HL Deb 22 January 1987 vol 483 cc1046-52

4.15 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)

My Lords, it may be for the convenience of the House if before embarking on another Committee stage I repeat the Statement being made in another place by my right honourable friend the Secretary of State for Trade and Industry on the subject of the Neill Report. The Statement is as follows:

"With permission, Mr. Speaker, I should like to make a Statement on the Report of the Committee of Inquiry into Regulatory Arrangements at Lloyd's.

"I have today laid before the House as a Command Paper the report of Sir Patrick Neill and his colleagues. I am sure that the House will wish to join me in expressing warm appreciation of their work.

"The committee was set up by my predecessor a year ago to consider whether the regulatory arrangements being established at Lloyd's under the Lloyd's Act 1982 provide protection for the interests of members of Lloyd's comparable to that proposed for investors under the Financial Services Act. The committee recognises the major contribution Lloyd's makes to the national economy. The report notes that the Council of Lloyd's has strengthened the regulation in its market by putting into effect a major programme of reform since the 1982 Act entered into force.

"The committee makes 70 recommendations which should bring the two levels of protection into line. The committee does not believe that the solution to the problems they have identified is external supervision of Lloyd's or an extension of the role of my department. It recommends instead a change in the balance of representation on the Council of Lloyd's by increasing the number of nominated independent members: they and the elected non-working members would then command a majority.

"The committee also recommends an enhanced role for the nominated members in Lloyd's, for example, through their chairing important committees.

"The committee's conclusion is that its recommendations will make the protection of Lloyd's members comparable to that provided under the Financial Services Act. The committee has moreover taken care to strike a balance between the safeguarding of members' interests and the protection of Lloyd's policyholders.

"The Government believe that the report provides a good basis for the further development of measures to protect the interests of Lloyd's members. I shall of course be discussing the report with Lloyd's. I shall want to hear their proposals and timetable for action. I am looking to Lloyd's to take all the necessary steps to bring the protection offered to members up to the standard of the Financial Services Act. I shall therefore be following closely with them their progress in this matter."

My Lords, that concludes the Statement.

Lord Williams of Elvel

My Lords, the House will be grateful to the noble Lord for repeating the Statement which his right honourable friend has made in another place. I am sure the House will also wish to join in expressing warm appreciation of the work that has been conducted by Sir Patrick Neill and his colleagues. We were only in possession of this report this morning. It is a very large work and very detailed, and all reactions and any questions that I may be asking on behalf of the Opposition at this time are by their very nature preliminary. We shall have to study this report in the detail that it deserves and no doubt we shall have an opportunity to discuss it when we have done so.

The Neill Report, if I may refer to it as such, catalogues certain improvements that have been made since 1982 in the regulation of Lloyd's and the protection of Names but it comes firmly down on the side of those who believe, and have believed—to quote from the summary at 1.5—that the regulatory arrangements now in place do not, provide protection for Names comparable to that proposed for investors under the Financial Services Act". In other words, self-regulation since 1982 has not satisfied the committee in this respect. The recommendations of the report to which the noble Lord referred in the Statement are many and various but, as he pointed out, there is one recommendation which is of prime importance; that is, that the composition of the council should be changed.

My first question to the noble Lord is whether he has had any indication at all from Lloyd's that it accepts that major recommendation. The second question refers to the proposed composition of the council. It is easy to believe that the nominated members, although they may be nominated by independent bodies, are not necessarily those who will have the public interest in mind. I say "not necessarily" and I choose my words very carefully.

They are very distinguished people who have been nominated. But I should like to ask the noble Lord whether the Government have any thoughts, and indeed whether he has heard that the Council of Lloyd's has any thoughts, on changing the method of nomination so that the public may be satisfied—in the way that the public will be satisfied when the Financial Services Act is in place in respect of other organisations of a comparable nature—that the public interest is properly represented.

Thirdly, the report makes no recommendation as to the independence of the chief executive. This is a matter which was widely discussed at the time of the resignation of the previous chief executive, and I think your Lordships will want to hear from the Government what view they believe they should take as a result of this report on that major point and whether they have any indication from the Council of Lloyd's of what view the council takes.

The main problem with this report, in our view, is with the terms of reference, because the terms of reference are quite clearly stated in the report. Paragraph 1.1 reads as follows: Our task has been to consider whether the regulatory arrangements at Lloyd's provide protection for Names comparable to that proposed for investors under the Financial Services Act, 1986. In so far as it goes, of course, the report addresses itself quite rightly to that point. Nevertheless, the report refers to the working Names, and indeed approximately one-sixth of the Names at Lloyd's, according to paragraph 2.8 of the report, are working Names; and it is my understanding that a great number of these working Names are, in fact, Lloyd's brokers.

The report quite rightly does not go deeply into, and says that is does not go into, the question of regulation of Lloyd's brokers. Are not Lloyd's brokers themselves, as brokers, covered by the Financial Services Act? Are we not therefore, if that is the case, in the position, if the recommendations are implemented in full, even so of having two systems of regulation running parallel, one which follows the Financial Services Act and regulates brokers, and another following the recommendations in the 1982 Lloyd's Act, which also regulates brokers but from a different point of view? Are we not now fully familiar with the defects of the Takeover Panel and the operation of the Financial Services Act, where two different systems of regulation try to go hand in hand?

Finally, I think we would take the view that so far as it goes this report is an advance. We hope very much that the Council of Lloyd's will accept the recommendations, and that we shall be coming back to that later. Nevertheless, there is nothing that I have seen in this report which deflects us from our view that the proper organisation of Lloyd's should be as a self-regulating organisation under the Financial Services Act, and we believe that that is something which the Government should bear in mind and should wish to consider again. So far as it goes, this is fine, but I note in paragraph 1.10: This change does not achieve precise comparability with the arrangements that will exist under the Financial Services Act". It is that comparability, which is required in order to re-establish confidence in the market that we all wish to see, that we hope the Government will bear in mind.

Lord Diamond

My Lords, my first duty is to make it clear that, although there was a time when I had a financial interest in this matter—that is to say, up to 1964 when I was a very modest Name—at that date I became Chief Secretary to the Treasury and since then have had no interest whatsoever. We on these Benches also wish to thank the Minister for repeating this very important Statement and to join in thanking all those, particularly the chairman, who have devoted so much time to preparing a thorough and speedy report which is very valuable in present circumstances.

I want to make it clear that we welcome the Government's Statement. We welcome the Government's decision that the interests of Lloyd's, the interests of this country and the interests of policy holders are best sustained by Lloyd's having the responsibility for seeing that their business is carried out with complete integrity, and that that should be their responsibility and not the responsibility of the Government. We think that they are best equipped to do this, as indeed is, in my view, every professional body, to know where to look for things going wrong and to have the strongest possible feelings against any member who transgresses. We think for those reasons, and for seeing that this country has the necessary repect for the integrity of Lloyd's which will continue the sense of confidence which it enjoys throughout the world, that the Government are right in the main decision that they have made.

Nevertheless there are one or two questions which I want to put to the Minister in order to clarify some of the sentences in this Statement. As we know, there is to be an enhanced role for the nominated members in Lloyd's and, in particular, the Statement says, for example, through their chairing important committees"; that is, in addition to the outside members having the majority, should that arise, they should have the right to chair important committees. I ask whether that involves any change in the 1982 Lloyd's Act, which I understood stipulates certain members of Lloyd's for chairing certain important committees.

Then the Statement refers to the safeguarding of members' interests and the protection of Lloyd's policyholders. May I ask the Minister whether I am right in believing that there is not a single case where a policyholder has been denied the benefit of his policy through a default of any underwriting member or syndicate of Lloyd's? The Statement goes on: The Government believe that the report provides a good basis". I accept those words completely. I agree that considerable further discussion needs to take place. For example, should not the independent members include an important link with the SIB, as happens at the moment? Should not that be, somehow or other, made a permanent arrangement, so that there would be no possibility of the members of the committee being unaware of the interpretation of their responsibilities being undertaken by the SIB? That interpretation may vary from year to year as new circumstances arise, and it is important that the attitude of the Lloyd's supervisors should be exactly the same as the attitude of the City supervisors, if I may put it in that shorthand language.

Then the Statement refers to the Secretary of State wanting to hear their proposals and timetable for action. Of course we understand that. Am I right in saying that that means the Government will make a further Statement about this matter when an appropriate stage in discussions with Lloyd's has been reached?

4.30 p.m.

Lord Lucas of Chilworth

My Lords, I am grateful to the noble Lords, Lord Williams and Lord Diamond, for their reception of the Statement which I have just repeated. I think that both noble Lords will appreciate that the Government have not sought the views of the Council of Lloyd's as regards the report; nor have we put to the council our views on that report. Therefore I should prefer to consider many of the questions raised this afternoon as points of view expressed by both noble Lords. Those views will of course be communicated to Lloyd's. However, there are one or two of those questions that I can answer.

Perhaps I may turn first to the question of the noble Lord, Lord Williams, concerning whether or not Lloyd's should have been within the ambit of the Financial Services Act. We did not think so at the time of the passage of the Bill which is now the Act, and we do not feel it is necessary at this time. The view of the noble Lord, Lord Williams, is quite contrary to the view expressed by the noble Lord, Lord Diamond, who has said that he believes that Lloyd's is best able to regulate its own affairs and protect its integrity. This is a view which we held consistently during our discussions on these matters last year.

The noble Lords, Lord Williams and Lord Diamond, asked me about the composition of the council as regards nominated members. Until we hear the views of Lloyd's as to how it intends to implement the recommendations or otherwise, I do not think that it would be right for me to make any suggestions from this Dispatch Box. No doubt both the council and ourselves will have to give consideration to that point in the light of the response of the council.

As regards the independence of the chief executive, which was a point raised by the noble Lord, Lord Williams, I believe that that, again, is entirely in the hands of the Council of Lloyd's. It will obviously take account of comments that have been made here and probably elsewhere, as well as taking account of the report itself.

The noble Lord, Lord Williams, asked a question on the terms of reference. I do not think there is anything I can say about that matter. Sir Patrick Neill's committee worked along the terms of reference set down in January 1986 and the committee has reported in line with those terms. In regard to brokers, who were mentioned by the noble Lord, Lord Williams, certainly they are covered, as I think the noble Lord recalls, by provisions of the Financial Services Act. How brokers are to be regulated in their responsibilities at Lloyd's is essentially a matter for Lloyd's. I heard what the noble Lord said with regard to the Takeover Panel.

In answer to a specific question which the noble Lord, Lord Diamond, asked concerning whether I knew of any case where a policyholder had been disadvantaged or lost out, the answer is, no; I know of no case whatsoever. When we spoke of the representation and the membership of the council, the noble Lord asked whether any changes would be necessary in the Lloyd's Act 1982. I have to tell him that in the time available to me I have not been able to consider every point. Perhaps I may communicate with him on that question.

The last question raised this afternoon related to the timetable referred to in the Statement. As the noble Lord, Lord Williams, has said, the report is a long and fairly complex one and it needs some study. I should be reluctant to forecast any kind of timetable. However, I certainly anticipate that my right honourable friend will ensure that Parliament is kept informed.

Lord Kimball

My Lords, is my noble friend aware that Lloyd's itself is very grateful to Sir Patrick Neill for his thorough and careful study of the situation? It must be particularly grateful for his finding that, Lloyd's now represents a prime example of self-regulation in action". It is also grateful to Sir Patrick for paying tribute to the energy and determination with which Lloyd's pursued compliance with the 1982 Act by passing new by-laws, by its codes of practice and by its associated regulation.

Is my noble friend aware that at a special council meeting of Lloyd's this morning, on the advice of its legal advisers that it has power within the present Act the council agreed to accept Sir Patrick's principal recommendation on the change of the composition of the council? I am confident that all the 70 recommendations in this report will be approached in the same spirit. I am also confident that the recommendations in Chapter VII on the procedure for Names complaints, which committee I have had the privilege of chairing for the past few years and which Sir Patrick now thinks is inadequate, will be complied with.

Lord Lucas of Chilworth

My Lords, I am most grateful to my noble friend, who has never made any secret of his involvement with Lloyd's and the Council of Lloyd's. I am glad he is able to bring from Lloyd's its gratitude to Sir Patrick Neill and his colleagues for the report. I was not aware that the council had this morning decided to adopt the suggestions made in the report with regard to the change in composition. I am grateful to my noble friend for telling us that this is so. I am particularly glad to hear from him of his confidence about the other 69 recommendations, including those in Chapter VII. The Government look forward to receiving the council's response to the report in due course. We shall then, in our turn, be able to make comments on its actions.

Lord Ezra

My Lords, I should like to join with other noble Lords who have spoken in welcoming this report. It represents a further step in strengthening the regulatory framework within which various parts of the City of London operate. I believe that what is now important is to make sure that these different regulatory frameworks are compatible with one another. My noble friend Lord Diamond, in his remarks, asked whether there would be a continuing and very close liaison between the SIB and the new Council of Lloyd's to make sure that they operate in tandem wherever their interests come together.

Secondly, I should like to raise the question of review. Many people have been concerned about certain developments at Lloyd's which were the reason for this report. Is the Minister able to indicate whether, after a certain lapse of time, there is provision for reviewing the operation of the new arrangements?

Lord Lucas of Chilworth

My Lords, I am grateful to the noble Lord, Lord Ezra, for his general acceptance of the report.

I think I have said all that I can say with regard to the framework of regulations and the compatibility between Lloyd's Council and the SIB. It is not for me or indeed the Government to say what form that relationship should take. I think it is reasonable to say that Sir Patrick Neill and his colleagues over the past 12 months or so have had to make their inquiries under the terms of reference against what I might almost call a moving target, in that there have been so many changes in the past 12 months. I hope that the Council of Lloyd's, with which we are concerned this afternoon, will take careful note of what has been said with regard to liaison with other regulatory bodies.

As to a review, my understanding is that Lloyd's itself keeps its own regulatory system under review. I return to what I said earlier: we have yet to study the report. We have then to consider what Lloyd's has to say to us—that is implicit in the Statement—before I can say anything about further formal reviews.

Lord Williams of Elvel

My Lords, not until after the next general election, I imagine.

Lord Lucas of Chilworth

My Lords, that is a very different question. No doubt the noble Lord looks upon the next election with less anticipation than I do, because I am quite confident that we will be continuing our programmes, successful as they all have been shown to be.