Water Bill

Earl of Lytton Excerpts

Monday 31st March 2014 Lords Chamber

[Lord Whitty]

My Lords, I, too, do not object to these amendments and I congratulate the Minister on getting through them in six minutes flat. Many of them will be substantial improvements to the Bill, particularly the ones which iron out a few things in relation to Ofwat in terms of the changing competitive regime. I very much welcome that. However, the noble Baroness will be aware that, in its second riposte, the Delegated Powers Committee said that it is not entirely satisfied with the provision for only the first instance of definition being by affirmative regulation. The Government will have to have an answer to that. In general, it is sensible for Ministers to swallow hard and accept all the recommendations of the Delegated Powers Committee, otherwise it ends in trouble down the line.

The only other thing I would ask about is Amendment 90T, which relates to hybridity. I do not really want to have a debate on hybridity now, but the Delegated Powers Committee raised the issue, and I am not sure that the Government’s response fully meets the point, because it effectively says that, whether it is hybrid or not, we are going to ignore it. I am not sure that is a satisfactory response, but if the Delegated Powers Committee will buy it, I will not object. Otherwise, we welcome these amendments.

[The Earl of Lytton (CB)]

My Lords, this is the first time that I have spoken at this stage of the Bill and I, too, must declare that I live in a band H property. However, I also have a professional interest in parts of the Bill by virtue of being a chartered surveyor. I certainly welcome the proposals for the affirmative resolution procedures outlined by the noble Baroness and agree that the disclosure of council tax information is necessary. However, I have one query, which relates to Amendment 90CD. Could the noble Baroness confirm that the normal process of disclosure will generally relate to the identity of the property and its council tax band rather than the identity of the chargepayer, the latter being something that is normally held by the billing authority? If I have missed some point about the disclosure, and where the identity of the individual can be discovered, perhaps she would put me out of my misery.

[Baroness Northover]

I hope I can put everybody out of their misery, which probably reflects the fact that I rattled through this in six minutes. First, I will take up the points made by my noble friend Lord Cathcart. We will come to a further discussion of reserves later, in which I am sure he will be interested. I make it clear that Amendment 90L is intended to ensure that employment contracts within the scheme are transferable, where otherwise they might not be. I reassure him that the amendment that he mentioned is not intended to enable the transfer of reserves that are required to be retained for prudential regulatory purposes. I hope that reassures the noble Earl on that particular point. I probably just went too fast on that one.

I am very grateful to the noble Lord, Lord Whitty, for his general support for these amendments. In response to the points he raised, I recognise fully, as a member of the Government, that the best thing to do when the Delegated Powers Committee comes forward with recommendations is to agree. However, he will also be aware that there are times when the affirmative procedure is used in the first instance and not thereafter because it is not anticipated that there will be significant changes later. I am sure that the noble Lord, Lord Whitty, will be very familiar with that pattern.

The noble Lord asked about hybridity. I will just go back to my original comments on that and then come to what I have been handed by way of inspiration. Amendment 90T addresses the risks that secondary legislation made at the end of the life of Flood Re could be seen as hybrid. The noble Lord thought that we had indicated in some way that we were just sweeping that aside—at least, I understood him to indicate that. I repeat that at the end of Flood Re we have every intention of carrying out a full consultation before making secondary legislation to ensure that any private interests are properly considered. I hope that the noble Lord is reassured on that point.

Perhaps I may write to the noble Earl, Lord Lytton, with further details on the point that he raised. I am sure that we can reassure him.

I am just checking to see whether I have covered everything. I trust that I have and am sure that noble Lords will make it very clear if I have not. I hope that, on that basis, they will accept the government amendments that I laid out at such speed.

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Moved by

[The Earl of Lytton]

89: Clause 51, page 108, line 18, at end insert—
“(6A) Regulations under subsection (5) shall provide that every policy which is subject to a levy for the purposes of the Flood Reinsurance Scheme shall be covered by the Flood Reinsurance Scheme.”

[The Earl of Lytton]

My Lords, I do not know whether I can rattle through this in quite such short a time as six minutes but I will do my best. I start by expressing appreciation to the many professionals and industry bodies who have been extremely open and frank with me about their views and insights. I am also very grateful to the Minister and his department for the correspondence and guidance that they have generated.

My starting point is that Flood Re is necessary and desirable, and I hope that nothing I say will be interpreted as damaging that. The objective of Amendment 89 is to enshrine fairness in the primary legislation by requiring that the subsequent regulations brought forward by the Secretary of State will ensure that all properties included in the calculation of the levy are eligible for the scheme. I will come back to that later. The objective of Amendment 90 is to ensure proportionality in the primary legislation by requiring that the regulations limit the possibility of unfair loading against any particular council tax band.

First, I shall set these amendments in the context of the wider issues. In Committee, I expressed grave concerns about the Government’s unwitting exposure of risks in the mortgage lending industry, a sector which, I pointed out, is influenced both by the availability at reasonable cost of perils insurance, including for flooding, and by its own independent assessment of risk. It is dangerous to assume that the potential for value write-downs is simple scaremongering or that lenders will necessarily just fall behind insurers’ lead. The situation is made worse by the express intention to move to individual risk assessment with insufficiently accurate, readily available or acceptably cheap data, either now or proposed, on which such individual risk could reasonably be assessed. It is clear from what the British Property Federation tells me that there is an issue here, and I feel that the Government could do more about it.

Either one has a risk pool and you do not ask too many detailed questions or there is an individual risk assessment with 1,000 variations. In the latter case, we can of course wait to see what happens to the at-risk properties that lie outside Flood Re. I am told that they can expect a significant hike in insurance premiums and I believe that we have started to see that happen. Of course, we do not know what the “at real risk” numbers are because Defra has not carried out an audit. The Environment Agency has different figures depending on whether coastal storm surge, fluvial, surface run-off, sewer surcharge or groundwater rise is involved, as well as indirect vulnerabilities such as property damage following disruption to services and access. Defra seems to select what suits its purposes, and in a sense I do not blame it for that. However, I am fairly unhappy about the whole of this part of the Bill, in particular, its evidence base and its unintended consequences, particularly when confidence in Flood Re is so vital, as I think it is.

I turn to some of the detail behind the amendments. The statement of principles said that it would ensure that home owners and small businesses would be protected. That was the public expectation. The Government claim that Flood Re is designed to cover the same categories of policyholder, but that is not how it appears. Leaving small and medium-sized enterprises apart, the Government need to explain and justify the exclusion of many homes and their rather convoluted way of defining them. It is that which I wish to address in particular.

The Defra note last week on the scope of Flood Re is evidence of the difficulties. The criteria are listed on page 2. Of the five criteria listed, three simply pose additional questions. As regards whether properties are insured in the name of an individual or in trust for an individual, how would one know? Whether properties are used for residential purposes may be a hotly debated matter given the number of people who work from home. The test of occupancy by the policyholder or immediate family also worries me. Under policies that are in scope, we note that contents insurance in the main is included but that stands in stark contrast to the insurance of the building fabric, which is on a different template. A lot of people with composite policies, especially some first-time buyers, might struggle to know the difference between the two. Buildings insurance policies in scope are covered on page 3 and it seems to me that things get into further complexity. The categorisation of owner-occupied homes provokes a raft of subsidiary questions. Who is insured? Who occupies? What are the family connections? For owner-occupied leaseholds you have to know whether the leaseholder is in actual occupation and what the insurance covenants state. These could be in a superior leasehold document or have just come about by subsequent lease variation or custom. The policy must cover three flats or fewer and the freeholder—in particular not being a head lessee I would ask your Lordships to note—must live in one of them. We have questions of numbers of units covered in the policy not being the same as the number of homes in the building and questions of how one might determine that. There is also the identity of persons, their relationships and the actual place of abode. Quite why the classification of homeowner hinges on the residence of the freeholder escapes me. I do not think that it will be seen as a fair test for this purpose. Once the presence of leasehold is established, the criteria create all sorts of further additional interests, but I will leave the noble Lords, Lord Grantchester and Lord Whitty, to expand on that.

When a top-floor maisonette gets split and combined with the roof space as an extra unit to make four, what then? Why should that change the status of all the others? Are leaseholders who share the freehold via a company formed for the purpose to be included? If so, how would one distinguish that from a next-door investment property? I do not accept the justification for the blanket exclusion of mixed residential and commercial blocks, in which I also include the one, two or three self-contained flats above the shop. I also feel that including these is not in any way insurmountable.

I turn now to the exclusion of council tax band H and I properties. I note that the Association of British Insurers’ briefing says that this was a ministerial decision. I simply point out that many people occupy modest London homes in band H while near-identical properties in the regions may be in much lower bands. The disparity has arisen because of the economic imbalance that has grown up over time. But, as the brokers Hiscox put to me, what conceivable difference would it make to the actuarial calculations of Flood Re to include them, especially if the maximum claim that could be made for higher-value properties was capped at some figure? What effects are anticipated from excluding large numbers of inner London homes? Further, since when has the registered address of a business been anything whatever to do with the place where the business is conducted or, for that matter, with the predominant use of the dwelling where it may happen to be registered?

I turn to the exclusion of properties built after 1 January 2009 which none the less, as with the other exclusions, form a component in the levy. In Committee, we debated Planning Policy Statement 25: Development and Flood Risk. That was published in March 2010. I am not clear why the earlier retroactive date was chosen, but I suggest that the process was less than open and transparent. Purchasers of homes in that category would have been unaware that they might have been excluded and will consider themselves, I suspect, unfairly penalised. Based on 2% of the estimate of completions since the end of 2008, there are probably about 30,000 of these properties as a rough estimate, 2% of which are at significant risk. But they should also be at particularly low risk in actuarial terms if local planning authorities, developers and planning inspectors have adhered to the principles of PPS 25. It would be much more appropriate to set a cut-off date of, say, Royal Assent.

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Flood Re is designed to be as simple to operate as possible. At present this information would be administratively burdensome to collect and would place impracticalities in the way of Flood Re’s successful operation. It would be costly to force insurers to apportion the levy for each household by council tax band and there would be no way to enforce that. For the reasons I have set out, this would not be workable in practice, so I hope that the noble Earl will be persuaded to withdraw his amendments.

[The Earl of Lytton]

My Lords, I thank the Minister for that comprehensive reply. I thank all noble Lords from around the House who have spoken. To the noble Baroness, Lady Parminter, the noble Lord, Lord Whitty, and the Minister, I say straightaway that I have no intention of putting them through the indignity of walking through the opposite Lobby to the one that I may go through. However, the area has been opened up for discussion, as I hoped it would be.

I start from the last point that the Minister made: he wants Flood Re to be as simple as possible. One of the points I was trying to get across is that the way in which the note from Defra sets it out was anything but as simple as possible. Indeed, the question arose as to exactly how one would paint the particular ins and outs by reference to that document. There it is: we have to make the bread with the dough that we have.

I think the Minister misunderstood me slightly, particularly in connection with business band H and post-2000 properties. That was not the main thrust of what I was trying to get across. The main thrust was picked up by the noble Lord, Lord Crickhowell, in the sense that it is that significant proportion of moderate-risk households—if I may term them that—that lie outside flood risk and therefore will be faced with individual risk assessment. However one wishes to divine the numbers in that regard, my take on it is that the number of those who lie just outside Flood Re but face an identifiably material risk is significantly greater than the number in Flood Re who will be protected. Therefore, on that basis, the safety net for the few might be seen as being at the expense of the security that once prevailed for a lot of people in the larger pool under the old statement of principles. I still think that that is an issue.

The Council of Mortgage Lenders refers consistently to its fears about affordability. The noble Lord, Lord Campbell-Savours, referred to a particular example. As he knows, I have a copy of the same letter. If you are on a limited income and having to juggle your finances and your insurance premiums go through the roof, your total repayments will rise to a critical level.

However, it would be wrong for me to go on at length. I will consider carefully what the Minister and all noble Lords have said. I am not sure that I am satisfied. Without wishing to use the somewhat threatening tones of the Terminator, I should say that I may well be back on this issue at subsequent stages of the Bill. However, in the mean time, I beg leave to withdraw the amendment.

Amendment 89 withdrawn.

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[Lord Krebs (CB)]

My Lords, I thank the noble Lord, Lord Grantchester, for suggesting that my committee acquires an additional job. I do not wish to speak at length about it but simply say that, were we to be asked to carry out the role he outlined, it would fit well with our current statutory duties. We already collect and analyse data on the number of properties at flood risk and the time trends. If we were to carry out this role there would be a couple of provisos. We would need access to the data held by the Government, Flood Re and the wider insurance industry. There might also be some modest resource implications for the work carried out by the committee. With those provisos I certainly think that the committee could very well carry out the job, as outlined by the noble Lord, Lord Grantchester.

[The Earl of Lytton]

My Lords, I shall make a short contribution on this amendment. Noble Lords will remember that at Second Reading I made the point that there was no equivalent to a Cambridge Econometrics study into the numbers that lie behind this. For that reason alone, there is some merit in this amendment to look at the hard science so that we get away from what has been described to me, by somebody who will remain nameless, as voodoo numbers that have been floating around. The absence of the degree of expertise that is regularly produced by the committee of the noble Lord, Lord Krebs, has needlessly increased doubts and concerns that might otherwise not have been there. Therefore, this is quite a good idea, although I am less clear whether I shall follow the noble Lord if he decides to divide the House on this issue.

[Earl Cathcart]

My Lords, when a similar amendment was debated in Committee, I took it to be only a probing amendment. Now it has been tabled again today, I am bemused, or perhaps confused, about what the Committee on Climate Change can add to the work already being done. The insurance industry, together with the Government and their agencies, has already assessed the number of properties in known flood-risk areas, particularly the number of properties that might struggle to afford flood insurance in the open market. They have also assessed the level of premiums required by council tax band, and the contribution needed from every householder—£10.50—to ensure that Flood Re has sufficient funds net of reinsurance costs from year 1.

I have no doubt that Flood Re will continually assess and reassess its assumptions, but in any event a five-year review is built into the scheme to assess whether its assumptions still hold true. This five-year review will allow Flood Re, with the agreement of the Government, to make adjustments to the levies and contributions accordingly, and I am quite sure that different areas of flood risk will be added to the pot.

I cannot understand why the noble Lord, Lord Grantchester, is moving this amendment, which will require the Committee on Climate Change to duplicate the work already done by Flood Re and by the Government and their agencies. Where will the Committee on Climate Change get its information from? The noble Lord, Lord Krebs, says that the committee does some work in this area, but it would need access to data from Flood Re, the insurance industry and the Government and their agencies, such as the Environment Agency. I do not believe that getting the Committee on Climate Change involved will add anything but will be double-handling, expensive and unnecessary.

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[Lord Cameron of Dillington]

I understand what the noble Lord is saying but the problem is that the tenant does not have an insurable interest. He cannot insure the property. No insurance company would accept his insurance of a property in which he is only a tenant.

[The Earl of Lytton]

My Lords, I too would have put my name to the amendment had I known about it in time. I apologise to the House and to the noble Lord, Lord Whitty, for not being in my place when he introduced it, but I understand a great deal about the background to it from previous discussions with him. Whatever we do with the cut-off point between what is in Flood Re and what is outside it, it is important that it is reliable, consistent, transparent and fair. The outcome must not be capricious or so asymmetric that people lose trust in it, because I am a believer that credibility is at the centre of Flood Re’s success.

One thing in particular stands in stark contrast with that. The commonhold units’ owners do not themselves own the fabric of the building: it is owned by the commonhold association. I asked myself, if there is a difference in personality, in legal entity, why is it that long leaseholders of the conventional sort in a similar building—with the freehold being the common parts and the fabric of the building owned by someone else—should not benefit? Why is there a blanket inclusion of commonhold but a blanket exclusion of leasehold? I find that difficult to understand, particularly because, under the Leasehold Reform, Housing and Urban Development Act, the intention was to try to get leasehold nearer to freehold, to remove the segregation between the freehold interest and the leasehold interest which for years has dogged the sector and allowed all sorts of abuses to occur and produced all sorts of disadvantage in funding, growth and reward for that investment.

It seems to me that the convenience of insurers is being put ahead of the public interest. There probably has to be a cut-off point somewhere in the system. It is not for me to speculate on what the actuarial approach would be to that, but it seems that where it is being placed at the moment defies objective analysis on the points of consistency and transparency that I mentioned. I am very inclined to support the amendment.

[Lord De Mauley]

My Lords, I am grateful for the opportunity provided by the noble Lord, Lord Whitty, to discuss the eligibility of leasehold and tenanted properties for Flood Re. In Committee, I said that we would take more time to look at the issue for lease- holders with the ABI and that we would provide further information on the scope of Flood Re.

We have developed with the ABI a briefing note that sets out the scope of Flood Re and covers proposed new subsection (1) in the noble Lord’s Amendment 89B. In summary, the note, which is available online, confirms that domestic contents policies will be available to all under Flood Re, regardless of whether properties are leasehold or freehold, rented or owner-occupied, except those properties in band H and those built from 1 January 2009.

Leasehold houses will also be in scope of Flood Re, provided that the leaseholder lives in the property and purchases the buildings insurance in his or her own name. Flats will be eligible, provided that there are not more than three flats in the building and that the freeholder, or one of those with a share of the freehold, lives in the building and takes out the cover. Setting the eligibility to a maximum of three flats reflects the general limit that the insurance market is willing to cover under a domestic or personal lines policy. There is already a competitive market for insurance for properties with four or more units, which we expect to continue. As I have already said, we and the ABI will monitor the market to ensure that that remains the case. We believe that a significant proportion of the leasehold sector will be in scope of Flood Re, but I should emphasise here that we expect most properties will not need to be in Flood Re and will find better prices through normal routes.

The noble Lord, Lord Whitty, suggests that that is all very complicated and does not go far enough. We have looked carefully at that with the ABI. Flood Re should be available only to those who need it. Indeed, in an earlier debate the noble Lord to some extent agreed with that. The ABI has assured us that the same systemic issues relating to availability and affordability do not exist for larger-scale leaseholders and commercial managing agents as in the domestic home insurance market.

The insurance industry has recently written to assure the Government that it does not expect there to be widespread issues over access to the insurance market for those parts of the leasehold sector which will be out of scope of Flood Re, which I am sure that noble Lords will agree is very welcome reassurance. The industry is clear that there is plenty of capacity to continue to provide insurance on a competitive basis.

I turn to the tenanted sector. As we discussed at some length in Committee, landlord insurance is out of scope for Flood Re for buildings cover. Landlord insurance is classified by the insurance industry as commercial. However, again, we have been assured by the industry that the majority of landlords will be able to find a more competitive rate outside Flood Re.

I emphasise that the proposed scope was not developed on the basis of cost: it is the nature of the policy which is key. The Government are clear that it would not be appropriate for landlords, who gain commercially from renting properties, to benefit from a subsidy on other households.