Lloyd's (Self-regulation) (Hansard, 25 March 1991)

§ Mr. John Bowis (Battersea)

I thank my hon. Friend the Minister for Corporate Affairs for answering the debate. Neither of us expected him to have to do so at the beginning of the week, but—because of matters in the courts which I think we both understand—it was felt appropriate to transfer responsibility from the Attorney-General's office to the Department of Trade and Industry. I am grateful to my hon. Friend for coming out on parade tonight.

What I am going to say is in no way meant as an attack on Lloyd's of London. It is much more a plea for that institution to be protected, and for its good name to be ensured. I believe that Lloyd's is one of the great national institutions for good: it has protected millions of people over the centuries and brought billions of pounds to the country. It is the powerhouse of our invisible exports. It has provided investment opportunities for its 26,500 `names', based on risk but grounded in the utmost good faith. I shall centre my speech round that motto of the market.

I am an unashamed Lloyd's supporter. I want Lloyd's to lead for Britain in our drive to make London the financial capital of the increasing market and community of Europe, and indeed of the world beyond; but it will do that only if it is above reproach, and there is not the faintest whiff of anything underhand. Of course there will be the occasional rotten apple, and from time to time changing technology or abused practices will require new safeguards; but so long as the rotten apple is seen to be dismissed the market, and so long as the new safeguards are intelligible and apparent, I believe that the public can be reassured.

The basis of the discipline and integrity of Lloyd's is, of course, the self-regulatory regime as set up under the Lloyd's Act 1982 and subsequent byelaws resulting from that Act and from the 1987 Neill report. One of the most important has been the 1989 "Run-Off Years of Account" byelaw. The temptation has been for Ministers to refer to the newness of the 1982 Act when asked about subsequently emerging evidence of malpractice. It must be given time to settle down, we are told—and, anyway, the actual offence often predates the Act.

I do not dispute that; I submit, however, that, after the best part of a decade's experience of the Act, it has proved inadequate to protect investors entirely from financial disaster, resulting not just from the vagaries of the market but from dubious actions by some people in that market. Sometimes that has led to civil action, sometimes to serious fraud investigations and sometimes to internal—or largely internal—inquiries, which have too often given the appearance more of cover-up than of genuinely seeking to uncover the truth.

I must be careful not to refer to matters that are currently before the courts; I can therefore speak only in general terms, giving general illustrations. I hope, however, that the hypothetical nature of the language of tonight's debate will not hide from Ministers, or from the Council of Lloyd's, the reality of the need for Lloyd's to do 743 more to convince the public that it is serious about rooting out wrongdoing; if not, there will be an unanswerable case for DTI regulations.

I have constituents who have lost very large sums of money as names at Lloyd's. I have constituents who stand to lose their homes because of these losses. Most sensible people who invest in Lloyds as names now take out "'stop loss" insurance against losses beyond a certain point. But some losses are unlimitable because the insurance years when major losses occur may themselves remain open way beyond the three-year norm. That, one might say, is tough, and no more than the name should have known was possible when he or she took the risk and perhaps benefited from the investment over a number of profitable years.

If, on the other hand, reports on the escalating nature of a particular risk, and forecasts of potential colossal levels of claim, are received by leading people in the management of Lloyd's— these are, of course, the same people who are responsible for its self-regulation—and if such warnings are kept secret by them, then one can no longer say that it is tough on the affected names; one has to say that they have been done down by a dishonourable, if not dishonest, act. Their agents and underwriters will have taken risks on their behalf without the full information that was available to others but not disclosed to them. In no way can such a situation be fair and above board, or acceptable under the laws of natural justice.

In some instances, the situation is even worse than that. There have been cases where it has emerged that firms with which those in the know have connections have themselves taken avoiding action and divested themselves of the risk by passing it on to an unsuspecting someone else. At the very least, in such cases, there must be grounds for an independent inquiry. The Chinese walls that are supposed to exist between Mr. X the regulator of Lloyd's and Mr. X the director of a Lloyd's firm of underwriters or brokers are frequently paper-thin. They can be acceptable only if any suspected breach of them is investigated rigorously and by people totally independent of, and not nominated by, the market. That, alas, does not happen. That is my main complaint.

I believe also that, when there is a major financial disaster within one or more of the Lloyd's syndicates—a disaster that is, prima facie, not the result of a fair risk that has gone wrong fairly—the burden should, at least in part, be shared throughout the society. A central guarantee fund, to which all members have to subscribe, protects policyholders. It would seem reasonable to have something comparable for the protection of investors. There have indeed been occasions when such a call has been made on members. Perhaps a system should be instituted whereby a beleaguered syndicate's names might call on such a fund to tide them over while an independent inquiry or a court case was held, and subject to repayment if the loss were found to be fair.

The current problems are, of course, often the product of pre-Lloyd's Act accounts which were not due to be closed until after the Act was in force, and which were then left open because of the unknown quantities of claims. That has muddied the waters when taking a view on the adequacy of self-regulation. On the other hand, if actions taken by Lloyd's under the new self-regulatory regime are inadequate, it is surely no excuse to say that the case being dealt with goes back to a period before the current Act.

744 The main cause of concern has been the unresolved question whether all material information relating to liabilities is always revealed when contracts have been offloaded and when warnings have been received by Lloyd's council from working parties or other outside experts. There are strong suspicions that this has not been the case, and the new self-regulatory framework does not seem to have the capacity to discover the truth.

Perhaps most difficult of all to understand have been the occasions when we are told that a Lloyd's inquiry has found no case to answer, and we subsequently hear of investigations by the Serious Fraud Office. The key justification for self-regulation in the financial world—or other worlds of complexity and technical knowledge—is that practitioners know better than anyone else where the skeletons are or could be buried, and how the system could be or is being abused. It is a poor reflection on the experts when their inquiries exonerate, while outsiders—whether fraud officers, journalists, or other hunters after truth—find a case to answer.

Whether one listens to the Willis Faber director, Mr. James Sinclair, who bitterly attacked the administration of Lloyd's saying, You cannot have confidence in Lloyd's, its policies, regulatory control or agents", or to Lloyd's head of regulatory services, who himself said, We do not feel comfortable about what has happened", it is clear to me that people of integrity and good will within Lloyd's are disturbed at the current state of self-regulation.

I ask my hon. Friend the Minister not to wait for current cases that we cannot mention to be finished but to call in the management of Lloyd's to discuss how better it could carry out its duties to its investors. I believe that my hon. Friend should make it clear that if that is not done to the satisfaction of his Department and of the House, he will consider bringing forward a system of regulation by his Department. A stroke of the pen, or at least a simple Government order, could bring Lloyd's within the Financial Services Act 1986. Above all, my hon. Friend should tell Lloyd's that when its friends, not its natural enemies, are critical of its procedures, it would do well to pay heed.

§ The Minister for Corporate Affairs (Mr. John Redwood)

I am grateful to my hon. Friend the Member for Battersea (Mr. Bowis) for bringing such an important matter before the House, for his opening courtesy towards me and for his opening comments on Lloyd's. As he said, it is a fine and important market that has done a great deal of good over many years. I have every sympathy with the constituents of my hon. Friend and with other names whose case my hon. Friend has taken up. I understand his reasons for circumspection of language, which will partly be mirrored in my remarks.

Although every investor is now warned that investments can go up as well as down, and all new names are told that insurance is a risk business, it is always a shock to make substantial losses. Lloyd's is a unique and important institution. It operates a system of professional independent regulation with a strong practitioner input. It employs 200 full-time staff on the regulatory side, and none of these can be names or practitioners.

There have been significant changes during the past decade in the way that Lloyd's is regulated, particularly to 745 improve the protection of the names. As my hon. Friend said, many of the problems which are still causing losses to names had their origins in the early part of the 1980s, before the reforms were introduced. As he also said, the Serious Fraud Office is currently examining one such set of problems to see whether there is a case that it should take on. If my hon. Friend has specific evidence about this or any other case, it should be sent to the SFO so that it has in its possession all the relevant information when coming to its important decision.

There are, of course, continuing losses for some, not least because the insurance industry has been passing through a low point in its cycle. Low premium rates have coincided with an abnormally high level of catastrophes and with the emergence of unforseeable losses arising from policies often written many years ago.

Lloyd's regulation encourages ethical standards of behaviour, not just obedience to the letter of the law. I recognise that, early in the 1980s, practice at Lloyd's fell short of what was required. In the past 10 years, however, much has changed, as my hon. Friend accepted. By the Lloyd's Act 1982, the constitution of the society was revised and a new council created which began to implement the reforms. The Act gives the Council of Lloyd's the authority and the responsibility for regulation of the members of Lloyd's and all those businesses which operate within its market.

In 1986, the Government set up a committee of inquiry into regulatory arrangements which was chaired by Sir Patrick Neill. The inquiry was prompted by the wish to give names at Lloyd's protection comparable with that proposed for investors under the Financial Services Act. The Neill report made 70 recommendations, which the Government asked the council to implement. This it did. All the recommendations have now been acted upon.

One of the key recommendations was to increase to eight the number of "nominated" members of the Council of Lloyd's. The appointment of these council members, who have no other connection with the Lloyd's market, is subject to confirmation by the Governor of the Bank of England. Combined with the eight external names who are members of the council, the nominated members now form the majority of the members of the council. The council therefore has a majority of independent and non-practising members.

Lloyd's concentrates on disclosure, monitoring and discipline. Regulation has to protect the interests of the policyholders and the names. In doing so, it must allow the people who actually conduct the business—the brokers and underwriters—to get on with their jobs.

The essence of any good regulatory system comprises rule making, applying the rules and dealing with breaches. The council of Lloyd's has powers, which it cannot delegate, to establish byelaws to govern the society and to regulate all who participate in its business. Each byelaw has to be approved by council by separate majorities of the working members and of the external and nominated members, ensuring a balance of commercial relevance and protection for the names and policyholders.

746 A general review department was set up to monitor the ability of agents and brokers to comply with the regulations. It visits agents and brokers active in the market to assess the adequacy of their management, systems and procedures. Investigation and discipline in cases of misconduct are also handled through council committees with tripartite representation.

The information available to names has also been strongly improved. Improved accounting and auditing arrangements have enhanced the competition between agents. An ombudsman has been appointed to investigate complaints by names against their agents or the corporation. A names interests committee keeps the complaints procedures under constant review. No regulatory system can offer a guarantee against all regulatory breach, but there is no reason to believe that a change from Lloyd's present system would achieve higher standards or more willing compliance.

We now need a period of stability, in contrast to the significant changes that have taken place since the events of 10 years ago. Several of the reinsurance contracts between Lloyd's syndicates have resulted in disputes between those who wrote the original business and those who reinsured them. We have to be clear what regulation can and cannot do. Unfortunately, it cannot prevent losses arising from adverse developments in the market or from poor underwriting. The emergence of losses does not necessarily mean that there has been fraud or negligence, but if there is a suspicion of that, evidence must be forthcoming and then action can be taken.

The council can and does offer to conciliate in the case of disputes between market bodies, but ultimately some disputes must be for the courts to decide. Where litigation is involved, I cannot comment.

I do not believe, from what I have heard so far, that there are grounds for a further major review of self-regulation at Lloyd's. It is important to remember that Lloyd's is far from standing still. An important step in looking to the future was the establishment of a task force to examine the basis on which capital is provided to support underwriting at Lloyd's.

My hon. Friend the Member for Battersea has made suggestions tonight on liability and burden sharing. One-year syndicates, individual membership and unlimited liability will all be considered by the task force, which is being chaired by David Rowland, the chairman of Sedgwick, and aims to report before the end of the year. I look forward to that report and support the efforts Lloyd's is making to take on the challenge of Europe and the development of a more global insurance market.

I shall also ensure that the chairman of Lloyd's sees a copy of the Hansardrecord of this debate and my hon. Friend's comments, so that Lloyd's can understand the nature of the allegations about which my hon. Friend is worried and can see the seriousness with which the House takes the matter of regulatory standards in an important organisation such as Lloyd's.