Water Bill

Lord Whitty Excerpts

Tuesday 8th April 2014 Lords Chamber

[Lord Marks of Henley-on-Thames (LD)]

My Lords, I support Amendment 13, which was spoken to by my noble friend Lady Parminter and to which I have added my name. I do so as a member of the Delegated Powers and Regulatory Reform Committee of which the noble Lord, Lord Haskel, who has already spoken, is also a member—other members are in their places today—to explain why that committee takes the strong view that a strengthened procedure, often called the super-affirmative resolution procedure, is important, at least on first exercise in the case of these regulations.

The context in which these amendments fall to be considered is that they are a wide-ranging set of amendments which represent a radical change of direction in the Bill. The Bill itself introduces considerable change in the way that the water industry operates, that industry being of great importance to the UK economy as a whole and to individuals. Although these amendments on retail exit are concerned with non-household supplies, as my noble friend has already stated, they are nevertheless of wide public importance.

The noble Lords, Lord De Mauley and Lord Moynihan, and my noble friend Lady Parminter have all explained the political context and impact of these amendments. I will confine what I say to the three reasons why a strengthened procedure is so important. First, there has been very limited time for the consideration of this scheme as a whole, as the noble Lord, Lord De Mauley, frankly recognised. The amendments are introduced in this House at Third Reading in response to amendments introduced earlier, notably by the noble Lords, Lord Moynihan, Lord Whitty and Lord Grantchester. However, in legislative terms, the amendments come, in this House at least, not even at the 11th hour: it is a minute to midnight. It is not, I suggest, satisfactory, and it is certainly not desirable, for nearly 11 pages of amendments to be introduced at such a late stage in the passage of the Bill without the time for lengthy and informed scrutiny of the detail of the proposed scheme. The amendments are complex and demand detailed scrutiny after all interested parties have had ample opportunity to consider them and to comment on them. The timing of their introduction has simply not permitted this to happen and the use of a simple affirmative procedure, as is proposed, would be likely to lead to a draft set of exit regulations being laid before Parliament for approval in unamendable form.

Secondly, quite regardless of the issue of timing, this is, I suggest, a case for a super-affirmative procedure in any event. The amendments would introduce into the Bill the power to make regulations which would effectively amount to an entire new legal framework to enable relevant undertakers to withdraw from the new market arrangements. If those provisions become part of the Bill without a super-affirmative procedure, then Parliament will have, as your Lordships well know, no opportunity to consider and report on the individual details of the proposed regulations and, in practical terms, no opportunity to invite detailed revision of their provisions. With the super-affirmative procedure set out in our amendment, there will be an opportunity for a committee of either House to consider the draft regulations in detail and to recommend changes to the draft for the Secretary of State to consider. The procedure proposed is similar to that in Section 102 of the Local Transport Act 2008, which the Delegated Powers and Regulatory Reform Committee recommended as a model. There is no rush to introduce these exit regulations, particularly not when they are potentially of such importance. They should not be the subject of delegated legislation without a full opportunity for Parliament to consider their detail.

Thirdly—this was touched on by the noble Lord, Lord Haskel—our committee was extremely concerned by the degree to which the amendments establish, not a list of requirements to which the Secretary of State must adhere in presenting the regulations, but a menu from which he can largely pick and choose at will. I have no objection to the fact that the power to make regulations in the first place, in subsection (1)(a) of the new clause proposed in Amendment 1, is permissive and not mandatory. It may be that the Secretary of State decides against exercising the power to make such regulations at all, although that is of course unlikely. However, if he makes such regulations, it is surely right that he should be required to incorporate all the safeguards of which the noble Lord, Lord De Mauley, spoke, which are essential to protect customers, to ensure proper consultation with interested parties, to safeguard the public interest and to secure appropriate parliamentary scrutiny. Yet the amendments as drafted are almost entirely permissive in respect of such matters.

I will trespass on your Lordships’ time for a moment or two to look at a couple of examples. Amendment 1 provides that exit regulations,

“may include provision for protecting customers”,

affected by a relevant undertaker’s withdrawal. Amendment 2 provides that:

“Provision under subsection (1)(a) may require a relevant undertaker … to consult”.

Amendment 4 states that:

“Exit regulations about the transfer of a part of a relevant undertaker’s undertaking may include provision for the making of a scheme to transfer property”.

These are all matters on which this House would wish to be given the opportunity for detailed consideration.

General directions are of general application. I will address two points on Amendment 9. Subsection (1) states:

“Exit regulations may make provision for the Secretary of State to publish … a statement setting out general directions for the”,

regulators. Subsection (4) states:

“Exit regulations may make provision for the Secretary of State, before publishing a statement under the regulations, to consult”.

These are all matters which I would expect, and I suggest your Lordships would expect, to be requirements. They are matters which concerned the Delegated Powers and Regulatory Reform Committee. The list goes on. The central point is that it is vital for Parliament to have the opportunity to consider the proposed exit regulations individually and to recommend changes to particular regulations before they become law without being restricted by the limitation inherent in a simple affirmative resolution procedure.

[Lord Whitty (Lab)]

My Lords, first, I apologise to the Minister that, due to a misreading of the Order Paper, I was not here to hear his first couple of minutes.

The Minister gave us a fulsome presentation of the changed position of the Government, which explained in considerable detail how these new powers would work. Those of us who sat through Committee and Report will know that the Government were faced with a pretty widespread view across the House that they needed to change their mind on retail exit. The noble Lord, Lord Moynihan, headed a series of debates which eventually brought the Government to change their mind and present these new clauses that are before us today.

It is of course a pity in many senses that this comes so late. Given this stage of the Bill, which has gone through both Houses of Parliament, it is difficult to deal with such a complex set of amendments. I am sure that when the noble Lord, Lord Moynihan, put amendments in this direction on the Order Paper at an earlier stage, and certainly when I did so, we did not expect to create quite such a substantial job-creation scheme for parliamentary counsel, but the Government have done a major job here and it would be churlish to quibble too much about it. However, there are problems with it. We all welcome deathbed conversions, but the central problem here is the lateness of the conversion. I wish that we were a stage earlier in the proceedings, when we could have tried to make minor amendments to the proposed clauses.

I echo the points made by the noble Lord, Lord Marks, in particular that there are several points in this, from the first new clause onwards, particularly in the very first line and the reference to protecting consumers, where “must” really ought to be substituted for “may”. With a bit more time, the Government might have come to that conclusion themselves in the instructions that they gave to counsel. However, we are where we are, and this is a major concession by the Government to the House. In a sense, the whole process has been a vindication of the way in which the House considers complex legislation and minds are changed—and we have the result here before us.

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[Lord Curry of Kirkharle]

Perhaps I may respond to that as I work through my argument.

Secondly, identifying the properties that will be subject to this special treatment will require the wisdom of Solomon and might create division and resentment among other property owners who are not able to benefit from the resilience measures used.

Thirdly—here I have some sympathy with the comments made by the noble Baroness, Lady Parminter—Flood Re needs a strategy for the amount of reserves that will be appropriate and need to be built up to cover flood risk. A strategic approach to the amount of surplus required is important. It will be very difficult to determine what the reserve should be to cover flood risk over a period of years, but it is essential that a reserve is established to maintain adequate funds to cover significant flood risk.

Finally, my most important point—I respond here to the comments made by the noble Lord, Lord Campbell-Savours—is that, as a policyholder, I do not want to continue contributing to a fund that has established a significant surplus. Once the surplus has been determined and achieved, I would hope that the Government and the ABI would have a mature discussion about reducing the contributions to the fund so that they do not establish an ever-increasing fund which may never be used. It would benefit the insurance companies if they did not need to continue collecting funds to contribute to this reserve. Resilience measures are essential and should be taken as properties are restored after flooding, but it is not the role of the fund to provide the resources to do that.

[Lord Whitty]

My Lords, I can see the immediate attractiveness of the amendment but I share some of the reservations of the noble Lord, Lord Curry. If we are going to do this, we have to be more precise than the provisions in the amendment. The noble Lord rightly said that Flood Re will need a strategy for its surpluses and the limitations on the degree of cross-subsidy it can require from policyholders more generally. There will be a limit as to what is acceptable in that regard. It will also need a strategy to ensure that resilience and mitigation measures are adopted by those at the highest risk. If this amendment means that, and if it is a relatively small part of such surpluses—by which I mean a very small part—I can probably go along with it. If, however, it is as open-ended as it appears—and we know what the demands for flood mitigation as climate change and population pressures increase are likely to be—the temptation for insurance companies outside the system, the Government and the population to try to raid the Flood Re surplus for those purposes will begin to increase as well.

Despite the initial attractions, I do not think I can support the rather open-ended nature of the amendment as it stands. However, as we move forward and review the scheme, I hope that the Government and the administrators of Flood Re, along with other stakeholders, will find ways of ensuring a maximal take-up of resilience measures by those who own properties at risk and their insurance companies.

[Lord De Mauley]

My Lords, I thank my noble friend Lady Parminter and the noble Lord, Lord Krebs, for Amendment 14. I am glad to be able to return to your Lordships, having considered the proposals in more detail. As I have said previously, reserves that build up during the lifetime of Flood Re will be used primarily to pay flood claims in the bad years. It will not be easy to identify surplus funds and any decision about Flood Re’s reserves will require a judgment about the level of cover needed for the unpredictable risks it bears. Any commitment by Flood Re to spend a proportion of its reserves in a certain way, such as on betterment or resilience, would potentially increase the amount of capital it needs to hold on an ongoing basis, thereby having an impact on the cost of the scheme and ultimately the levy.

However, it is entirely right that there should be clarity on the principles regarding how surplus reserves would be dealt with, should that situation arise. This is not about small reserves that could provide one or two years’ comfort for Flood Re, but significant additional capital implying that Flood Re is excessively capitalised. It is important to recognise that this is not a situation that we anticipate occurring in the first few years of Flood Re’s life, as reserves will build up only gradually, if at all.

We have previously set out that during Flood Re’s life, we would expect the levy and eligibility thresholds to be set in such a way as to manage down excess reserves. I agree with my noble friend Lady Parminter that it should be open to Flood Re to spend some surplus money on resilience measures if it is appropriate to do so as part of its commitment to support households to prepare for risk-reflective pricing. Flood Re will have a duty to deliver value for money. One of the benefits for both households and insurers of installing property-level resilience measures is that, properly fitted, they can reduce the cost of future claims. Research suggests that for some homes, installing resilience measures can reduce the cost of subsequent flood claims by more than 70%. While we recognise that there is still work to be done to improve the evidence base, a point that the insurance industry raised in the Public Bill Committee on the Bill in the other place, I strongly agree that investment in resilience measures from whatever source could have a role to play in reducing the overall cost of claims over the lifetime of the scheme.

I recognise, too, that it would be helpful to provide greater clarity about how Flood Re will support policy- holders to prepare for transition to risk-reflective prices. We therefore propose that the secondary legislation, which will itself be subject to the affirmative procedure, will set out in more detail the points that Flood Re’s transition plan should cover, including that Flood Re could encourage and incentivise policyholders to make their properties more resilient to flooding. We will also expect Flood Re to consider in broad terms the process for managing any surplus during the lifetime of the scheme, either as part of the transition plan or in its wider governance framework. Parliament will have an important role to play in holding Flood Re to account for its use of resources and the delivery of its purpose, and its directors will be directly accountable to Parliament for that.

In relation to any reserves at the end of Flood Re’s life, as I have previously explained, Clause 71 allows the Government to require Flood Re to transfer a sum of the reserves to government, following consultation with Flood Re. It will ultimately be for the Government of the day, in consultation with Flood Re and Parliament, through affirmative resolution, to decide on the treatment of any reserves. I reassure your Lordships that there is no presumption about how reserves might be disbursed.

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[Lord Whitty]

My Lords, I am grateful to my noble friend Lord Campbell-Savours for tabling the amendment and, more particularly, for reminding the House and the Government that at the end of Report there was still considerable confusion over inclusions and exclusions in Flood Re and, as the poignant examples that my noble friend has alluded to make clear, a considerable amount of alarm out there about the potential exclusion from insurance of leaseholders in particular but also of other groups of people who are not clear whether they are included or excluded. As the noble Earl, Lord Lytton, has just said, it is a question not just of insurance but of current and future mortgage and other loans that one can raise on the property, and it therefore has very profound effects.

As the noble Earl said, whether we need a review every year is one matter, but it is incumbent on the Government to say that we need this continually under review, and the only formal reference to review is every five years. This confusion and alarm need to be cleared up a lot sooner than in five years’ time. I hope the Minister can at least give some reassuring words to my noble friend that that will indeed be done.

[Lord De Mauley]

I thank the noble Lord, Lord Campbell-Savours, for his amendment and I thank him even more for reminding me that, in my excitement over my earlier amendments, I have so far omitted to declare my interests, and I should do so. I own a farm, through which a tributary of the River Thames runs, I have an extraction licence, a bore hole, a house which was flooded in 2007 and a minority stake in a lake. I am glad to put that on the record.

As I explained in previous debates, Flood Re will be subject to regular review. We expect these formal reviews will take place at least every five years. These formal reviews will need to consider the effectiveness of Flood Re in discharging its purpose and functions. Importantly, the reviews will also need to consider the levy and premium thresholds, particularly in relation to its capital model, which we debated in detail earlier in relation to the amendment from my noble friend.

The reviews will also need to consider Flood Re’s effectiveness in managing the transition to risk-reflective pricing over the operation of the scheme. As I said earlier, the secondary legislation will set out in more detail the points that Flood Re’s transition plan should cover. Flood Re will have to lay its accounts in Parliament on an annual basis, and its responsible officer will be directly accountable to Parliament. The Comptroller and Auditor-General will examine Flood Re’s economy, efficiency and effectiveness as well as its propriety and regularity.

It is also important to note that there is nothing to preclude the formal reviews taking place more frequently, which the noble Lord, Lord Whitty, asked me to confirm, should concerns be raised; for example, if it is seen that excessive surpluses are being built up.

I hope that it is clear that Flood Re is going to be regularly reviewed and closely scrutinised, but we need to strike a balance and, in particular, I am concerned about significant risks to the certainty and stability of Flood Re income if it is under constant review. Flood Re, the insurance industry and policyholders need to have some degree of certainty about its operation and Flood Re must be allowed to plan for transition accordingly. Insurance is a long-term business. An annual review of the scheme would be resource intensive and I am not clear what added value it would bring in addition to the current arrangements for parliamentary scrutiny.

In addition to the formal review process which will be carried out at least every five years, as I have described, both the Government and the Association of British Insurers have committed to monitoring the market for flood insurance and will publish the results of that monitoring.

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[Lord De Mauley]

Yes, my Lords.

[Lord Whitty]

My Lords, I thank the Minister for these amendments and for his explanation. I will not oppose any of these amendments, as he is no doubt gratified to hear. I will make two points, one of disappointment and the other of praise.

The disappointment is that among amendments brought forward by the Government at this stage are not those that relate to clarifying the position on abstraction reform and on providing some greater assurance on affordability of water bills. Whoever is in government in the next couple of years must address those two issues with some degree of urgency. It is a pity that we did not manage that in the Bill.

My praise, like the Minister’s, goes to his officials, who undoubtedly gave us a lot of information at the beginning of the Bill and put up with all our idiot child questions throughout the Bill. We made considerable progress, even today. I thank the Minister and the noble Baroness, Lady Northover, for their patience.

Amendment 16 agreed.