My Lords, it is probably appropriate that I follow the noble Lord, Lord Campbell-Savours. I have to admit that I live in a band H property, but it is not in London and I am glad to say that it is built on a hill. My Amendments 160ZA and 161D are in this group. I shall be brief, because there is another larger issue that I want to address.
I tabled Amendment 160ZA to see whether I could flush out the rationale behind the exclusion of certain categories of property from FR, but also because there seemed to be a reluctance to consider both sides of the coin in terms of what is in and what is out of the safety net. What is in identifies and underlines what is out. It cannot be otherwise. The fact of exclusion does not mean that other insurers will not provide some cover, but it does, as the noble Lord, Lord Campbell-Savours, said, have consequences. I have certainly received correspondence suggesting some very significant rises in free market premiums based not so much on the immediate severe risk but on that broader category of material risk that will be flagged up and will lie between those that have no risk whatsoever and those that are protected by the FR safety net. It is in the public interest that any scheme report under Amendment 160 should look beyond the narrow scope of FR inclusions and also look at wider exclusions.
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On Amendment 161D, I wanted to raise an allied issue. Part of the problem is that many of the terms in Clause 69 are undefined, “household premises” being one of them. My amendment would simply insert a definition of “household premises”. Paragraph 14 of the 20th report of the Delegated Powers and Regulatory Reform Committee points to the huge amount of detail that is going to be—to put it bluntly—kicked down the road to be dealt with in regulation, probably towards the end of this year. This creates great uncertainty both for this House, in terms of working out what we are legislating for, and for those homes and businesses which may in due course be affected. Uncertainty, as I know as a professional valuer, is corrosive, and particularly so in the present state of flooding and dislocation of households, businesses, services and infrastructure, of which we have heard a great deal. As a factor in risk
assessment, it is essential to contain it as far as possible. I think that the Government could probably do better on that count because FR is hypothecated on a very narrow basis.
I have already flagged up the issue that I am about to raise with the Minister, and I thank him for his letter to me following Second Reading and for seeing industry representatives last week. The second bullet point in the revised statement of principles states that ABI members will,
“Continue to offer flood cover to existing domestic property and small business customers at significant flood risk providing the Environment Agency has announced plans and notified the ABI of its intention to reduce the risk for those customers below significant within five years”.
The noble Lord, Lord Moynihan, also introduced this point. However, long leaseholds, buy to lets, band H properties and those built post 2009, and small and medium-size enterprise premises fall to be excluded. I assume that they are excluded because there are no government plans to reduce the risk and therefore flood reinsurance cannot underwrite them—that is an assumption that I make. So the many people who thought that FR would ensure future cover for their properties will be disappointed.
I understand that the sustainability of insurance cross-subsidy is an issue, and I do not suggest that this should be perpetuated for any longer than is absolutely necessary—nobody should expect government or society at large to prop up an outdated risk model or practices involving cross-subsidy in the knowledge of much more detailed individual risk. However, this is about a managed transition and it is to the credit of the Government and the ABI that a precipitous withdrawal of flood cover did not occur last summer. However, with the present weather, the exclusions from FR and a lack of clarity over many of the implications of Clause 69 definitions, along with better knowledge— which is always a dangerous thing—we have significant transitional uncertainties. Valuer members of my profession, like me, deal with this sort of thing constantly.
Contrary to what the Defra impact assessment might lead one to suppose, there is no simple gradation of supply and demand via the price system when dealing with risk in property valuation. In the lending world, it is more a case of a simple on/off switch. There are many reasons, but the voluntary banking regulation under Basel III may have something to do with it along with recent memories of toxic loans. I have conferred within my own profession and with the British Property Federation and the Council of Mortgage Lenders. It appears to me that the interdependence of insurance and mortgages is highly significant. Absence of cover for a standard peril, including flood, most probably means no mortgage either.
There is also, of course, the lenders’ ability to look at risk on their own terms, regardless of whether there is an insurance underpinning. It is my belief that, in future, lenders will not be any more indulgent than insurers when it comes to risk, and probably a good deal less so, given the typical mortgage life compared to an annually renewable insurance policy. This becomes akin to what I understand is known as a “red-lining principle”, a term coined in the USA, which the noble Baroness, Lady O’Neill of Bengarve, who is not, I think,
in the Chamber, pointed out to me a few days ago. Put simply, everything within a red line drawn on a map becomes uninsurable and then unmortgageable; disinvestment, deprivation and decline then follow.
The noble Baroness, Lady Gardner of Parkes, who is also, I fear, not here today, reminded me last week of the effects of lender reticence on high-rise and ex-council flats. Value write-offs in these cases might easily be in the order of 10% to 15% without any other environmental risk. Once property of any kind is in a limited market of cash buyers only and with a material flood risk attached, as we are talking about in this instance, write-downs might easily exceed 30%.
The Council of Mortgage Lenders calculates that 5 million residential properties will fall outside the FR scheme, to which might be added—I am guessing—a million small business premises. If a third of those suffer an average write-down of £100,000 due to being in a mortgage ghetto, the outcomes are substantial. Mr Philip Wilbourn, FRICS, an expert in valuation and environmental risk, considers that direct and indirect write-offs could be trillions of pounds. That is a very serious implication. Even if he is only half right, the Government need to take note. It is enough to affect loan books, investment, pensions, tax yields and overall market and investor confidence. This is also about financial security of households and solvency of businesses.
I do not blame FR, but I do suggest that a more holistic approach is needed if market turbulence is to be minimised. Leaving significant sectors high and dry—excuse the pun—has accentuated what is ultimately a latent problem. Nor do I suggest that FR could ever be expanded to cater for this, so we need to look elsewhere. I have written to the Minister suggesting ways in which potential harm might be mitigated. I suggest that he engages in urgent discussions with professionals and lenders as to how some of the very useful measures in the Bill can be fast-tracked to empower and resource local communities, such as those on the Somerset Levels, and foster more initiatives such as Sheffield’s Lower Don Valley business improvement district scheme. I also think that it is time for a change in the lending and insurance markets. The Government have a role in constructively addressing risk and preventing precipitate and unconstrained damage affecting everyone.
I raise this issue because it seems to me that, although it sits outside FR, it is a matter of very great public interest and very great financial import. I thought long and hard about whether I should raise it in the context of the Bill, but ultimately felt compelled to do so. I do not think it is anywhere near a lost cause, but for the same reasons I gave earlier this afternoon that we need investment to go into resilience and flood protection measures, we do not need the plug pulled on the capital value element of properties at the same time. I hope that the Minister, who I am certain will not be able to give me any very detailed response, if any at all, will take this away and that perhaps some aspects of the Bill can be fast-forwarded, if for no other reason than to bring back confidence, which I fear may soon be in limited supply if nothing is done.
The Government need to be on the front foot on this—as, indeed, there is every reason to be—in order to make sure that damage, in terms of the perception of what is being done and how all this is being contained and managed, is brought back into a sensible format.