My Lords, I think that no one champions more the huge and wonderful increase in entrepreneurship and small business in the UK. I have often done that here in your Lordships’ Chamber and the Bill contains a lot of useful micro-provisions that are helpful for small business. It has the excellent objective of supporting the UK’s position as the best place in Europe to start and grow a business. I hope very much that the Small Business Commissioner initiative will work. There is certainly the need for SMEs to save the time and costs of going to law to resolve disputes.
I am slightly sceptical about the success which will be achieved in cutting £10 billion of red tape. I am afraid my experience is that the regulatory and administrative requirements on SMEs and sole traders continue to grow inexorably, of which the most annoying to me are the never-ending and pointless AML requirements. By 2018, small businesses will also be faced with the cost and effort of providing pensions, even if they have only one employee. I will also repeat the points that I made in the September economy debate: the EU’s competition Commissioner is obliging the UK to change our very successful EIS and VCT schemes to qualify for EU state aid approval. The changes will limit severely the supply of equity risk capital for SMEs that are moving into a growth phase and, for reasons not yet explained—and contrary in this case to the accommodating facilities of the European Commission’s 2014 risk finance guidelines and the general block exemption regulation—exclude acquiring and sorting out SMEs with problems from qualifying for EIS and VCT status. I declare my interest as chairman of the EIS Association.
I support strongly the expansion of apprenticeships and congratulate my noble friend Lord Baker on the success achieved by university technical colleges in preparing young people for apprenticeships. I also wish the Government every success in stopping overgenerous taxpayer-funded six-figure pay-offs in the public sector.
I will talk about the specific requirements in the Bill for insurers to pay insurance claims within a reasonable period of time, as in Clauses 20 and 21. I suggest that all would agree with the objective of enhancing protection for SMEs and consumers but the provisions in the Bill are causing widespread concern in Lloyd’s and wholesale insurance markets. I should add that I have absolutely no involvement with Lloyd’s or the insurance industry. The CEOs of the Lloyd’s Market Association, Lloyd’s itself and the International Underwriting Association have written to the Economic Secretary, setting out their concerns in detail. I hope that the Government will come forward with their own amendments to
disapply Clause 20 in respect of large insurance risks, where statutory protection is not appropriate or necessary for international business and commercial risks written in London.
The damages for late-payment provisions are the same as those ultimately removed from the Insurance Bill before it was introduced to Parliament in 2014, which was then on the advice of the Law Commissioner. I would like to quote David Hertzell, who was then the Law Commissioner. In his evidence to the Special Bill Committee of the House of Lords on that Bill, he said:
“It is absolutely impossible these days, and probably always was, to draft law that can cover both ends of this huge spectrum of different types of business. We have drafted something that we think fits the vast majority of businesses that sit within the middle of the bell curve. At the more sophisticated end, we expect businesses to take care of themselves, as they do now with their individual contracts, and at the less sophisticated end we have the Financial Ombudsman Service. This legislation”—
which became the Insurance Act 2015—
“is intended to be focused on the mainstream commercial marketplace. We expect the people who operate outside that marketplace to contract on different terms, as they do now. It is a default regime that essentially seeks to achieve as neutral an outcome as possible”.
The Insurance Act, if it is to be amended by Clause 20, will create a difficult framework for the London marketplace. Where Lloyd’s takes real issue with what the Law Commissioner said is that the Insurance Act has not created a neutral regime. Contracting out will be technically and commercially difficult and—the worry is—more so than switching to another legal destination such as Bermuda. The LMA and IUA put forward a proposal at the same time as the Insurance Bill in 2014 to create a remedy of damages for reckless or deliberate mishandling of claims, which seemed to go to the nub of the problem that the Law Commission wanted to cure but without exposing the market to bad faith or speculative litigation. It was a pity that Parliament chose then not to adopt the industry proposal.
There has been no consultation with the LMA or IUA regarding this Bill’s provisions, although HM Treasury said back in 2014 that the Government would continue to work with stakeholders to reach and agree solutions. The Government have not taken heed of what the Law Commission described as the “legitimate concerns” of the London market. Combined with other problems contained in the Insurance Act, the Government are not taking account of the balance required in English law if it is to remain the law of choice for different types of business and, in particular, international insurance business including reinsurance underwritten in the London markets.
The provisions would introduce a further significant element of uncertainty into insurance contracts written under English or other UK law. What would be a reasonable time for payment or reasonable grounds for dispute? Speculative claims for damages are likely to be made as a matter of course when a valuable or complex claim is disputed. Consequential damages claimed could be disproportionate to the cover purchased and the premium paid. Claims handling costs will increase significantly because of speculative, vexatious claims. There will be significant problems in the dispute resolution process, whereby insurers may have to disclose
legally privileged advice to show that they are acting reasonably. Claims reserving will be problematic if large secondary claims for consequential losses are made. All this would lead to higher loss ratios, capital requirements and premiums. Unfortunately, the contracting out of the damages for late-payment provisions within the Bill will be a commercial non-starter, especially in soft market conditions. Wholesale insurers are already subject to FCA regulation in relation to claims handling, where the FCA has not found evidence of any systematic late payment of claims.
The Bill’s impact assessment also contains unrealistic underestimates of the damage for late-payment provisions, with continuing costs of investigating unmeritorious claims of just £375,000 per annum for the entire industry and increased litigation costs of £100,000 for five years for the entire industry. These sums could be absorbed by just one major speculative claim. The impact assessment is also inaccurate and incomplete in other major respects.
Applying enhanced statutory protection against late payment of claims is inappropriate and disproportionate for the wholesale life industry. The net effects and costs will damage the international competitiveness of the London insurance and reinsurance markets and are likely to lead to a rapid switch from English law to other jurisdictions such as Bermuda, with major implications for London. The wholesale insurance industry would therefore like to see Clause 20 disapplied in respect of large risks, as defined under the EU solvency II directive, and reinsurance claims, so avoiding the problems that I have spoken about.
6.41 pm