, in the first instance, the regulations should not be subject to the affirmative procedure.

This is an important matter that is at the heart of the level of protection the Bill seeks to provide to members. It is one thing to say that there is a protection, but understanding what that protection is in quantitative and real terms is important. Because we have not seen the draft regulations and do not know the policy intention, that is difficult to assess. That is why Amendment 30 provides for the first regulations to be subject to the affirmative resolution procedure. Given the importance of this matter and the lack of detail before the Committee, why is it not appropriate to apply that procedure in the first instance?

[Lord Flight (Con)]

My Lords, Amendment 29 and 40 are amendments to opposition Amendments 28 and 39. They would both add after “members’ funds”,

“, beyond the normal capped pension scheme charges,”.

The point is really very simple: without this change, the opposition amendments would have the undesirable —and I think unintended—effect of hampering the orderly exit of the sponsor. I am sure that is not the intention behind them.

Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Flight

Monday 21st November 2016 Lords Chamber

[Baroness Drake (Lab)]

My Lords, Amendment 18 proposes a new clause that, put at its simplest, seeks a compensation fund or provider of last resort when a master trust fails and there are not enough resources to meet the costs of wind-up and transfer. It is the in extremis protection, ensuring a last line of defence for members’ funds if the capital buffer required under Clause 8 or the proposed continuity option provisions in Clause 24 fail.

Setting regulatory operational capital requirements for master trusts is important but does not guarantee the security of members’ benefits or rights. I am sure the Minister will reassure us that the Government intend to be robust. The trouble is that we are not sighted on the robustness of the capital adequacy or transfer-out regimes—indeed, neither is he at this point—because so much of it is still left to further policy decisions and regulations. Concepts such as “sustainable”, “sound” and “sufficient financial resources” are undefined in the financial sustainability requirement in Clause 8. There are no draft regulations for us to consider. There is no provision in the Bill for what happens if the regulatory regime fails to ensure that sufficient financial resources are available in the event of a master trust failure.

The Constitution Committee points out in its letter to the Government of 11 November that Clause 24, dealing with wind-ups and transfers-out, is an example of the Bill delegating the power to make regulations that will determine substantial policy issues when a draft of the regulations is not available and the Government have yet to determine their policy. This regulatory regime will be applied to an existing market that has developed in a variety of ways. The Government cannot guarantee that they will have time before its introduction to create and hold the benign behaviours needed to protect scheme members. The impact assessment acknowledged uncertainty about the Bill’s impact because substantive policy decisions will not be taken until the secondary legislation stage. Indeed, such is the amount of further work to be done that the authorisation regime will not come into effect until 2018. The Bill does not make clear what happens if no potential receiving scheme is able or willing to accept the benefits of the members on transfer. The scheme records may be in disarray. The actual costs of wind-up and transfer will not be known or knowable in advance.

Under Clause 33, there are prohibitions on the charges the master trust and the receiving scheme can impose on the members transferring, or on imposing any new charges to meet costs for which a receiving scheme is liable but which were originally incurred by the transferring scheme or as a result of the transfer. If the actual costs of wind-up are very high, the terms of the clause may deter other suitable master trusts from accepting a transfer in whole or in part.

The impact assessment explains that the prohibition on increasing member charges during wind-up and transfer will work because the money to pay for these costs will be met by the access to funding or capital reserves held in accordance with the new financial stability reserve requirements in Clause 8. Yet no regulator can guarantee that those will always be sufficient. Indeed, the impact assessment reasoning is restated by the noble Lord, Lord Freud, in his letter of 14 November. However, neither the Bill, the impact assessment nor the Minister’s letter inform us what would happen if, in a particular failing master trust, the capital reserve requirements proved insufficient for whatever reason. The Bill proposes no contingency plan for the failure of a master trust the records of which are in disarray, which has insufficient financial resources to comply with its duty when a triggering event occurs, and for which no master trust is willing to accept transfer of members’ benefits. What will happen in those circumstances? How will all the members’ funds be protected against increased charges? What liability for or immunity from the past provider’s mistakes will a receiving scheme have? What plans do the Government have for ensuring that bulk transfers between master trusts can legally proceed in an efficient and timely manner to ensure continuity of coverage for members of failed master trusts?

The suggested timetable in the Bill indicates that the new regime will come into full effect in 2018, after most remaining employees have auto-enrolled, so it will be some time before it is in place. However, the retrospective casting of the Bill—which I support—means that for existing unauthorised schemes, the scheme funder is liable for wind-up and transfer costs when a triggering event occurs on or after 20 October 2016. What if that funder has insufficient resources, is a limited liability company or is insolvent? Where would wind-up and transfer costs be recovered from?

In his letter of 14 November, the noble Lord, Lord Freud, comments that in such a situation,

“we would expect the normal considerations in terms of insolvency and court proceedings to apply to this financial debt as to any other”.

That prompts a series of questions for the Minister. What does that mean? Who would bring the proceedings and how would they be financed? If the members of such a master trust were transferred, would the receiving master trust be covered by the prohibition in Clause 33 on increasing charges? The noble Lord, Lord Freud, further comments in that letter:

“We do not expect the number of trusts who will find themselves in this position … without solutions for their members to be high. We anticipate that the market will wish to consolidate”.

That leads to a more general question: how exactly is it to be determined which is the appropriate master trust to be the receiving scheme in a wind-up under Clause 24? How will a potential receiving scheme be identified? Presumably, the regulator will not leave it to other schemes to do some self-organised divvying up. It could be problematic under competition law for a panel of providers to self-organise the divvying up of schemes. Will there be a formal regulatory allocation process, and if so, what will it be?

People need to be reassured that the Bill will provide them with protection in practice. At the moment, that ultimate reassurance is not there. The amendment does not prescribe the model but it fixes the principle of a last resort provision. I recognise that work needs to be done. There are matters to be considered—how to protect against moral hazard; how to ensure that market players do not game the process to cream off the best members; the need to look behind a triggering event to identify evidence of cherry-picking; and the funding underpin for a last resort provision—but there is a compelling need for a compensation or last resort provision, as proposed in the amendment. Without it, the Government cannot credibly assert that the Bill will do what is claimed in the opening line of the Explanatory Notes: protect all savers. I beg to move.

[Lord Flight (Con)]

My Lords, it is actually extremely unlikely—in fact, virtually impossible—that members will suffer if the manager of a master trust gets into difficulties. The assets attributable to the pension fund members are segregated from the assets of the manager. How valuable or otherwise they are will depend upon how well they have been managed and, if there is more than one fund choice, which fund people have chosen.

Secondly, it is clear that the Pensions Regulator will and is intended to play the brokerage role. If it perceives that a master trust manager is in trouble, it will quickly sort out who is going to take over that business. It has value because fees are attached to managing the money, which other master trusts will happily pay. There is even some source of revenue coming back to the master trust in trouble as it is bailed out.

I am afraid that this sort of plaintive request for a compensation fund does not have my support. I thought we had collectively agreed that we did not want another compensation fund. Adding it at the end, almost out of principle, when the chances of it ever being used are virtually zero, is not particularly constructive.

--- Later in debate ---

[Baroness Drake]

I accept the clarification from the noble Lord. The amendment—which at this stage is partly probing, although underlying it is a principle that is a matter of substance—was not intended to prescribe the model. It does not say it has to be a compensation fund—it could be a provider of last resort—but there needs to be an explicit provision in the Bill that makes it clear what happens to protect the members’ pots when the supervisory and capital adequacy regime fail in a failing master trust. I do not believe that the Bill addresses that at the moment. I am not arguing for a particular model; I am arguing for a principle of absolute clarity as to how members’ protection against exposure to meeting the cost that I described—the risk that the Bill seeks to mitigate—will be addressed in an in extremis position.

It is not a plaintive request—I say to the noble Lord, Lord Flight, that I am not a plaintive request person. I am standing here quite firmly because potentially 7 million people are going to be affected and, over time, there will be trillions of pounds under management. This matter is worthy of interrogation, rather than us simply hoping.

[Lord Flight]

The issue is an administrative one, in that you have people’s pension fund money, and the manager has got into trouble and, let us say, gone into liquidation. What administration would make sure that a new manager takes over and continues to investment-manage those pots of money? There have been suggestions that the Pensions Regulator himself should be empowered, or maybe required, to act as a broker with regard to such arrangements, but that problem has not yet been solved. That, surely, is the practical issue, not people losing money out of their pension pots.

Trade Union Bill

Debate between Baroness Drake and Lord Flight

Monday 11th January 2016 Lords Chamber

[Lord Flight (Con)]

My Lords, notwithstanding all that has been said, this legislation is not intended to be hostile to the trade union movement but rather to modernise and address practices that are now outdated and sometimes inappropriate, particularly in the public sector and particularly with regard to the interests of consumers and taxpayers. My perception was that the Labour Party broadly accepted this, and hence in the other place did not table any amendments addressing the key elements of the Bill, but rather initiated a debate on conducting ballots in the workplace by electronic communication, which is important and which I personally support.

I support the important elements of the Bill: the ballot reforms in Clauses 2 and 3; the requirements for an opt-in for union members paying the political levy in Clauses 10 and 11; addressing facility time in Clauses 12 and 13; check-off arrangements in the public sector in Clause 14; and beefing up the powers of the Certification Officer in Clauses 15 to 17.

As we are all aware, the Bill requires that at least 50% of union members entitled to vote on industrial action should cast their vote for the ballot to be valid, and that, in addition, in important public services affecting the public, at least 40% of those entitled to vote should vote in favour of industrial action. The present arrangements, where only a simple majority of those voting is required, have led to abuse by militants, largely in the public sector and frequently inconveniencing the public. Trade unionists should accept that many members of the public are fed up with public sector strikes. Candidly, it is a disgrace that doctors are threatening to go on strike.

Of the days lost from strikes in 2014, 91% were in the public sector, which represents less than 30% of those in work and has both higher pay and better pensions than the private sector. Indeed, reform is needed more in the public sector than in the private sector.

Clause 10 provides that union members must make an active decision to contribute to political funds. Some unions, such as Unison, I understand, already have a tick-box. Clause 11 requires unions to include in their returns to the Certification Officer greater detail on what the political fund is spent on where expenditure exceeds £2,000. My reading of the legislation, however, is that failing to opt in to the levy will not necessarily mean that a member’s union contribution will be reduced by the amount of the political contribution. This could provide for a hidden increase in members’ subscriptions. However, of more moment, statute already requires an annual shareholders’ vote for companies to make political contributions, which should reasonably be matched by union members’ political levies similarly being voted on annually. Contrary to assertions made this evening, no banks or public listed companies make party-political contributions to any of the parties.

There has been a growing lack of distinction between trade union duties and trade union activities that qualify for facility time where there is no statutory requirement to pay union representatives for time spent on union activities. In practice, some union representatives are paid for undertaking activities as well as duties. It is surely reasonable that trade unions should pay for activity representation within the public sector organisations themselves, rather than the taxpayer shouldering this burden. In 2012-13, trade unions received £108 million in subsidies from taxpayers, plus a further £85 million in paid staff time and £23 million in direct payments. In 2013, at least 2,841 full-time equivalent public sector staff worked on trade union activities and duties at taxpayers’ expense. Out of 1,074 public sector organisations, 344 did not formally record facility time. This area needs tidying up and cleaning.

As noble Lords are aware, historically employers have deducted trade union subscriptions from a member’s pay and passed them on to the union. With direct debit facilities more easily available, there is no longer any real need for this practice. Some 972 public sector organisations—91% of public bodies—still provide check-off facilities. Only 213—22%—charge for this service. In 2012-13, these 213 bodies charged £1.77 million. If the other 759 public sector bodies were to charge, this would equate to £6.3 million—effectively another taxpayer subsidy. In today’s world, it is surely not the business of public sector employers to be processing staff dues. But if they do so, they should charge appropriately for the service.

Most legal services, including litigation, are reserved activities and can be provided only by a regulated person. However, the Legal Services Act 2007 was amended, for no particularly valid reason, to provide that trade unions—not other not-for-profit organisations—would be wholly exempt from regulation in the provision of legal services to their members. Experience with compensation claims suggests that trade unions need greater, not less, regulation in related territories.

At present, the Certification Officer, although called a regulator, has little more power than Companies House: in other words, they check that accounts have been received but not what is in them. So beefing up the powers of the Certification Officer in Clauses 15 to 17 is an important aspect of the Bill. It would be interesting to have more detail on what is intended here. For example, where there are potential frauds, the Bill needs to provide the mechanism for action and the Certification Officer needs to be adequately funded to act. The relationship of the Certification Officer to the Electoral Commission as regards the monitoring of union elections and the registration of political donations also needs to be considered. The provisions in the Bill regarding the Certification Officer need further consideration.

[Baroness Drake (Lab)]

Does the noble Lord accept that the Certification Officer has the power to check that the unions have adjusted the contribution rate of members who have opted out?

[Lord Flight]

I am not aware of whether that power exists at present. It is certainly intended so far as the Bill is concerned. But I suggest that there are quite a lot of other useful things that a Certification Officer can and should be doing.

--- Later in debate ---

[Baroness Drake]

My Lords, the public can be forgiven for thinking that this Bill is only about strike action. That is what public commentary has focused on. But in reality, as today’s debate has demonstrated, the proposals go much wider. The Bill does not stop at setting high thresholds for strike ballots by train drivers, teachers or hospital workers; it launches a much broader attack on the ability of trade unions to organise and politically engage, subjects them to extended scrutiny from the Certification Officer and expands Ministers’ powers, with significant and unseen secondary legislation still to follow—all of which disturbingly upsets the balance of influence in our treasured pluralist democracy. Amnesty, Liberty and the Equality and Human Rights Commission—the hat-trick—have all expressed their deep concerns.

In contrast to the 1980s, industrial relations today are in a benign state. Strike days are a tiny fraction of the 27 million days in 1984. No evidence is provided for why such extensive provisions are needed today and no assessment of their impact is yet published, yet the Bill shifts the balance of power against workers in the labour market and the balance of political influence against trade unions and the Labour Party.

Currently, the Certification Officer has the power to act on a complaint from a trade union member. The Bill transforms it from an adjudicator on disputes between unions and their members into an enforcement agency with wide-ranging powers—even if a member has not made a complaint—to initiate investigations, require the production of documents and impose substantial fines. It gives the state extensive access to members’ details and privileged correspondence. As the Minister for Skills confirmed, third parties will be able to raise concerns. The failure to act on them could well expose the Certification Officer to judicial review. As the Equality and Human Rights Commission comments, the power to instigate complaints, as well as investigate them and adjudicate on them, compromises the impartiality of the Certification Officer and therefore raises substantive concerns about compliance with Article 6.

As my noble friend Lord Hain observed, excessive state interference with independent trade unions has normally been strongly opposed by all good democrats. The Bill gives Ministers significant reserved powers to amend primary legislation relating to facility time for union representatives in public authorities. The Equality and Human Rights Commission believes that these open-ended powers could be used to introduce disproportionate interference with freedom of association. They are, indeed, open-ended. As the Delegated Powers Committee observed, the Government’s power to require information, or impose a limit on facilities, extends to a person who is not a public authority but who has functions of a public nature because they receive funding in part from public funds. This could include a care home with local authority-funded residents; a charity providing services; indeed, a long list of employers who receive public funds.

The Bill introduces stricter rules for a lawful ballot and lawful industrial action, but meeting those higher standards of legitimacy will still not be enough for a legitimate strike. The Government are intent on removing the restrictions on agency workers being employed to cover striking workers. In effect, responsibility will be transferred from the principal employer to the employment agency, through service-level agreements, to resolve a lawful dispute by strike breaking. Agency workers will have to strike-break to keep their jobs with the employment agency, because the agency’s service contract will require them to supply labour during a strike, and the agencies know that.

Tony Blair once said that British labour law is,

“the most restrictive on trade unions in the western world”.

It is about to get even more so; yet individual protections are also being weakened. The big increase in fees saw employment tribunal claims plummet by nearly 70% in the year following their introduction—way beyond deterring unmeritorious cases.

The Government claim that they are the workers’ party because they increased the minimum wage. I have spoken in favour of such an increase from these Benches. However, as the Centre for Policy Studies argued, it was driven as much by the need to address low levels of UK productivity and stop companies—including many large employers—taking advantage of in-work benefits to subsidise their pay bills as it was by a caring attitude for the low paid. The £4 billion rise in pay which the increase will generate is no substitute for the £12 billion cut in benefits.

The proposals on political funds do not represent a regulatory regime that is fair to all political parties. They are a partisan measure, intended to reduce unions’ political engagement and the funding of the Labour Party. The change from “opt out” to “opt in” does not come from measured cross-party consideration. The established precedent that changes to party funding happen only by consensus has simply been torn up.

Figures show that from 2009 to 2015, excluding donations directly paid to candidates, the Conservative Party received £39,970,822 and the Labour Party £7,437,087 in company donations. They confirm what we all know: Labour receives significant funding from trade unions, the Conservatives from business. But there is no proposal, for example, for businesses to seek the specific approval of individual shareholders for the donations that they make. Employers use opt-out to put employees in salary sacrifice schemes and to change terms and working practices, and the state uses opt-out to get workers to save for retirement. But it is now unilaterally unacceptable for unions to use it, even with the bedrock protection that members cannot be auto-enrolled into union membership. The certification officer will now have new powers to require unions to report in considerable detail on how political funds have been spent.

The Government claim that the rules are even-handed because they apply to employers’ associations. That is disingenuous. None of the 94 employers’ associations on the certification list has a political fund. Companies make political donations individually or via other channels. Everyone with a modicum of understanding knows that these rules will impact only trade unions.

[Lord Flight]

Companies are obliged by statute to vote on whether or not to make political donations, as a result of which virtually no public companies do so any longer.

[Baroness Drake]

To the best of my knowledge—do not hold me to the exact detail—all that companies have to do is have a resolution at their annual general meeting every four years. I am sure that trade unions would be prepared to do that at their annual general conferences if we were matching like for like. My point is that the rigour and the conditions are going to be applied only to trade unions. There are no reciprocal intrusive requirements being imposed on employers or companies in the Bill.

The Government have the right to govern but should not use that privilege to unfairly weaken the basis of legitimate opposition. That is not governing; it is undermining our democracy.

Financial Services Bill

Debate between Baroness Drake and Lord Flight

Wednesday 25th July 2012 Lords Chamber

[Lord Flight]

My Lords, the focus of the insurance objective is rightly on policyholder protection. I do not really understand why the drafting includes those who “may become policyholders”. If they do become policyholders, they will surely be covered automatically. If they do not become policyholders, they will not be covered. I am not aware of any other area of financial services where there is any focus on future potential customers. I have a very simple question: why does this include those who “may become policyholders”? What is the logic, if any, behind this inclusion?

[Baroness Drake]

My Lords, I shall speak to Amendment 141 in my name. The PRA is the prudential regulator of the insurance companies. It has an insurance objective, which will include a requirement to contribute to securing an appropriate degree of protection for policyholders, understandably reflecting the correlation in the insurance sector between the management of risk and the consumer outcome, especially in with-profits policies. The PRA has no explicit consumer protection remit. The FCA does.

The Treasury has, as far as I can see, recognised the need for the PRA to seek advice from the FCA in achieving the balance between the interest of the policyholder and the prudential strength of the company when it comes to with-profits policies. While I understand that the responsibility for that balance should remain with the PRA, it is intended that these matters will be covered by a memorandum of understanding between the PRA and the FCA. However, that memorandum of understanding has to be compatible with the PRA’s view of how to advance its prudential objective. That is where I remain concerned, because this leaves the PRA with a very wide discretion as to what is an appropriate degree of protection for with-profits policyholders.

Unless I am misinterpreting the government amendment in this group, which I will have to wait to hear, the effect of that amendment is to strengthen or give even greater clarity to the fact that it is the PRA which holds the ultimate authority for determining that balance between the prudential strength of the company and the interest of the policyholder. Given that, I believe that it would be desirable if these matters were not left to a memorandum of understanding alone, but that the Bill should guide the approach of the PRA with respect to the regulation of with-profits policies by providing a set of principles which this amendment seeks to set out. Perhaps I may set out my reasons.

The PRA’s focus will be on the prudential regulation of firms, and the stability of the financial system. It will not have the culture to proactively protect consumers who hold with-profits policies, and yet the regulatory framework of with-profits policies has been subject to sustained criticism from the Treasury Select Committee, observers, academics—large numbers of people. However, with-profits policies are still a significant consumer issue. There are around 25 million policies, worth about £330 billion. These policies typically state that the policyholder will share in the profits from the fund, which are distributed to the policyholder in the form of bonuses. The policyholder’s contract normally states that they receive 90% of the profits from the fund, and the shareholders receive 10%.