HC Deb 16 July 1985 vol 83 cc289-96

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Lennox-Boyd.]

11.55 pm
Mr. Bryan Gould (Dagenham)

It is regrettably true that over the past decade or so Lloyd's, the world's premier insurer, has been wracked by a succession of scandals. No one doubts that Lloyd's is now painfully, if somewhat belatedly, grappling with those problems and is doing a great deal to put its house in order, but the consequences of those earlier failures are still emerging, and Lloyd's is inevitably caught up in the need to resolve those outstanding difficulties fairly and effectively.

The most significant of the recent troubles is that involving the PCW syndicates. The way in which Lloyd's and other authorities respond to this case raises at least two matters of substantial public interest.

First, in a case where a number of people at the heart of Lloyd's perpetrated frauds and thefts involving up to £40 million over some years, why have no charges yet been brought? After all, these matters came to light well over two years ago. Fraud cases are admittedly complicated, and the major figures have admittedly fled the jurisdiction, but that should not have prevented the bringing of prosecutions, which in itself would have done a great deal to reassure City opinion—and, indeed, opinion beyond the City—that the authorities were taking these matters seriously.

The dilatoriness of the Director of Public Prosecutions leaves a real question mark over the Government's determination to deal with City fraud. There is a sharp contrast between the huge police operation which was mounted in Oxford a year or so ago to bring to heel a handful of some of the most vulnerable people in our society—those who had allegedly been party to minor social security frauds—and the zeal shown in apprehending them, and the failure so far to take any action whatever in the courts in respect of fraud on a truly massive scale. That sharp contrast must leave the Government open to charges of double standards. They must answer the question: why is it that there appears to be one rule for those who transgress in a minor way, but apparently a quite different rule—and one which does not seem to be applied—for those involved in substantial fraud in the City?

The second major issue of public interest arising from the PCW affair is the damage which has been done to Lloyd's and to the City's reputation. It is damage which arises not just because of the original fraud and Lloyd's failure to prevent or detect it, but now also by virtue of the inadequacy of Lloyd's response to the substantial losses which have since emerged.

It might be useful if I briefly recount the history. In 1982 it became clear that two underwriters, Peter Cameron-Webb and Peter Dixon, had over a long period defrauded the names for whom they managed underwriting syndicates, and defrauded them of as much as £40 million. The chairman of the parent company of the managing agent, the brokers Minet, was involved also in the frauds to a minor degree. When this came to light, Minet was active immediately in recovering some of the money, and with another major broking firm contributed some of its own money to make good and cover the losses. The names who accepted the offer of money from Minet under the arrangement—over 99 per cent. of those involved accepted—did so on condition that they signed an agreement which prevented them from bringing any further legal proceedings against Minet or anyone else in respect of the losses. In effect, they assigned their legal rights to a company set up jointly by Minet and the other broking firm which was involved.

The Department of Trade and Industry, Lloyd's and Minet all set up inquiries into what had gone wrong; little has emerged as a consequence of the inquiries so far. All those institutions, including the Department, have purported to regard the £40 million loss which became apparent in 1982, and the arrangement which was then made to reimburse those who were defrauded, as a self-contained episode under which a line could safely be drawn. Unfortunately, that does not seem possible any longer. It has now emerged that substantial further losses have emerged. The names have been called upon in recent months to contribute over £60 million this year, and it is estimated that their total liabilities may be as much as £130 million.

It is the question of how to treat the new development which is the real issue in the debate. Lloyd's takes the view that these further and potential losses are to be regarded as ordinary trading losses, that they have nothing to do with the earlier fraud, and that the principle of unlimited liability must therefore apply to them. The Minister wrote in a recent letter that he sees no case for extending his departmental inquiry into the original fraud to cover the new situation which has been revealed. Minet, whose chairman I met a day or two ago, says that it did all that could be expected of it to resolve the problems caused by the PCW fraud and that subsequent losses are little to do with it and not its responsibility.

These attitudes cannot be supported. They are fatally undermined by what we now know about the way in which the PCW syndicates were operated and by the way in which the victims of the fraud have been dealt with. First, there is the deal which the names were told would resolve the problems and which involved their signing away any further rights that they might have. That deal is now seen to have been seriously deficient. If it were tested in the courts, it would in all probability be found to be invalid. This is because information which was available to Minet and Lloyd's at the time that the deal was signed last year, and which was material to the question of further losses, was at the very least not properly interpreted by Lloyd's and Minet, and was certainly not disclosed to the names. The deal is almost certainly vitiated by the fact of nondisclosure to the names.

Secondly, an independent inquiry carried out by Price Waterhouse, and recently handed over to the steering committee of names affected, shows that the accounts of the syndicates over a long period were "grossly manipulated" and that material facts were concealed. Those are matters for which Minet, as the parent company, and Lloyd's, as the supervising authority, must surely bear some responsibility.

Further, the money which was recovered by Minet and used by it to reimburse names for the originally disclosed losses of £40 million was obtained by the cancellation of certain reinsurance contracts. In view of the way in which other reinsurance arrangements operated, which were conducted through PCW-controlled companies and which were described by Price Waterhouse as extremely prejudicial to the interests of the names mainly affected by the losses, and because of the underlying context of the way in which the reinsurance arrangements worked, the consequence of the deal and the cancellation and return of premiums on some reinsurance contracts was to leave the names without any effective reinsurance cover. The fact that the price of accepting the deal was to leave them without that cover was not made clear to the names at that time.

The fourth point—admittedly it affects only a small group of names—is that that minority of names which insisted, despite strong pressure to dissuade them from doing so, on taking out stop-loss policies, have now discovered that those policies were placed with PCW baby syndicates and were framed in terms which makes them worthless. As ordinary Lloyd's policyholders, therefore, as well as in their capacity as investors in Lloyd's, those names who took out those policies have good reason to feel aggrieved.

Fifthly, it is clear that much of the underwriting done on behalf of the names over that period, which involved a high proportion of long-tail business, much of it to do with insuring against asbestosis claims in the United States and in respect of which the recently disclosed losses principally arise, was done in breach of Lloyd's rules and limits on the amount of underwriting to be done. That was something, again, that Lloyd's failed to detect or prevent.

The whole miasma of accounts being manipulated, of reinsurance arrangements which were fraudulent and prejudicial, of insurance policies which turned out to be worthless, of failure to disclose material facts and of breach of some of the most fundamental rules, leave the names, who are now required, according to Lloyd's to pick up the bill for losses which might amount to £130 million—all arising as the result of a succession of nefarious practices—feeling not a little hard done by. Few objective observers would not conclude that they have justice on their side.

What is more important, the combination of events makes it extremely difficult for Lloyd's to adhere to its position of disclaiming responsibility for what has happened and of maintaining, with the Department, that the losses arose from an ordinary course of trading.

The truth is surely that those further losses arose, as did the earlier ones, which are plainly attributable to fraud, from one continuous course of conduct. There were fraudulent defalcations which had the inevitable consequence that the underwriters involved in that fraud were then compelled to give top priority to maximising immediate premium income—irrespective of the nature of the business, the risk undertaken and the Lloyd's rules—with the prime and overriding objective of getting in the money so that they could conceal the fraud and escape detection for as long as possible.

It is not possible to draw a line under the £40 million loss, which is attributed to fraud, and then to say that any further losses were unrelated and that the ordinary principles of unlimited liability should apply.

Lloyd's responsibility is engaged, because throughout the period it was, and claimed to be, the regulatory and supervisory authority. It was its responsibility to ensure that the rules were enforced, that fraud was detected and that the managing agents were not just competent but honest. I make that latter point because I believe that the chairman of Lloyd's is on record as saying that the responsibility of Lloyd's is to ensure that managing agents are competent, but he stopped short of saying anything about honesty. I cannot believe, according to the principles applied by Lloyd's, that it is possible to be competent and yet to be dishonest.

Lloyd's has not so far faced its responsibilities, and the consequences of a continuing failure to do so will be extremely damaging, not least to Lloyd's. There is the prospect of protracted and expensive litigation, dragging through the courts for years to come, guaranteeing unfavourable publicity for Lloyd's throughout that period.

The whole process will certainly be repeated on a much grander scale in the American courts, as a number of American names are also involved. It remains to be seen whether in any litigation Lloyd's would attempt to avail itself of the defence available under section 14 of the Lloyd's Act 1982, which grants Lloyd's immunity against legal action. That provision may be held not to apply retrospectively to acts and omissions which arose before 1982.

If Lloyd's were to attempt to rely upon that defence it would be ironic, because it insisted on that provision when the 1982 Act was being discussed, on the ground that it was essential to provide it with a important instrument for carrying out that supervisory function. It would be ironic, to say the least, if it were now to use that provision as a shield to protect themselves against the consequences of the failure of carrying out that duty to supervise.

The City of London is going through a difficult period of rapid change. Therefore, it is important that City institutions are seen to be operating properly in the interests of investors and the wider public. Lloyd's can, if it wishes, continue to bury its head in the sand for a time, but the losers would be not only those who have been the victims of the fraud, which it was Lloyd's responsibility to prevent, but the good name of Lloyd's and the City of London.

One consequence would be the discrediting of the principle of self-regulation. Why should anyone in these circumstances be prepared to entrust to Lloyd's the privilege of self-regulation when the record shows not only its failure to prevent abuses—a failure that involves not just a few crooks at the margin but some of those at the heart of the Lloyd's establishment, which is what is such a cause for concern—but its failure to take responsibility for the fact that it has not carried out its supervisory duties effectively?

The consequence of this is that a new Labour Government would be obliged to look again at how Lloyd's is regulated, just as we would wish to see self-regulation in the City looked at again. In the new circumstances arising in the City, with such a rapid change of institutions and technology, there is likely to be a premium on the dearest and most direct form of statutory provision, without undue bureaucracy, but at least guaranteeing to investors adequate protection.

In the meantime, the Minister has a major responsibility. His Department has the overall responsibility for supervising the insurance industry. He must talk to the Lloyd's council and extend the ambit of his inquiry to cover the events that have occurred subsequently. He must knock some heads together. The future operation and good name of the City are at stake. No one suggests that Lloyd's should take the full financial burden of what is happening. Lloyd's must at the least take the responsibility of negotiating an agreement that is seen to be fair and acceptable to all the parties. The Minister's duty is to guide Lloyd's towards that point.

12.12 am
Sir Anthony Grant (Cambridgeshire, South-West)

I piloted through the Lloyds Act in 1982. That Act was supported by the Opposition, most notably and competently by the hon. Member for Oldham, West (Mr. Meacher). The Lloyd's council has exercised its powers under the new legislation responsibly. It is right to have an inquiry, but it must not be unduly delayed. The worst thing for the good name of Lloyd's, and for everybody else, would be a prosecution that failed. That would be disastrous. I am sure that my hon. Friend the Under-Secretary will deal with that.

The only point that should be stressed—and I hope that my hon. Friend the Under-Secretary will stress it for the good name of Lloyd's and the City—is that the scandal and dreadful plight of the syndicate names is internal. No policyholder outside has suffered the loss of a single penny.

12.13 am
The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Alex Fletcher)

I am glad that the hon. Member for Dagenham (Mr. Gould) acknowledged that Lloyd's has been reviewing the rules and regulatory procedures with great energy for some time, and it is putting its house in order. However, I cannot agree to any suggestion to the effect that it is burying its head in the sand.

The hon. Gentleman referred to the Government's monitoring of Lloyd's, concentrating particularly on the developments surrounding the syndicates that are under pressure. The hon. Gentleman gave an account of the events that took place at Lloyd's, which is helpful because it saves me from doing so in the short time available, even if it was his version of events.

It is plain that the matters connected for example with the Richard Beckett Underwriting Agencies Ltd. involve a complicated chain of circumstances. However, I refer immediately to the point raised by my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant) because it is a very important and basic point for the House to remember. The policyholders, the consumers, are not at risk in any of the matters that are causing concern in the House and elsewhere.

Mr. Gould

I think that the Minister will accept that those who took out stop-loss policies are in a special category, and are at present at risk as Lloyd's policyholders.

Mr. Fletcher

I accept that those people are in a special category.

Against that background, I should like to summarise the actions that have been taken by the Government and Lloyd's. Allegations of irregularities in the conduct of companies within the Alexander Howden Group PLC and Minet Holdings PLC Groups emerged in the autumn of 1982. Inspectors were appointed by the Department of Trade and Industry in September and November 1982, under section 165 of the Companies Act 1948, to investigate the affairs of both groups.

I should like to make it clear that the Department maintains close contact with the inspectors. Their investigations are well advanced and they are keeping an close touch with current developments, including the recent report by Price Waterhouse, which has been made available to them and the Department. The matters dealt with in the report are within the scope of the inspectors' investigation. If it were necessary to extend the inspectors' powers in any of those matters, that would be done.

I expect to receive the inspectors' reports early next year. It is my expectation that both reports will be published, with the qualification that to avoid any possible prejudice, publication would be delayed while prosecutions were under consideration or in progress.

As the hon. Gentleman acknowledged, the question of prosecution is a matter for my right hon. and learned Friend the Attorney-General and the Director of Public Prosecutions, but my Department is in close touch with the DPP, and police investigations are continuing.

As a self-regulating market, Lloyd's has its own powers to deal with irregularities. In the Howden and Minet matters, the initial step was to appoint committees of inquiry comprising leading counsel and an accountant. Both inquiries have reported, the reports were made available to the Department, the Department's inspectors and the Director of Public Prosecutions. The investigations have led to disciplinary action by Lloyd's against a number of individuals.

Looking at the position generally, one sees that there have been a number of other matters where investigations have been initiated. Lloyd's keeps the Department informed of those matters, and the police or the Director of Public Prosecutions are also informed by Lloyd's where necessary.

The council of Lloyd's has taken other actions in relation to RBUA and its syndicates. There has been the decision to introduce a new agency company, headed by Sir Ian Morrow and others from outside Lloyd's. There is the new fact-finding investigation into RBUA's operations from 1983 onwards, and there is the extension of the date for members to show their ability to comply with the solvency test.

The normal date for the test cannot be extended for long, because Lloyd's has to prepare statements of the whole business of Lloyd's and other documents for submission to regulatory authorities in many parts of the world to comply with local legislation. I understand that a majority of the 375 members affected by RBUA's losses have now met the solvency test.

It appears that some of the latest problems stem from the particular sort of risks underwritten. Insurance companies around the world bear the financial scars of some business underwriten in the United States of America. The size of the wound became clearer to many during 1984. Members of Lloyd's participating in syndicates with a substantial exposure to this business are not free from the consequences.

I emphasise, therefore, that both Lloyd's and the Government took action when it became apparent that there were problems. Lloyd's has taken disciplinary action where appropriate and has launched its own inquiry into the latest difficulties of the affected syndicates, as well as taking various other measures to help the names involved.

We are keeping in close touch with Lloyd's and we promptly sent in Companies Act inspectors to the Peter Cameron Webb syndicates when it was clear that there might be fraud or malpractice. I repeat that we can extend the investigations should other matters come to light which make it necessary to do so.

The DPP is considering the evidence gathered in the course of the inspections and, as I said, police investigations are in progress. These are, however, complex areas and I am sure that the hon. Gentleman will appreciate the need for a proper case before bringing criminal charges, frustrating though that may be to those who, clearly, would like to see justice being done. While we regret the fact that some names are facing substantial losses, there is nothing to imply that a Government inquiry into Lloyd's generally is either necessary or desirable at this stage.

To put matters into perspective, it is worth making two points. First, in respect of the 1982 year of account, there were 431 syndicates trading at Lloyd's and the losses disclosed by the Beckett agency involved three of those syndicates. Secondly, the total number of members of Lloyd's in 1982 was 20,145 and in 1985 there are 26,050. The number of members affected by the Beckett agency syndicate's losses is 375.

I appreciate the concern that has been expressed in the House about the situation at Lloyd's, and of course we are all concerned about the reputation of Lloyd's which is important to the national economy and which is worldwide, although I understand, somewhat from my own experience of travelling abroad and from information I have from Lloyd's, that its business is not suffering in any way from the inevitably bad publicity that is following on these matters. It is sometimes necessary when travelling abroad to make the point that my hon. Friend mentioned, namely, that the consumer, the policyholder, is not in any way at risk as a result of the matters that have taken place at Lloyd's.

I believe that proper action is being taken by Lloyd's and by the Government and, as I said, we shall use the powers available to us if events prove that a further extension of the investigation or some other action is required by the Department. But I cannot accept the suggestion, put albeit mildly, by the hon. Gentleman that the events at Lloyd's are in any way a criticism of self-regulation. Since the new powers were made available to Lloyd's in 1982 by Parliament, Lloyd's has moved vigorously and effectively to improve its procedures, and the further need for self-regulation and the extension of powers in this sphere which I expect will from part of legislation next year, covering the whole of the financial services industry—

Mr. Gould

And Lloyd's?

Mr. Fletcher

No, because Lloyd's already has its own powers and, as I said, is exercising those extremely effectively, not least in its attempt to get to the bottom of the difficulties that are the subject of this debate.

In the legislation that I hope will come before the House next year, covering financial services generally, lessons will be learnt. Lloyd's will learn lessons from what has occurred and we in the Department and others in the city will learn lessons from these events from the point of view of rule-making and regulation, and I assure the House that we shall put those lessons to good use.

Question put and agreed to.

Adjourned accordingly at twenty-four minutes past Twelve midnight.