Memorandum by the Association of Lloyd's
The Financial Services and Markets Bill ends
the long standing right of Lloyd's to regulate itself. I am writing
as Chairman of the Association of Lloyd's Members, which represents
the majority of the Names who continue to underwrite. Names, in
the broad sense of individual capital providers, supply £3,500
million of capacity to the market, and the regulation of Lloyd's
is of vital importance to them.
The last two decades have seen a massive failure
of self regulation at Lloyd's, which inflicted losses exceeding
£8,000 million on Names, and which brought the market to
the brink of insolvency. These losses were not the mere product
of misfortune, although they were triggered by a variety of catastrophes
and claims arising from asbestosis. However, their magnitude and
their concentration on a minority of syndicates at Lloyd's arose
from gross negligence and a failure of regulatory supervision.
Five separate High Court judgments found that there had been culpable
negligence by Lloyd's agencies and awarded the Names involved
the most substantial damages in English legal history.
Against that background, the ALM supports the
intention of the Financial Services and Markets Bill to bring
the regulation of Lloyd's under the Financial Services Authority.
However, we are very concerned that the Bill may not enable the
FSA to regulate the market effectively and that there may be a
dangerous combination of responsibility without effective powers.
Everybody accepts that over the last four years
there has been a very substantial improvement in the regulation
of Lloyd's. The Regulatory Division has a strong and effective
director and a staff who have made great progress in remedying
the faults of the past. They should remain in place, and continue
to work in close liaison with the market, an essential condition
for effective regulation for a market place as idiosyncratic as
that of Lloyd's. We do not advocate the creation of a Lloyd's
Department at the FSA and the absorption within it of the Lloyd's
However, it is clearly time to change the Regulatory
Division's reporting lines. At present the Division reports to,
and is subordinate to, the Council of Lloyd's. It is, of course,
tempting to say that, given the enormous task the FSA faces, it
would be much the simplest solution to leave the Council to get
on with it, with the FSA merely retaining a degree of oversight,
as is currently proposed. The implications of this decision would,
however, be very hard to justify. One of the key features of the
creation of the FSA is that for the generality of financial services
it sets up a regulatory structure clearly separated from the activities
and markets regulated, a principle which should obviously be applied
to Lloyd's too. If things are left as they are, the Regulatory
Division and process will remain subordinate to a Council which
can override byelaws or decisions put forward by the Regulatory
Division. The Council of Lloyd's always contains a specified number
of Working Members who, together with other "insiders",
have the power to block byelaws and exercise wide ranging influence
more generally. This would mean that at Lloyd's, alone in the
FSA's domain, one would perpetuate the inappropriate practice
of the regulated employing and controlling the regulators.
This problem is far from theoretical. Not much
more than two years ago, a High Court judge found that Stephen
Merrett, who had only just ceased to be Deputy Chairman of the
Council of Lloyd's, had intentionally deceived both the auditors
of his syndicate and the Names on it as to their liabilities.
The Names were awarded damages of over £100 million. Other
members of the Council have been defendants in similar litigation,
or have actually been the subject of disciplinary proceedings
brought by Lloyd's itself. We believe that the FSA must be able
to control the Regulatory Division at Lloyd's directly.
We are also concerned with the Bill's provision
that, banks apart, all the financial institutions to be regulated
by the FSA, including Lloyd's, will be authorised automatically
when the Act is implemented. While this is appropriate and inevitable
for the other bodies, the starting position of Lloyd's is different.
It has not been subject to the previous 1986 Financial Services
Act or any other external scrutiny. Hence there can be no confidence
that the Council's constitutional arrangements and practices are
appropriate for handling regulatory issues under the new Act.
Particularly if it is intended to proceed with the "preferred"
solution, there may well be a number of steps and undertakings
which it would be appropriate for the FSA or Treasury to require
the Council to undertake or commit to before authorisation. Since
we understand that the FSA is likely to arrive at its views on
how to arrange the regulation of Lloyd's in the relatively near
future, this is an urgent issue, which presumably should be recognised
in Clause 190 in the legislation.
THE 1982 ACT
We were very concerned to learn that it had
been suggested to the Committee at two separate hearings that
the Financial Services Bill should be amended to give the Treasury,
at the request of the Council of Lloyd's, the power to amend the
1982 Lloyd's Act.
We recognise that the 1982 Act restricts Lloyd's
in many ways, some of which may be commercially disadvantageous.
So we understand why it can be argued that it is desirable to
amend the Act.
However, imperfect though it may be, the 1982
Act also contains vital safeguards for the members of Lloyd's,
of whom the Names and other capital providers continue to be a
vital part. For example, if the Council passes a byelaw, which
is perceived to be against the interests of the members, they
have the right to revoke the byelaw at a subsequent General Meeting.
It is a vitally important point that the vote at such meetings
is conducted on a one member, one vote basis.
Of course, it will be suggested that the intention
of giving Lloyd's and the Treasury the power to amend the Lloyd's
Act would only be used for financial regulation, since this is
the purpose of the Financial Services Bill. The difficulty with
this argument is that financial regulation can have a very direct
impact on the capital and income of Names at Lloyd's. Indeed much
of the regulatory debate since 1995 has revolved around how far
regulatory policy should preserve a level playing field or, rather,
be tilted to encourage non-aligned capital providers to leave
The creation of any such broad power, with its
potentially major implications for the market place and its participants,
should be very carefully considered. To avoid controversial and
potentially fundamental changes in a private Bill designed to
protect the rights of a wide range of private persons, both corporate
and individual, every care needs to be taken to ensure that there
is full provision for those individuals to safeguard their
rights.The process of change should be an open and fair one.
The best way to achieve this would be to provide that any amendment
must have been previously approved by a substantial majority of
the members of Lloyd's, say 75 per cent voting on the one member
one vote basis enshrined in the 1982 Lloyd's Act. If one did
this, it would be reasonable to confine the electorate to members
currently underwriting at Lloyd's, since these would be the parties
affected by any amendment to the Act. A further essential safeguard
would be that any such amendments should be approved in advance
by the FSA.
29 March 1999