Summary of responses to the consultation and the Department for Transport response

Question 1

Introduction

Accepted Answer

In the consultation document we provided an explanation of why we proposed to remove the options of deposits or securities as an alternative to conventional motor insurance. These are summarised below.

Securities

Motor insurers are subject to authorisation and the regulation applicable to insurers, such as ongoing solvency requirements and their conduct is regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Security givers which are not motor insurers are not subject to the same stringent regulatory oversight by the PRA and FCA in relation to holding sufficient capital and having adequate risk controls in place. This means an increased risk that they will be unable to pay out in the event of a claim concerning a vehicle in relation to which a security is given.

The Motor Insurers Bureau (MIB) which is funded by a levy on motor insurers will, under the Uninsured Drivers’ Agreement, in Great Britain between the Secretary of State for Transport and the MIB, and in Northern Ireland, between the Department of Infrastructure and the MIB, satisfy claims where the security-giver is unable to pay out, and therefore the third party victim will not be disadvantaged. However, we consider it inappropriate that premium paying motorists (who ultimately bear the costs of insurers) should bear the potential risk posed by a security-giver who has made no financial contribution to MIB.

Deposits

A deposit of £500,000 could be used to exempt a significant number of vehicles for a business from the requirement to hold compulsory insurance. Once deposits are made they are not required to be renewed and a depositor’s financial situation may change significantly from the date the deposit is made.

The deposit might not be sufficient to meet all third party liabilities which arise from the use of the vehicles subject to the deposit. In the case of a serious personal injury claim, this may total millions of pounds so a victim might not be fully compensated.

If the depositor is unable to meet a third party claim, the MIB would not compensate the victim because the liability incurred in respect of that vehicle would not be a liability for which a contract of insurance must be in force to comply with Part VI Road Traffic Act (RTA) 1988 (Article 90(2)(b) of the Road Traffic Order 1981(RTO) in Northern Ireland), and would therefore be outside the scope of the Uninsured Drivers Agreement.

Deposits and Securities

We are also concerned that the deposits and securities regimes might not be fully compliant with European Union (EU) law. The Directive requires compulsory insurance in respect of third party liabilities of the Euro equivalent of approximately £1.2 million property damage, and £6 million personal injury ((under the RTA (RTO in Northern Ireland) for conventional insurance personal injury liability is unlimited)). Neither a deposit of £500,000, in the case of depositors, or a maximum requirement of £25,000 in the case of security-givers, provide any guarantee that such liabilities can be met.

On 23 June 2016, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit day, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation. During the implementation period, the UK will no longer be a Member State of the European Union, but market access will continue on current terms. To give businesses and citizens certainty, common rules will remain in place until the end of the period.

Question 2

Summary of responses to the consultation

Accepted Answer

There were 14 responses to the consultation which proposed the removal of deposits and securities under s144 (1) and s146 of the Road Traffic Act 1988 and Article 90(2)(b) and Article 93 of the Road Traffic Order 1981 in Northern Ireland as alternatives to motor insurance. These can be separated into following categories:

a) 4 respondents which currently have a deposit or a security
b) 3 that were businesses currently without a deposit or a security
c) 4 were insurers or brokers
d) 3 other respondents

A summary of responses to each question were as follows:

Question 1

If you disagree with our proposal to remove the deposit and security alternatives to compulsory third party motor insurance, then how else do you propose we reform these regimes to ensure they are fair, protect victims and are compliant with the law?

The majority of respondents disagreed that these options should be removed. Respondents did not explain how to be compliant with EU law.

Most of those with a deposit or security, and other businesses, usually bus or coach operators which do not presently have a deposit or security, as well as some insurance brokers, wanted the options retained. There was concern that passenger bus service or coach operators had either limited opportunity to purchase insurance for their fleets, or the ability to do so at a competitive price because of the small size of the market. Even some currently without a deposit or security wanted these options to be available for this reason.

Some respondents suggested that instead of removing these options there should be reform. Suggestions included that the size of the deposit should be increased from the current £500,000 per annum as it was recognised that this would not cover a significant injury. Another proposal was that depositors should be required to contribute to the Motor Insurers’ Bureau (MIB) levy, perhaps through a charge on the interest of the deposit which is lodged with the Accountant General of the Senior Courts. They added that this would ensure that the MIB would be able to cover accidents when the deposit was not sufficient to cover the costs of serious accidents by liable vehicles, or if the company which made the deposit could not pay.

One respondent thought that there should be a ‘fit and proper person’ test for a deposit or security arrangement. This would include checks and balances being in place to enable all new entries to the deposit/security arrangements to be ‘fit and proper persons’ with adequate financial resources so the Secretary of State for Transport is confident payments, for which they are liable, would be paid promptly. This respondent also thought that the Department for Transport could refuse to renew the arrangements for those which fail to settle claims when liable.

The respondents that agreed with the department’s proposal included major industry bodies such as the Association of British Insurers (ABI) and the British Insurance Brokers’ Association (BIBA) and one current depositor.

Question 2

For those who currently have a deposit, are security-givers or security-holders.

What would the impact be on your business if we removed the options for a deposit under s144 (1) or a security under s146 of the RTA?

If there would be a significant impact then please explain why?

Most respondents with a security or deposit thought that there would be costs. Only a few organisations which presently use these options quantified these. One stated that it could provide cash flow problems, especially for companies in their infancy. Some stated that there is a limited insurance market with few insurers willing to cover bus and coach fleets and they would need to consider other collateral with their insurers to replace the government deposit or security, which is often the practice for companies with fleets of vehicles.

Question 3

What time period would you consider is appropriate between confirmation that the change will go ahead, and removal of the option, and why?

Most respondents thought that these provisions should not be removed so did not provide an appropriate timeframe. But if they are removed then those which stated a timescale thought that they would require sufficient time to adapt to the change, often more than a year.

One respondent, thought that the current depositors or holders of a security should be allowed to continue with these arrangements, especially if there has been no failure to pay compensation. However, they should be closed to new entrants.

The ABI thought that there should be clear mechanisms in place to prevent ambiguities concerning which party has liability for an accident after the regimes are removed.

Compensation for accidents which happened when a company held a deposit or security but a claim is brought after the regimes are removed.

Question 4

If the deposits and securities regimes were removed and deposits refunded, then how would you propose to ensure that victims receive appropriate compensation for liabilities incurred at the time that you relied upon a deposit, or gave out securities, in place of insurance? Would you support the deposit made by depositors and security givers to be retained for 3 years after the regimes have ended?

Alternatively, do you have another suggestion?

If so please explain?

One respondent stated that few claims are reported after 3 years of the incident date, and even if they were then the reputational risk to the company of defaulting on its claims liabilities / obligations are such that motor claims will be processed before or after the deposit arrangement ceases in exactly the same manner. They added that suitable protection should be in place to protect depositors from a potential prosecution for failing to insure a vehicle when the deposit arrangement ceases. This is because it is not possible to backdate insurance cover. Therefore, as a depositor who has relied on the deposits for a long time, this respondent would need to know that retrospectively they could not be prosecuted for not having held insurance for the period when they relied on the Deposit.

There was support for the 3 year retention period from a couple of other respondents (ABI and Law Society).

Another respondent thought that 3 years was too short as a longer period of retention would be necessary. This would especially be the case for minors who might have a claim many years later. This is because under the Limitation Act 1980 the standard timeframe for making a personal injury claim is 3 years, but if the injured party is a child at the time of the accident then the 3 year limit commences only when the child is aged 18.

A number of other respondents did not think that the regimes should end so did not give a view on a time limit.

Question 5

Do you agree with our analysis of this issue presented in this consultation document?

If not, please explain why not?

There are some who agreed with the analysis. However, several respondents stated that they did not agree with the removal so disagreed with our analysis, with some again stating that they thought the insurance options would be restricted in the market conditions. They explained that an amendment such as the expansion of the MIB levy to include depositors would be a more suitable alternative.

One respondent thought that removing them was not proportionate to the actual risk given that most operators using the options are large responsible organisations.

Question 3

Government response by the Department for Transport in Great Britain

Accepted Answer

The Department for Infrastructure will provide a separate government response for Northern Ireland

We have considered the responses to the consultation. Whilst a majority of the fourteen consultees were against removing these alternatives to motor insurance, we did not receive compelling evidence that would; a) guarantee victims would be paid if a depositor is unable to cover the cost of a high claim; and, b) ensure there is a fair solution to the MIB paying compensation to victims of accidents under the Uninsured Drivers’ Agreement, if a security giver which is not an insurer cannot pay. MIB is funded by a levy on insurers so the cost would be passed on to premium paying motorists. In addition there is a risk that the UK would still be non-compliant with EU law if changes are not made. We therefore intend to make regulations which would remove the options of a deposit or a security under s144 (1) and s146 of the Road Traffic Act 1988. Those organisations which currently take advantage of these will have to purchase compulsory third party motor insurance instead, as required by s143 of the Road Traffic Act 1988.

The reforms proposed by some respondents to the consultation, for example that depositors or security givers (which are not insurers) could contribute to the MIB levy or to raise the deposit above £500,000 are not appropriate because depending on the size of the deposit set, it might still not be enough to guarantee victims full compensation in high value claims. There would also need to be discussions and calculations about how much each company would contribute to the levy, or what the size of the deposit would be increased by, along with amendments to the MIB Articles of Association and the Road Traffic Act 1988.

Although we are not aware that any of the present depositors or security givers have defaulted on their obligations, the retention of these alternatives to insurance would leave open the possibility of it happening in the future, potentially leaving accident victims without compensation. If they were retained then organisations which do not currently have these might apply to have them and may be less solvent, so increasing the possibility of a company defaulting.

Also if the options were retained then there is a risk that we would still not be compatible with EU law. Removing the options would eliminate this risk.

In light of consultees’ concerns about the potential difficulty in obtaining insurance for some fleets due to the market conditions, we have decided to give firms who currently have a deposit or security a transitional period of up to two years from when the law changes to get their affairs in order and arrange compulsory third party motor insurance for their fleets.

In response to concern (by the insurance industry and one depositor) that there should be no dispute about liability for accidents as a result of removing these options, once an insurance policy is taken out by the company so the deposit or security ceases to apply, then liability will fall to the motor insurer rather than the depositor or security giver for accidents which happen from that date on.

In the consultation we proposed that the Accountant General of the Senior Courts could retain any deposits or security for 3 years after the set date for the removal of these options. This would be security for compensation for liabilities incurred at the time that these organisations held a deposit, or took out a security with a security giver in place of insurance, but an accident had not yet been reported or settled. We thought most claims are likely to be reported within 3 years. However, we have decided to leave conditions concerning the return of funds as it is currently. Keeping the law as it stands gives us the ability to consider on a case by case basis whether each deposit/security giver can offer suitable protection for victims, rather than a fixed 3 year period cut off which may in practice be either too onerous for a particular company or put victims at risk if there is a risk of ongoing claims. In practice, this may be earlier than 3 years or later. Therefore once insurance is purchased, depositors and security givers can have their funds returned when they have shown they are able to meet outstanding liabilities.

No new deposits or securities will now be granted by the government.

Summary of responses to the consultation and the Department for Transport response

Introduction

Securities

Deposits

Deposits and Securities