§ 3.40 p.m.
§ Lord Peston rose to ask Her Majesty's Government whether they consider that the current arrangements for the regulation of Lloyd's of London are satisfactory.
§ The noble Lord said: My Lords, since the Government have made no effort to initiate a debate in your Lordships' House on what has happened in recent years in Lloyd's, and what ought to happen in the future, I felt it was my duty to do so instead. I am aware that in doing so through the medium of an Unstarred Question considerable limitations are placed on all of us but on me in particular because I can speak only this once. I must, therefore, apologise to the Minister that she will have to carry the full burden of dealing with any complications and technicalities that arise in the debate. I shall not be allowed to help out by coming back a second time. I shall refer to that later, but it does not mean that this is the only time I hope to debate the matter.
§ My purpose today is not to examine individual cases of which I have no direct knowledge but instead to consider regulation in general. Perhaps I ought to say at this point, because it appears to he a rather sensitive area, that I at least have no direct involvement with Lloyd's 'whatever; nor, so far as I know, has anyone with whom I am connected. That is my negative declaration of interest.
§ In considering regulation in general, it is my view that the system of self regulation under the Lloyd's Act 1982 has failed. It is also hard to believe that the proposed changes, following the reports of the task force and the Morse working party, do more than scratch the surface. Nothing essential has changed.
§ While it contains useful measures, I do not believe that the proposed business plan will work. There has been no suggestion that there will be a root and branch investigation and vetting of all names agencies, of all syndicates or of the behaviour of working members. In so far as there have been serious conflicts of interest —and there is no shortage of allegations on that—they seem to continue. It is hard to see how the new arrangements will prevent a recurrence in the future.
§ Therefore, above all, what we need from Lloyd's is a formal statement that the conflict of interest problem will be addressed and the highest priority given to exposing and removing such conflicts. By "we" I do not merely mean names —I have pointed out that I am not one. Nor do I merely mean those directly connected with Lloyd's. When. I say that we require a formal statement by "we" I mean all of us who are concerned with the probity of our financial institutions.1707
When your Lordships debated the Financial Services Act 1986, we on this side warned that the Lloyd's exemption under Section 42 would lead to disaster. Perhaps I may read to your Lordships the wording of that section of the Act because in my judgment that is precisely the cause of things going wrong. It states:
The Society of Lloyd's and persons permitted by the Council of Lloyd's to act as underwriting agents at Lloyd's are exempted persons as respects investment business carried on in connection with or for the purpose of insurance business at Lloyd's".
That is precisely the mistake that underlies all the subsequent troubles. It is also of interest that that sentence fully recognises that what happens at Lloyd's is not simply or even overwhelmingly insurance and reinsurance; it is an investment business.
§ As I said, we divided the House on that matter. Our warnings were rejected by the Government but I have to say, to my regret and the regret of my noble friends, we have been proved right. Therefore, what is required urgently is new legislation to remove the exemption of Lloyd's from the Financial Services Act and to give clear cut roles to the DTI, in regard to overseeing insurance and reinsurance, and to the Treasury on the investment side.
§ I should also be interested to know—I do not know whether noble Lords or the noble Baroness can help me—the weight that can be attached to the approval by the Governor of the Bank of England to the appointment of what are called "nominated members" to the council. Can we be told who those people are and what they do? More to the point, what have they done in the past and, in particular, more recently in the past few years?
§ It also seems to me that we need an answer to the question of what went wrong. I find it hard to believe that it was a matter of bad luck. Obviously, in any risk-taking business there is bad luck but I do not believe that that was the essence of what happened. It seems that much more of what we observe was due a great deal to poor judgment and professional incompetence. In addition, as we are all aware, there have been allegations of all manner of corrupt practices and fraud. Many of those involve legal proceedings and are, or have been, before the courts. Other noble Lords may refer in general to such matters in the debate. My concern is that we have heard little or nothing from the Government on that aspect of the matter despite, as I said, the public interest in maintaining the integrity of our financial institutions and the public image of the City of London.
§ I turn briefly to some specific problems and questions. There are the so-called "open years", from which the losses are still not determined. There are also more recent years involving large losses which are difficult to quantify or predict. I understand that much of the difficulty in all those cases has to do with decisions in the United States court. The consequence is that it makes it impossible for names to estimate the extent of their exposure or make any kind of rational decision for the future.
§ It is not altogether clear how Lloyd's themselves 1708 propose to deal with the problem of non-payment and whether existing reserves, including extra reserves, can cover the liability. I should guess—again, I look forward to hearing what noble Lords have to say—that all the openness and unfinished business will act as a deterrent to the entry of new names, including the entry of corporate capital, which is given a certain degree of emphasis in the business plan, assuming that it will be proceeded with. In other words, it seems to me, as someone completely from the outside, that what I understand is to be called "NewCo" could go bust. As someone who recognises the importance of our financial institutions, I feel that if that were to happen it would be little short of disastrous, not just for Lloyd's but for the City in general.
§ What I and, I am sure, other noble Lords would like to know is what the Government think about this situation and whether they have anything to propose. I ask the noble Baroness whether, purely for precautionary purposes, the Government's own experts have made an analysis of the scale of the problem and whether they have at least examined a worst case scenario.
§ In general, the remarks that I have just made relate to the burden carried by existing names. That is a topic which I am sure other noble Lords will address. The central question that I ask is: to the extent that the funds of those names are exhausted, how are the losses to be paid for?
§ I referred to the problem of litigation and, in particular, to the allegations of negligence. As I said, I do not feel able to discuss that issue in detail. However, there is an important and logical point to be made. If the powers that be admit that all is not right with Lloyd's and that they intend to make changes, they would appear to be adding support to those who are claiming negligence or worse. Moreover, it may be that one reason why the root and branch reforms for which I call appear not to be in prospect is the fear that recognition by Lloyd's of the need for stronger action will be prayed in aid by those who are suing.
§ In terms of Lloyd's proposed new detailed internal arrangements, I have not discussed the introduction of corporate membership. It does not seem to be a bad idea. However, I am doubtful about the future of unlimited liability. The market could work without that. Above all, there is a great need for more transparency in the future. Names need to be better informed of the nature of the risks that they run and of the position of the people with whom they are dealing. There needs to be a properly formulated procedure for dealing with conflicts of interest.
§ I have sought to explain that there is a public interest in what happened at Lloyd's and what may happen in the future. Damage has been done to the way in which the City of London is perceived, especially by foreigners. Anyone who doubts that fact should read the overseas press. In my judgment the Government cannot sit idly by. I have called into question Lloyd's exemption and self-regulation. I reiterate that I do not believe that a new Lloyd's Act is required. The correct move is to add Lloyd's back into the Financial Services Act. In addition, the Treasury and the DTI need to play a bigger role; I 1709 hasten to add, which may disappoint some people, not as part of the social security system but as regulators or overseers of regulators.
§ There is a possible need for a new, fully independent investigation. As I understand it, the Morse working party did not do that. There may have been a full study done in-house. If so, I am unaware of it. Perhaps the noble Baroness is aware whether or not Lloyd's has done a full research study on what happened. I fail to see how a new business plan can have a proper basis unless there has been a full study on what went wrong by an independent person—by which I mean someone who has absolutely no connection with Lloyd's, past, present or future.
§ I have covered the points that I wished to raise. I look forward to the individual contributions to the debate and to the Minister's replies to my questions.
§ 3.53 p.m.
§ The Earl of Lindsey and Abingdon
My Lords, I am grateful to the noble Lord, Lord Peston, for initiating this short debate on the current regulation arrangements of Lloyd's of London. I am sure that all those present this afternoon listened with interest to the noble Lord and that we will all wish to comment on what he said. I must begin by declaring an interest in that riot only am I a name at Lloyd's, but I was also a director of an underwriting agency until my retirement last year.
In the past I have defended the Committee and Council of Lloyd's in your Lordships' House in their endeavours to come to terms with the Lloyd's Act 1982, which includes provisions for self-regulation within the market.. For those noble Lords who were not present or around in 1982, the Private Bill had its Second Reading in your Lordships' House on April Fools' Day and came into effect in January 1983. Since that time the Council of Lloyd's has used everything in its power to try to improve the running of the Lloyd's insurance market by passing endless by-laws under the provisions of the Act. In fact, I thought that they were doing such a good job that when the Financial Services Act, to which the noble Lord referred, came along, I, together with many others, saw no reason to think that Lloyd's should be included within its regulatory powers like the rest of the City of London's financial institutions.
After all, the Lloyd's private Act had not had time to prove itself. However, since 1986 a lot of events have overwhelmed the international insurance market and especially Lloyd's, with its particular type of investor; namely, the unlimited liability member. Natural and manmade catastrophes followed one after the other through 1988, 1989 and 1990, all of which have recently been coming home to roost as insurance claims. On top of this, a small number of syndicates starting laying off risks among themselves. That went round in circles and subsequently became known as the spiral. This greedy and irresponsible experiment by some underwriters has led to more than 4,000 unfortunate underwriting members of Lloyd's ending up in what can only be described as a financial slaughterhouse.
1710 We must now ask the question: could some of this irresponsible underwriting have been avoided in the market if there had been an entirely independent regulatory body? Since all the bad news has come to light, the Council of Lloyd's has put together separate market and regulatory boards of its own. But the regulatory boards still have four out of 15 members who are working professionals from within the market. I do not query their honesty and integrity. But however good they may be, there is the question of the conflict of interest creeping into any dispute. The market board should be run in the main by the insurance professionals who work within the market; but serious consideration should be given to the setting up of an entirely independent regulatory board which might even require amending the existing Lloyd's Act 1982.
In conclusion, I believe that this approach would lead to a return of confidence within the rnarket which will, in its turn, attract new capital, both individual and corporate, as proposed in the recently produced business plan, so that Lloyd's can continue into the future as a major invisible export earner and a leader in world-wide insurance.
§ 3.58 p.m.
The Earl of Harrowby
My Lords, very rarely do I take up your Lordships' time, because I discovered long ago that there are always at least a dozen people in the Chamber who know very much more about a subject than I do. However, my self-restraint has let me down on this occasion and I hope that it does not let your Lordships down at the same time. I thank the noble Lord, Lord Peston, for raising this subject at this most opportune time. I agree with him that it is surprising that it has not been raised before. I agree with 95 per cent. of his comments and conclusions; but I shall come on to those in a moment.
I have not a negative interest to declare; I have a positive interest to declare in that I am a name at Lloyd's. I am fortunately not a major koser—no more than you would expect in a recessionary period. I suffer my loss as I expect to do. It is not a major loss. I have a son who is in the medium category but riot a substantial loser.
Lloyd's is privileged to have its own Act and it has abused that privilege. It has, in my experience, been inefficient throughout, negligent very largely, criminally negligent on occasions, and fraud has been perpetrated in a number of known cases.
In retrospect, they clearly ought not to have had their own Act; they ought to have been brought under the Financial Services Act which came in at a later date. I do not agree with the conclusion of the noble Lord, Lord Peston. I believe that moving to that now would upset the apple cart and it would be too dangerous. Remarks have been made about the business plan and its chances of success. It would damage any possible chances of success if we started trying to change the regulatory regime. That does not mean that I should not like to see one or two changes in the Act. My noble friend who has just spoken mentioned that. I believe that one or two changes are 1711 essential and it is probably now best that they are done internally, much as we all distrust the past leadership of Lloyd's.
The point has already been made that we are not sole traders, but investors. We have not been protected. Only now is the new regime acknowledging that state of affairs, by implication only, and no formal apology has been made. But I believe that their thoughts, ideas and interpretation of philosophy have now changed and acknowledge that the outside names are investors and not traders and that they are not being properly advised.
I have been asked time and time again why I do not resign. I am a businessman. All my working life I have been a banker and an industrialist, and I do not know very much about the detailed workings of Lloyd's. I certainly know nothing about underwriting. But I have been fighting Lloyd's ever since Sasse because I recognised at that point, many years ago, the troubles they were in, the malpractices which were involved and the lack of control at the top which is at the root of all their troubles.
Their inefficiency beggars belief. To start with, they invariably—and until recently I believe, legitimately —over-traded. In my interpretation that means that premium limits were regularly exceeded and there was always a good excuse as to why they were exceeded. There is no point in having regulations if they are not adhered to.
Years ago I asked for my exposure. No answer was forthcoming and the reason for that is perfectly obvious: they were not capable of giving it. Until recently scientific risk evaluation has been absolutely nil. I imagine that it has improved now. I do not want to resign but to push Lloyd's back into the position of being the flagship that it was and something of which we were all proud.
In all this I am not criticising the new regime. I take my hat off to it. I believe that they are very brave men to undertake what they have. It is problematical whether they will succeed. I do not have total confidence in the business plan but, at last, and for the first time, somebody is taking control. As I said, I take my hat off to them for doing so.
I have a number of suggestions for the board, and I use the word "board" advisedly and on purpose—the committee. It too recognises the need for change. In the introduction to their Business Plan summary, they say,We must manage the Society in a new and more directive way".That is using the word "directive" for the first time. That is right and it was needed long ago—otherwise this crisis will not be circumvented.
My first suggestion is that non-executive directors must he in the majority; otherwise, they will not be able to wield the rod that is needed so badly to get rid of the rotten apples, and so forth. Furthermore, it is beyond belief that someone facing litigation should occupy a very senior position on the committee. Can it be that that person was put there by working names? I have been asked on a number of occasions whether that is the way the City behaves. I have said, "No, the 1712 City does not normally behave like that. That is Lloyd's being a law unto itself". That sort of thing must end; and that is one of the reasons why the Act must be changed or someway round it must be found. If non-executive directors were in the majority, that situation would not be allowed to pertain for long.
It is right and proper that I should put on the record the fact that I warned the gentleman concerned that I would make these remarks in your Lordships' House today. That same gentleman might like to know that his office, which is one of the biggest at Lloyd's, is under heavy criticism from certain quarters among his active colleagues for its inefficiency and other misdemeanours.
My second suggestion relates to corporate investment. That means investment with limited liability. The rest of us do not have limited liability and, in equity, that cannot be allowed to continue. The introduction this year of compulsory high-level stop-loss should do that; but it must be acknowledged that that is the end of unlimited liability —or is it merely shuffling risks around the market, as has happened so often in the past?
Thirdly, agents have a dual role. They are shareholders and investment managers paid by us, the outsiders; yet many have exposed their names to their total wealth and more. Is that not criminal negligence? It is certainly negligence and, in my view, it is more than that. No regulator would have allowed that situation to have occurred. A regulator would have intervened long before. I suggest that, for the next decade at least, subject to any court variations, 20 per cent. of the salaries and pensions of the worst offenders should be devoted to the Hardship Fund for those they have abused. There should be a lesser percentage for less guilty brethren. I am sure that the ingenuity of the leadership of Lloyd's could find a way to make that legally possible.
Fourthly, any prudent risk-taker caps his liability. That should be obligatory. We should be able to say good-bye to open-ended commitments. The extraordinary US court awards would then be of no effect. In parenthesis, the United States will rue the day if Congress continues to refuse to cap court awards.
Fifthly, I should like to talk to your Lordships for a minute (if you can spare the time) about the dangers of asbestosis. The dangers have been known since 1924. Industrial working regulations were issued in 1931. But reaction at Lloyd's only began in 1974 when Sturge divested itself of all its liabilities. One up for them. But full awareness only struck the market in 1981. On 10th November of that year a committee member of Lloyd's chaired a meeting explaining the position to the panel of auditors—and yet those agents and auditors never warned names in the period up to 1988, and even then, they did so only in muffled terms. One might say that that is perhaps understandable because there would have been a major capital withdrawal from the market if they had. It might be understandable, but it is surely criminally negligent.
Stupendous damage has been done. Some of the water has flowed under the bridge. The rest must be ring-fenced. The new board is trying to do that, and I 1713 hope that it will succeed. It has to find a way to protect itself from the type of exaggerated awards that are current in the courts today. I am sorry that much of that is being copied in this country. I warn the Lloyd's committee, having learnt the lessons of asbestosis, against involvement in pollution, tobacco and professional indemnity business. Those are traps into which it may well fall if it is not careful.
Sixthly, I urge the committee to steer clear of such risks in America until the American courts regain some sense of balance and until exposure is capped. I wrote recently in Lloyd's magazine as an outsider that profits were the name of the game, not turnover or even market share. Lloyd's has to manage the business downwards. Managing the business downwards is the most difficult thing one can do; but, nevertheless, it is essential that it does that. Then, if one is efficient and cost competitive one can re-enter the market when the time is right.
Lastly, I fear that old habits are still entrenched in Lloyd's. That is why it must get down to sorting out the place and getting rid of a large number of people. I put forward a scheme to the committee about a year ago designed to assist some names who want to retire when their open years are closed. I would have understood if I had been told in answer that the scheme was not philosophically acceptable or technically feasible. I did not receive that answer. What I did receive was buck passing. The corporation said that it was not its business to establish syndicates. That is untrue, incidentally, because it has already established Centre-Write. Try the underwriting agents. The answer from them was that it was not on because it was not profitable. What does one do when one is faced with that attitude when they should be trying to help some of their members who have been fleeced?
It is essential that the new management in which I have confidence—I believe that it will do its best—goes through Lloyd's like a dose of salts and applies a rod of iron, because I want to see Lloyd's back on its pinnacle as one of this country's biggest earners of foreign exchange. I wish the new team every success with its first—believe it or not, it is its first—business plan.
In conclusion, I should like to say a word to my noble and learned friend the Lord Chancellor. I hope that his attention will be drawn to these remarks. There are a great many unhappy people out there. There are many people who have been badly advised, ill-treated and fleeced. Some of them are meeting procedural difficulties in pursuing their litigation aims. I recognise, as do other noble Lords, that it is not practical to ask for a change of the law or even a change of rules; but where there is the option of discretion, I hope that the judicial authorities will exercise that discretion in favour of those people so that even if they do not come away richer—as some of them undoubtedly will not, because, apart from the rights and wrongs of the matter, there is a limited sum of money vailable—they will at least have the satisfaction of knowing that their case has been in front of a judge.
§ 4.15 p.m.
My Lords, I suspect that I am the only insider in the Lloyd's market to speak today so perhaps I may start by declaring my positive interest. I was for 40 years an insurance broker with the same international company. For most of that time I was a passive underwriter; what is known as a working name at Lloyd's. My underwriting life was from 1954 until the end of the 1988 account.
My personal philosophy on underwriting was by no means typical of most Lloyd's names. Briefly, it seemed to me that as a young man I always needed a lot of money and should take chances. The older I became, the greater was my earned income. Eventually my school fees became less and the less I needed to put my earned income at risk from underwriting. Unlike most other names at Lloyd's, throughout my life I maintained a low profile, minimum lines and just two syndicates.
I am told today that the average number of syndicates for a name at Lloyd's is 16. Even granted that each of those 16 has a minimum line, the aggregation must today expose an average underwriter to significantly more loss—and, indeed, to significantly more profit—than it exposed me.
I have another view of Lloyd's, which again is uncommon. As an employer I was anxious that my employees should resign from underwriting at or about the time of their retirement. It seemed to me wrong that they should put their pensions at risk from underwriting fortunes; that was unless they had private wealth of their own. Having explained my background and my views, I leave it to your Lordships to decide whether what I wish to say about Lloyd's and regulation at Lloyd's is impartial or prejudiced.
Today's Question undoubtedly arises as a result of the losses. But I wonder whether it is as widely known as it ought to be that these losses are not just Lloyd's-wide; they are certainly UK-market-wide and internationally-wide in various areas, although not wholly across the international underwriting scene. Perhaps the worst affected country of any from the losses at which we are now looking is Scandinavia: that is Sweden, Norway and Denmark. Certainly the UK has been hurt and as much as Lloyd's names have been hurt, so also have insurance companies. Companies which spring to mind immediately are the, Municipal and Mutual, the Orion and the English and, American, which have all folded during the past couple of years.
If one looks at the commercial scene one finds that. a number of companies headed by the Prudential have pulled out of commercial insurance altogether and retired to life insurance and personal lines. If one looks at the reinsurance scene one finds endless companies which have pulled out of either all reinsurance or part reinsurance. Usually in the case of part reinsurance they have pulled out of treaty; certainly they have pulled out of excess loss. Therefore, the losses are not just problems at Lloyd's. As a result of Lloyd's unique system, it has received press coverage to a far greater degree than has beer given to companies.
1715 Why have we had these losses? There are basically four reasons. I wish briefly to go through them because it is fair and I should like to represent to your Lordships that at least three out of the four have little bearing on regulatory problems. The first reason was that we went through a long period of sustained low rates based on sustained profits. We have been through a period of an almost continuous oversupply of underwriters around the world. It is a fact that in the 1980s those in the London market, whether Lloyd's or the insurance companies, could no longer control the rates which they required in a way that they could when I first entered the market in the 1950s and 1960s. So they had to follow the rates down or get out of underwriting altogether.
The second reason is that we have been through a period which seems, thank goodness, to be over, in which there was a significantly greater than average number of catastrophes. That has been very difficult for everyone—Lloyd's, companies in the UK and abroad. Everyone has suffered from that far greater than usual incidence of catastrophes.
The third problem arises for anyone who underwrites business from America and there is the problem of the American courts to which my noble friend referred earlier. In the United States the social system and jurisdiction of that country has come to the conclusion that insurers have deep pockets which are there to be used for the nation's needs. That is based on the assumption that the insurers will get back their money in due course in any event. That is not the insurance on which I was brought up which was based on the principle of fortuity. Nevertheless, we have had to put up with the fact that those underwriters who accepted USA liability business have found that the policies which they underwrote in the 1950s, 1960s and 1970s which had no claims, because the claim that was originally submitted was regarded as being excluded, in the United States' courts is now found to be included; and of course, no reserves were set for problems of that nature.
All underwriters—British and American—have been caught by that. I do not regard them as negligent. Your Lordships may ask why a British underwriter underwrites in the United States if there are those problems. If one wishes to underwrite—and I hope to show your Lordships later on how important underwriting is to the economy of the country—you must underwrite in the United States. Until recently it contained over 50 per cent. of the world's premium income, and it is still between 40 per cent. and 50 per cent.
Those are the first three reasons for losses. The fourth reason is quite clearly that there have been some had underwriters and agents giving bad advice. I am in no position to say whether those bad underwriters and agents have been negligent and I have no doubt that when the court cases come to fruition, those matters will be sorted out. But, yes, there certainly has been some bad underwriting. However, the reason that we are looking at such a 1716 disaster today is because of a combination of all those four reasons. That has caused our problems. Only the last reason has regulatory implications.
As has already been mentioned—and I thank my noble friends for the positive way in which they spoke about Lloyd's—there is now a new Lloyd's team as from 1st January 1993. With that team comes a major culture change. That change is simply that today's leaders accept that they must manage the marketplace whereas yesterday's leaders only saw themselves as administering it. That is a big, big difference. I am extremely hopeful that it will make a major change for the future of Lloyd's, whether it be policyholders, names or staff.
As we have heard, the first thing that the new management did was to create a split. It set up two new boards—one for market affairs and one for regulation. For the regulatory board an outsider was brought in to be chairman who had nothing to do with Lloyd's—Brian Garraway. He had no previous connection whatever with Lloyd's. With respect, I do not believe that the fact that there is a minority of Lloyd's participants on that regulatory body will in any way influence its decisions because they are in the minority. It seems to me that there should be one or two people available who can tell the regulators what goes on. Therefore, I should have thought that it is a good thing to have a minority of players on the regulatory board to inform those who are not players at Lloyd's.
That board sets standards and minimum qualifications, and is looking at people to ensure that they are fit and proper. It is monitoring activity against bylaws and codes. Again, I am not sure how widely it is known that a number of bylaws and codes have been in practice for some time now.
On the market board side, we have seen continuous activity to increase the training and minimum standards required to bring in underwriters and others with responsibility. The regulatory board and the new market board are now just seven months old. I put it to your Lordships that they need time before we try to judge them.
Finally, I suggest that it is in everyone's interests that Lloyd's overcomes its current problems. I believe very strongly that it is in names' interests, because a bankrupt Lloyd's will be unable to give them the help which they currently seek with the losses that they have.
I have much experience of watching companies and concerns in the insurance world that have called in the liquidators and where, 25 years later, the claims are still coming in. Indeed, I do not yet know of a single concern that has wound itself up in the insurance company world that has actually been able to put in place at the beginning sufficient money to pay for claims received at the end of the procedure. Therefore, without doubt, a Lloyd's that was wound up by its membership would cause that membership far more trouble than a Lloyd's that was ongoing, continuing and—it is to be hoped—making some profits and, therefore, had money to help those members with their problems.
1717 It is in the City's interest that Lloyd's should continue trading. There are currently about 60,000 jobs in the City dependent upon Lloyd's. It is in the London insurance companies' interest that Lloyd's should continue to trade. I say that because each one of them will agree that Lloyd's is actually the hub that allows the Lloyd's brokers to bring in the business, a far higher percentage of which goes to the insurance companies than goes into Lloyd's. Finally, it is in the interests of the country, because of the importance of our invisible earnings arising out of the commercial insurance market.
I wish that I had the 1992 figures with me, but they have not yet been released. Therefore, the 1991 figures must suffice. They are as follows: £1.9 billion from the insurance companies; £0.5 billion from Lloyd's; and £0.9 billion from the Lloyd's insurance brokers, making a total of £3.3 billion earned by the insurance market for the country's balance of trade in 1991. Much has happened at Lloyd's; indeed, an enormous sea change has taken place. Please, give it a chance to work.
§ 4.26 p.m.
§ Lord Lucas of Chilworth
My Lords, all noble Lords who have spoken thus far have advised the House as to the reason for them taking part in the debate. I shall do likewise. My reason for doing so is because during 1985 to 1987 I sat where my noble friend the Minister is currently sitting. I had to respond to many of the questions that were put by the noble Lord, Lord Williams, which have today been similarly put by the noble Lord, Lord Peston.
I am very glad that my noble friend Lord Chelmsford underlined the importance of Lloyd's in his concluding remarks. Therefore, I need not repeat it. However, I should merely like to underline the fact that Lloyd's must he made to work. It has an international reputation; it is a big earner and a big employer. Now is not the time to suggest that another organisation be created. I believe—and I shall return to the point later—that Lloyd's is capable of managing its affairs to meet the end described by my noble friend.
My noble friend Lord Lindsey and Abingdon said that he wanted an independent regulatory body, while my noble friend Lord Harrowby said that the 1982 Act should be scrapped.
The Earl of Harrowby
My Lords, with the greatest respect to my noble friend, I did not say that the Act should be scrapped; I said that there may be parts of it—for example, with regard to the board being able to veto certain directors—which should be capable of being amended. However, for the reason that I gave, I certainly do not think that it should be scrapped.
§ Lord Lucas of Chilworth
My Lords, I am most grateful to my noble friend for that explanation. I thought that he said that it was wrong that Lloyd's should have had its own Act. However, I entirely accept what he says.
I quote from the report of Sir Patrick Neill:Shortly after the 1982 Act received the Royal Assent, a series of scandals came to light which showed the imperative need for such powers",1718 and so on. In that very splendid report, which admittedly was set against the background of the Financial Services Act, he described what changes he thought should be made.
Sir Patrick came to the conclusion that Lloyd's was capable of managing its own affairs and of being its own regulatory body. He set down 70-odd recommendations. When your Lordships debated that report in January 1987, the noble Lord, Lord Williams, said —I paraphrase his comments—that he knew that when Lloyd's was exempted from the Financial Services Act it would not work. I am sorry that the Liberal Democrat Benches are empty this afternoon. I am equally sorry that the noble Lord, Lord Peston, does not seem to have much support behind him. However the noble Lord, Lord Diamond, speaking from the Liberal Democrat Benches, said on the contrary he was happy that Lloyd's should act as its own self-regulatory body.
The Government reached that view also and held to that view. But in that debate my noble friend Lord Kimball, who I believe—if memory serves me right —was then the chairman of the disciplinary and complaints committee of Lloyd's, assured the House that already a number of the recommendations had been put in place and that the others would be dealt with. I do not know whether or not they have all been put in place. Certainly the events of the past two or three years give rise to some doubt that they have all been put in place.
I do not believe for one moment that it is a failure of the regulatory system that has brought about the unhappy situation in Lloyd's today and any loss of confidence that Lloyd's is suffering in the international scene. I believe that all this took place against the background that my noble friend Lord Chelmsford described and against the background of a lot of loose money tumbling over in 1986, 1987 and 1988 in all sorts of areas. Then the going got a bit tough, as has been said. However, human nature and natural greed overcame professionalism and proper management. I believe my noble friend Lord Harrowby said that that situation revealed inadequacy and an element of negligence. I will not disagree with him on that.
One then has to ask oneself what was being done to rein in the membership of Lloyd's. It has been suggested that the ruling body—the board—was inadequate and may still be inadequate. It may be that the culture was wrong arid that it was a cosy club which thought that if it administered itself, everything would be all right. The culture may have to change but that does not mean there should be a new regulatory body. Where is a new regulatory body to come from? In 1987 the noble Lord. Lord Williams of Elvel., wanted an SEC kind of arrangement. Surely he does not want that today—or does he? Unfortunately, the noble Lord, Lord Peston, cannot answer for him and is denied another opportunity to speak today. However, we shall hear from him again on this matter.
Should the regulatory body be taken away from Lloyd's? Where will it be put—in the DTI? ft should certainly not be put in the Treasury. I am sure about that. The responsibility which is enshrined in the 1982 Act and which was put in place by Lloyd's in a series 1719 of bylaws against the recommendations in Patrick Neill's report—all noble Lords applauded that report at the time, and I doubt whether any have any reason to change their opinion today—must be reconsidered. Perhaps a new arrangement might be satisfactory.
It is not for me to talk about why names enter the business with unlimited liability. I would not do so even if I could. That is a matter of the contract arrangements they made. I do not find it inequitable. They enter voluntarily. I shall say no more about that. If Lloyd's wants to change those arrangements, either to defend people through capping or by attracting new money, whether corporate or private, that is a matter for the Lloyd's board to sell to the people it wants to attract into that market-place.
I am desperately sorry for people who have suffered as a result of the greediness which overshadowed prudence and professionalism and led us to this sorry state. However, I do not believe, as the Question of the noble Lord, Lord Peston, implies, that a new regulatory authority need be set up. Nor do I believe that we need a new Act. Do we need another inquiry? Matters which may come before the courts could provide such an inquiry.
I should like to echo what my noble friend Lord Chelmsford said. Let the new culture—of which he has knowledge and I do not—which is evident in the new team which is planned have a chance. Let us stand behind that new culture to restore the confidence of the world in what is and always has been of importance to London as a world financial centre.
§ 4.36 p.m.
Earl Alexander of Tunis
My Lords, I am grateful to the noble Lord, Lord Peston, for initiating this timely debate. I must declare an interest, being a name at Lloyd's.
Insurance is a unique business in which the principle of good faith is paramount. When a party comes "on risk" he is entitled to know the nature and extent of that risk. Should any material information be withheld—even by mistake—he is entitled to repudiate that contract. That is the law.
As it is simply not practical to carry out the degree of "due diligence" normally undertaken in commercial transactions, the insurer—the man who takes on the risk —also takes on the word of the insured. As stated in a case in 1869:the law demands a higher standard of good faith between the parties, and there is no class of documents as to which the strictest good faith is more rigidly required than in policies of assurance".I hope that your Lordships will bear those words in mind when I recount just a few of the facts which have emerged since 1982. In 1982 the Lloyd's Act granted the Council of Lloyd's the status of self-regulation and legal immunity from suit. As your Lordships have heard, that is a privilege unequalled in the world of commerce. A grave responsibility accompanies that privilege: the responsibility of good faith which goes with unlimited liability.
One would have thought that names could sleep easily because that status also included a duty of care. The Chairman of Lloyd's himself said so in answer to 1720 a question at a recent annual general meeting. At that meeting almost the entire council was present on the platform, including the corporation solicitor. There was not a single dissenting voice. I have in my hand a verbatim transcript of that exchange:Question: Does the Committee/Council owe a duty of care to its members?
"Well, the answer is of course yes. The Council of Lloyd's does have a Duty of Care. Due care to see that the society is properly regulated. It does not have a duty to underwrite on behalf of its members etc. etc. The answer to the question is that for regulation [purposes] we have a Duty of Care". There was some understandable confusion, because Lloyd's had already instructed its lawyers to plead in court that it owed no such thing.
Far from sleeping easily, investors had unknowingly signed away all the legal rights and protections which are afforded those who invest in, say, the stock market. Parliament awarded Lloyd's the right of self-regulation after a number of meetings at which Members of Parliament were told that only Lloyd's knew how to regulate the market. Financial reports and accounts to support their argument showed that all was well. In fact, no less than 142 syndicate accounts should have remained open as the losses from asbestosis and pollution were so large as to be unquantifiable—and that was in 1981.
Auditors' letters to Lloyd's asked for instructions. The committee insisted that all accounts were to be closed. The Lloyd's Bill was going through Parliament at that time. The closing and signing off of the accounts was achieved by a device called rolling the losses forward, thereby passing solvency at a stroke.
Many years later, following overwhelming evidence of negligence by the underwriters—I believe that it was referred to by my noble friend Lord Harrowby —Lloyd's wrote to all names imploring them to settle their differences outside court. Some stuck to their guns and continued the action. The settlement in their favour was some £116 million. Those members who heeded Lloyd's found themselves not only time barred but liable to the full extent of their losses. I ought to add that I was not among that party.
The Council of Lloyd's has powers to investigate agencies. One particular report was so damning that it might well have persuaded Parliament that Lloyd's should have outside regulators. However, unfortunately that report was not allowed to be shown to the names during the passage of the Bill through both Houses of Parliament. Names had to go to the High Court to obtain a copy; but by then it was too late and the damage had been done. Those suffering names made a further application to the High Court to obtain vital documents that were stored by Lloyd's in a warehouse outside London. Within hours of the judge ordering their release, the papers were destroyed by fire. To the best of my knowledge, Lloyd's made no attempt whatsoever to investigate or to assist the names in their pursuit of the facts.
Those affairs clearly demonstrate, to me at least, the breathtaking incompetence of the Lloyd's regulators. I would be doing my fellow names a disservice if I did not say that I believe that it is sometimes worse than mere incompetence. It is the greatest pity that the intelligence available to the 1721 market on asbestosis and pollution was not disseminated to the affected names, just as Lloyd's went on a recruitment drive in the early 1980s when members' agents scoured Canada, America and Australia signing up names.
My informants tell me that American members, perhaps less shy than others, are invoking the RICO Act—the Racketeer Influenced and Corrupt Organization Act. My own judgment, as I told them, is that such action is misconceived. Should they win, the errors and omission underwriters would apply to the courts to have their contracts set aside. The successful plaintiffs would therefore be unable to collect any of their damages.
A consequence of self-regulation and non-accountability is the violation of the law of agency. That states that an agent must at all times act in the best interests of his principal. Not so at Lloyd's, my Lords. When a conflict of interest arises between a name and Lloyd's the agent betrays the name. In one case bank guarantees were called despite the clearest evidence—I speak of Lloyd's own evidence—of false accounting.
I have copies of names' correspondence with the regulators of the market going back to 1985 in which were detailed and verifiable complaints. In particular, premiums were written on their behalf and in their name of between two, three and four times the limit that they agreed in writing with their agent. Furthermore—I believe that it is absolutely ludicrous —names were put on syndicates, insuring other syndicates that they were on, thereby paying management fees twice over for the same risk.
The council has had every opportunity over many years to put its house in order. Legal immunity has left names with no redress. Lloyd's defence is that it can do its job only if it does not have to look over its own shoulder. How do other professionals manage it? Stockbrokers, bank managers, lawyers, accountants, all handle clients' accounts.
In conclusion, I believe that the only way that disputes of this nature can be settled is, unfortunately, through the courts. Every man and woman in this country should have access to law if they feel that they have been wronged. Those of a vexatious nature are always weeded out. I fervently hope that the courts will expedite those cases of the many, many names who have been driven to penury by their misplaced trust in an institution which was once upon a time held in such high esteem. I believe that it is now up to Parliament to look again at the 1982 Lloyd's Act which has so shamelessly been exploited at the expense of the society's members.
§ 4.45 p.m.
§ Lord Auckland
My Lords, the House will be much obliged to the noble Lord, Lord Peston, for initiating this sensitive debate. The pity of it is that we are discussing it late on a Friday afternoon, because the matter ought ideally to be debated before a full House of Parliament. There are those who are not only names at Lloyd's, but are involved in the whole international and national working of finance generally.
1722 I declare a very bygone interest, as one who began working in Lloyd's in 1948 in a fascinating building in Leadenhall Street. I shall not comment on the new building because it is not germane to the subject of the debate, but noble Lords will draw their own conclusions as to its architectural niceties or otherwise. However, that is irrelevant.
I was a working name at Lloyd's between 1956 and 1963. Many noble Lords will remember the three hurricanes, Betsy, Carol and Hazel, and I think I am right in saying that the losses were spread more over the market than the present losses. Even allowing for inflation since those days, the amount of the losses was probably not as great but most names—and it was mainly inside names in those days, there were relatively few outside names—like myself, were working names. Many of us felt as bitter as the names do now. However, I do not believe that at that time Lloyd's itself could be held largely responsible for the losses. It so happened that they hit the marine market which was then, as probably now, the one which makes the most profit. The Maryland coast was badly hit, shipping was badly hit and enormous losses were sustained. However, that is water under the bridge., if I may use that expression.
Of course, when one becomes a name at Lloyd's one knows that one is taking a certain amount of risk. Whether all agents are as competent as each other is another matter. An inside name has the advantage, or at least some advantage of knowing how the market works. At the time when I became a name, it was obligatory for anyone working in Lloyd's., in whatever capacity, to have worked there for five years before there was any question of their becoming a name, so that by that time they had some knowledge, even as a junior, of how Lloyd's worked.
Those who saw the recent "Panorama" programme on Lloyd's will have been shaken by the examples Many of those who are names at Lloyd's are relatively wealthy, but one's heart goes out to the pharmacist from Evesham in Worcestershire and the elderly lady who was secretary to a distinguished gentleman in the City. As a reward for the service which she gave to the company, in all good faith he made her a name at Lloyd's. Of course, both names faced the rnost enormous losses. Whether Lloyd's itself can be held largely responsible for that is a matter of individual judgment. In the present situation the outside names are in the majority.
There have been allegations (I do not know whether one can refer to insider dealing) that inside names have been given advantageous terms. They are allegations. As I do not work at Lloyd's, I am not in a position to comment. My knowledge comes from what I have heard, read and to some extent seen.
As other noble Lords have said, the organisation that has been set up within Lloyd's must be given time to work. My noble friend Lord Lucas of Chilworth put his finger right on the pulse. If Lloyd's is to lose its regulation, to whom will it turn? I do not believe that any government department will take on because departments have enough problems on their hands as it is without having to handle Lloyd's. It would be a major tragedy if Lloyd's were to go under. At the 1723 moment it is the subject of intense criticism, some of it brought on itself, as noble Lords must face. But Lloyd's has been going for 300 years. It was originally a coffee house and the term "A1 at Lloyd's" still, I hope, holds.
We live in a world of national and international turbulence. Nobody could foresee Piper Alpha. Nobody can foresee hurricanes in Florida or off the coast of the Shetlands or disasters anywhere else. Lloyd's can hardly be held responsible. But agents must warn those whom they are persuading to become members that such things happen. Some people assume that nothing can go wrong with Lloyd's. Of course, things can and do go wrong everywhere. It is to be hoped that the new organisation within Lloyd's will make it quite clear that the agents concerned must make quite sure that incoming names are aware of that. Obviously, this is not a very enthusiastic time for new names to come forward. We must face the fact that even in 1993 another hurricane or oil spill may occur. The risk is ongoing.
This debate has served to bring Lloyd's into the limelight. We must all hope that one of the greatest financial institutions in the world, which has been responsible for an enormous amount of foreign currency and export earnings, can ride the present storm.
§ 4.54 p.m.
§ Lord Marlesford
My Lords, first I must declare an interest as a victim of Lloyd's. I am a longstanding victim who has been a member since 1964 and who, after taking into account every cheque received, is now hugely out of pocket as a result of that membership. Lloyd's problems are both longstanding and of relevance to the future of Lloyd's. The crucial question, which was asked by the noble Lord, Lord Peston, to whom we are grateful for having raised the matter, is whether the current arrangements for the supervision of Lloyd's are satisfactory. I, for one, do not expect the Minister to give an answer when she replies to the debate. I hope that today we shall be opening a wider debate outside the House that will enable the Government to come to a balanced view on what can and should be done.
There are four main causes of the Lloyd's disaster. I shall first list them and then give examples of each. The first was a coincidence of external factors over which Lloyd's can reasonably claim to have had relatively little control; secondly, there was serious professional incompetence; thirdly, there was negligence bordering on fraud; and, fourthly, there was a widespread failure of moral standards which has sullied the reputation of the City of London for a generation.
There are four external factors. First, the personal tax regime in Britain has always made membership of Lloyd's particularly attractive to high income individuals. With top marginal income tax rates of over 90 per cent., the Inland Revenue was in effect underwriting over 90 per cent. of any losses. In addition, there were certain tax free possibilities of capital gain. Rightly, in my view, loopholes in the 1724 capital gains tax provisions were closed and, even more rightly, the top rates of tax were slashed from 98 per cent. in 1979–80 to 40 per cent. in 1988.
I should point out that that was a lucky break for the Government. Noble Lords may have seen a recent Written Answer indicating the total of £880 million of tax repaid in respect of underwriting losses over the five years since 1988 and £386 million tax repaid in 1992–93. I imagine that the figures for 1993–94 and 1994–95 will be at least double that. At 80 per cent. marginal tax rates there would have been an extra £1 billion or so on the PSBR. None the less, in recent years Lloyd's has been an extremely unprofitable enterprise for the ordinary British taxpayer.
Secondly, there has been the most unusual coincidence of both natural and man-made disasters over the past few years —hurricanes, earthquakes, oil spillages and fires. Thirdly, the American courts have gone quite mad. Fuelled by the pernicious system of contingency fees for lawyers, American juries have been handing out mega and punitive damages in cases where British insurers, by the standards of the British law of contract, could have repudiated liability. How long Lloyd's should continue to pay for awards which would be repugnant to British standards of justice is a serious issue which has not yet been addressed. One can only hope that the slaughter of American insurance companies and the consequential impossibility of obtaining cover at reasonable rates for many of the risks which must be covered by insurance for an advanced society to operate properly will stimulate the American Congress to take action.
Fourthly, there was a huge increase in insurance capacity which resulted in Lloyd's being forced out of its traditional direct insurance markets into reinsurance, which is far more difficult to assess. Certainly, Lloyd's has proved that it was not up to the task, and that brings me directly to my next main point, which is incompetence.
It is deplorable that until recently no professional qualifications were required to be either an underwriter or a broker at Lloyd's. Even now many old hands are still operating who are hopelessly inadequate both intellectually and professionally. Lloyd's recently arranged for a group of parliamentarians—of which I was one—to visit the market. I spent some time in one of the boxes and was fascinated by the sophistication of the methods used to assess risks. I can only say that I believe that those methods are well beyond the capabilities of many of those whom I know personally to be working in Lloyd's, who are much better at the traditional method of writing their names on the slip based on the "quality" of earlier names on it.
There was, I suppose, an early warning of the incompetence in the affair of computer leasing. That goes back to the 1970s. Enterprising Americans purchased computers with bank borrowings to lease to users. Banks were rightly concerned that the computers could become obsolete. Astonishingly, Lloyd's were prepared to insure the computers against technological advance with predictable and considerable financial loss.
1725 I turn to negligence, of which again we had an early warning at Lloyd's. Many noble Lords will remember the unsavoury Savonita affair. It related to a reinsurance claim on a cargo of mainly Fiat cars carried in 1974 from Italy in a ship called the "Savonita". Part of the cargo was damaged at sea by fire. The Italian insurance company (part of the Fiat group controlled by the Agnelli family) had as their broker at Lloyd's a firm controlled by my noble friend Lord Pearson of Rannoch. Mr. Pearson, as he then was, became suspicious. It later emerged that some of the supposedly damaged cars were being resold in mint condition at near mint prices. Mr. Pearson refrained from pressing the claim on behalf of his client and, having obtained leading counsel's opinion on what he should do in relation to the fraud, reported the matter to the then chairman of Lloyd's. The net result was that Lloyd's did nothing about Mr. Pearson's submission. The business was transferred to Willis Faber who ultimately collected 96 per cent. of the claim for the Agnelli company.
Despite considerable pressure against him from the then Tory establishment this scandal was fully exposed on 23rd March 1978 in another place by my honourable friend Mr. Jonathan Aitken. Interestingly, the Minister of the then Labour Government who replied to the debate and who rejected the allegations made by Mr. Aitken was the noble Lord, Lord Clinton-Davis. At that time the Whitehall establishment was also protecting Lloyd's from exposure. I recommend noble Lords to look at that debate. Subsequently, the case led to the setting up of the Fisher Inquiry. The Savonita affair reflects nothing but credit on my noble friend Lord Pearson and nothing but discredit on the Lloyd's establishment at the time which, if it was not condoning fraud, was seeking to sweep it under the table.
A far more recent and significant case of negligence, or worse, is the cause of the growth of Lloyd's capacity by more than 70 per cent. from 1985 to 1988. The insiders knew the state of world insurance and of the fierce competition which had driven premiums far below what was prudent. Yet they deliberately pulled more and more people and capital into the market, assuring names that the market was turning at last. The then immediate past chairman of Lloyd's, Sir Peter Green, wrote to his names in September 1984:A number of years have now passed since we have been able to offer our Names an opportunity to increase their shares. The Underwriters report that rates are now hardening in all sections of our business and in some areas to a very significant extent … I believe that you should most seriously consider increasing your share from 1st January 1985".Where was all the money to go? The LMX spiral was one answer—round and round incestuously, growing like a cancer. Another answer was in underwriting risks at premiums which should never have seen the light of day. So if the market for all this new capital was not there, what was it for? Why was it needed? Well, we have found out.
By 1982 it was evident to many in the management of Lloyd's, and to very many agents, that the environmental and health claims from America—pollution and asbestosis—showed every sign of turning from a row of molehills into a range of 1726 mountains as long and high as the Rockies. It was said last year that all the insurance money in the world is too little to pay for cleaning up America. No doubt there were those insiders, back in the early and mid-eighties, to whom it did not look quite so drastic. But most must have realised that if Lloyd's could broaden and deepen substantially its capital base it would have a better chance of riding out the fearful storm to come.
We still have to learn why the warnings of impending disaster over pollution and asbestosis, circulating in the Committee of Lloyd's; in 1982, were not passed on to all names. We still have to discover whether the warnings were received or understoocl by a host of auditors who sanctioned reinsurance-to-close year after year.
However, the crucial point is that Lloyd's capacity was expanded between 1985 and 1988, riot because the business existed to justify it—not even the agencies argued that —but because of their horrendous overhang from the past. Names, although made aware of their limitless liability for risks underwritten in their name, were enticed with the promise of greater profits, but wilfully kept in the dark about the true historic nature of those risks.
Was this a policy which the agencies pursued independently, all having come to the conclusion about the need to expand their capital base to avoid bankruptcy? Or was it a much wider conspiracy—of silence—starting at the top?
I now turn to the most distressing of all four causes of the Lloyd's disaster—the widespread lack of integrity. I shall focus on only one issue, the widespread practice and use of baby syndicates— technically known as preferential underwriting—to syphon off the best risks for a few favoured names. Typically, they would have under 50 names and often fewer than a dozen. They have been illegal since 1983 when a by-law was passed to require any syndicate to have at least 100 names.
I checked on the 1980 Lloyd's syndicate lists, a year when the baby syndicates were at their height, to see which of the high and mighty in the Lloyd's establishment were members of them. Two of the five most recent chairmen of Lloyd's were on them—Sir Peter Green and Mr. David Coleridge. Mr. Stephen Merrell, now a deputy chairman of Lloyd's, was also on one list.
Although they have only been banned since 1983, let us be quite clear that the baby syndicates are, and always have been, conceptually dishonest. There was never any excuse for them. They were of course one of the reasons why insiders did better than outside names, as is highlighted in Sir David Walker's report. And yet the baby syndicate ethos is still justified by many who still work in the market, sornetimes with little shame. I myself received a letter from a Lloyd's members' agent (not my own) dated 15th September 1992, commenting on the Walker report:It is well known that Working Names have an average capacity substantially below that of Non-Working Names and, indeed, taking 1992 as an example. 45 per cent. of Workers write £150,000 or less, whereas only 5 per cent. of Non-Workers have limits this small, the Workers of course being of relatively small capital worth".1727 I have no reason, or confidence, to believe that, given half a chance, some of the Lloyd's insiders would not be up to their old tricks or new varieties of them. At present they are like the three-card fraudsters on Oxford Street who pack up into a side street when the police are around and return when the coast is clear. What we need is to make sure that the coast is never again clear.
I have heard nothing but good of the new regulator, Mr. Brian Garraway, a former deputy chairman of BAT, who, with no previous links with Lloyd's, arrived in January of this year as chairman of the Lloyd's Regulatory Board. This board was set up under the Morse Report. The fact is he reports to the Council of Lloyd's. In my view he should report either to the Secretary of State for Trade and Industry or to the Governor of the Bank of England. That is for discussion.
Finally, I want to deal with a most important aspect of the new business plan—corporate capital—the part which involves its introduction. Lloyd's was faced with a choice. It could attempt to save the many individual names who face personal ruin or it could attempt to save Lloyd's as an institution. Understandably, especially as the careers of those involved depend on Lloyd's, it has given priority to the latter and the vehicle chosen is corporate capital.
There is a market for such capital and I believe Lloyd's will be successful in raising the required capital to keep it afloat. A number of brokerage houses and investment bankers are working on schemes to invest in Lloyd's. Such schemes are typically tax efficient structures, located offshore, and attractive to international capital.
As I understand it, a scheme would raise an amount of capital—say × million pounds. It would invest that in the short-term capital market earning 6 per cent. to 8 per cent. on its capital. In addition it would be possible to underwrite two times ×x million pounds in Lloyd's premium. I believe that for capital to be attracted the returns will need to be around 15 per cent. Hence the Lloyd's return on premium needs to be around 4 per cent.; that is to say, two times 4 per cent. plus, say, 7 per cent. on the capital invested which equals 15 per cent. If the premium returns are in the region of 10 per cent., as Lloyd's has hinted, such vehicles will return 25 per cent. plus to their shareholders. That return will suck in international capital and quickly restore capacity. But the rates on Lloyd's market will become more fiercely competitive and be held down.
These corporate schemes will be ring-fenced so that they have no liability for prior Lloyd's losses. The net impact will be that they will serve new corporate investors and Lloyd's intermediaries and brokers. They can only be negative for existing names, as they will supply capacity to the commodity business which is reinsurance. In effect, traditional names are being abandoned and, albeit in a different form, the strategy is once again to bring in new capital to save the institution.
So what is Lloyd's doing to help? It is offering Greek gifts. First, it is doing all in its power to prevent 1728 names going bankrupt. I believe that it would be better for many names if they did become bankrupt. At least then they could start life again instead of being left in bond servitude for life like the victims of money lenders in India. Secondly, Lloyd's is reducing, in many cases by as much as a half, the cash that is being demanded this year. Like the skilful blackmailer, the calls are being adjusted to what the victim will bear rather than driving him to the police or to suicide.
There is an overwhelming case for the ending of self-regulation. Even so, for most names it will be too late. For them, Lloyd's will have been a sad story, and for many, a personal tragedy.
§ 5.10 p.m.
§ Lord Renwick
My Lords, I rise to speak last and am glad of that because, as I shall explain, I declare no positive interest in Lloyd's. I am not a name and never have been. I started my career in the City with unlimited liability on the Stock Exchange. Therefore, somewhat luckily perhaps, I was not tempted to Lloyd's. However, I do know a great many members of Lloyd's and a great many names. Many of them are ravaged. Indeed, there are two in my close family.
The noble Lord, Lord Peston, should be very pleased with himself for stimulating what I think has been an excellent discussion from a very broad range of interests on this most desperately important subject. Without being personally involved, for the past six months I have been trying (in what spare time I have had) to understand the implications of the Lloyd's market and what has happened, and to discuss with various interested parties what could be done.
This matter is of national interest, as the noble Lord, Lord Peston, said. That view is shared to some extent by all of your Lordships who have spoken today. This debate is certainly in the individual interests not only of the 6,000 to 8,000 names whom I have been led to believe are very severely affected, but also of the 30,000 odd who make up the full complement of Lloyd's names.
I do not want to take up too much of your Lordships' time. I know that it is now late on a Friday evening and that this is but the first stab of your Lordships' House at being totally constructive in looking at regulations for this great institution and in discussing and looking at a way forward, which is something on which this House has a brilliant history.
I am sure that we all feel, with my noble friend Lord Chelmsford, that we need time to sort this out. We need to allow the new regime at Lloyd's and the new regulator the time to understand—as I have found it very difficult to understand—the full machinations at Lloyd's. I hope that there is time for that to happen.
I take the idea put forward by the noble Lord, Lord Peston, that there should be an inquiry by people totally unconnected with Lloyd's. Lloyd's has evolved over time as a very difficult market. As my noble friend Lord Harrowby said, it is difficult to gain information from within the market. He said that he looked to find the level of his exposure, but could not. Syndicates and groups of names who are having problems are finding it difficult to discover who is on 1729 which syndicate. So I am not sure that that will be easy. My noble friend Lord Marlesford asked whether we were confident that the old habits which die hard would not be continued within Lloyd's.
During the past few months a potential solution to the problem has been brought to my notice. Although I am not part of the group, I have been kept closely in touch with an extension of the Lloyd's business plan. I do not want to go into details now, but I can say that I believe it will be published and that the publication date is next Tuesday. It has been prepared by names and brokers who have experience of many of the things that have been discussed this afternoon. The solution has been proposed to the council, because, being an extension of the Lloyd's business plan, it is not something that the Council of Lloyd's can do itself. It is something that the members can do.
I have seen details that satisfy the requirement of all the players in this sorry saga. So it is with some hope, expectation and excitement that I announce this to your Lordships. The details will follow, because I do not want to refer to a small part of it and get it out of' proportion. There is some hope not just for the names who have been worst hit but for the managing agents and members agents. It may also give some relief to my noble friend the Minister.
I am in no way anticipating my noble friend's reply to the debate. I am looking forward to hearing what she has to say. The plan involves the current players in the Council of Lloyd's. I hope that there will be some relief for those names who have recently seen the 1990 results and have every reason to fear the 1991 results.
§ 5.18 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Baroness Denton of Wakefield)
My Lords, I thank the noble Lord, Lord Peston, for bringing this matter before the House. It is, as he said, some time since the issue was discussed here or in another place. Two facts need to be borne in mind. The first—on which many of your Lordships agree—is that Lloyd's is an important market place which has been commercially successful for many years, contributing considerably to our invisible exports; and, as my noble friend Lord Chelmsford pointed out, responsible for providing a great many jobs.
When trading difficulties arise, it is important to distinguish between what is a straightforward trading loss, whether or not subject to civil legal dispute, and what is a regulatory question.
The second point is that insurance regulation may he for the protection of two distinct parties; the policyholder on the one hand and the investor in the insurance undertaking on the other. Most of the comment that we have heard today relates to investor or underwriter protection rather than policyholder protection, although I shall return to the latter.
Every investor is now warned that investments can fall in value as well as increase. At Lloyd's every new underwriter or name is warned before he joins that insurance is a risk business and that he has personal unlimited liability for his insurance obligations. Several noble Lords have pointed out that unlimited 1730 liability is just that—unlimited. Every penny they possess is pledged to their insurance underwriting for the protection of the policyholder.
Lloyd's is a unique institution arid its self-regulatory regime has evolved specifically to deal with its particular features. operates a system of professional independent regulation with a strong practitioner input. The corporation of Lloyd's employs 200 staff dealing specifically with regulation. None of these employees may be names themselves. either as underwriters or as market practitioners.
There have been significant changes in the past decade in self-regulation at Lloyd's to improve the protection afforded names. This process is continuing. However, it is in the very nature of the insurance industry that problems take a long time to emerge and to resolve. Much of the underwriting giving rise to the losses emerging and being suffered by names today took place in the 1970s and before. For Lloyd's, as with other insurers, these problems have been compounded by the industry passing through the low point in its cycle between 1988 and 1992. As my noble friend Lord Lindsey and Abingdon said, low premium rates have coincided with an abnormally high level of catastrophes.
Lloyd's regulation encourages ethical standards of behaviour and not just obedience to the letter of the law. However, the Government recognise, as does the new management team at Lloyd's, that practice up to and during the early part of the 1980s fell short of what was required.
Much has changed since then. The Lloyd's Act 1982 revised the constitution of the society and a council was created to take over from the old committee of Lloyd's responsibility for regulation of the members of Lloyd's and all those businesses which operate within the market. A key aspect of the council was the introduction of outsiders to be nominated members whose role can best be approximated to that of a non-executive director. Since the council's inception and throughout the 1980s it undertook a massive overhaul of Lloyd's regulatory structure through the promulgation of new by-laws covering all aspects of the market's business.
A general review department was established to monitor the ability of agents and brokers to comply with the by-law requirements. It visits agents and brokers to assess the adequacy of their management, systems and p+ocedures. Investigation and discipline in cases of misconduct are handled through council committees with tripartite representation.
The information available to names has also been substantially improved. Better accounting arid auditing arrangements have increased 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 review.
The regulatory arrangements at Lloyd's have undergone constant evolution since 1982. In 1986 the Government set up a committee of inquiry into the regulatory requirements chaired by Sir Patrick Neill, QC. The inquiry was prompted by the wish to give 1731 names protection comparable with that proposed for other investors under the Financial Services Act. As my noble friend Lord Lucas of Chilworth pointed out, the Neill Report made 70 recommendations which the Government asked the council to implement. The council did that and all the recommendations have been acted upon. The Neill committee of inquiry did not consider that external regulation would be any better.
One of the key recommendations was to increase the number of nominated members of the Council of Lloyd's. The appointment of those members, who have no other connection with the Lloyd's market, is subject to confirmation by the Governor of the Bank of England. The noble Lord, Lord Peston, asked who those people are. They are chosen for their independence of thought and experience of regulation; for example, the chairman of the Securities and Investments Board is a nominated member and I am in no doubt that those members play a major role in securing a strong independent input into self-regulation.
Combined with the external members who represent the names, they form a majority of the members of the council. To emphasise the point, independent and non-practising members make up the majority of the council.
Lloyd's has not left self-regulation with the Neill recommendations. In November 1990 the council appointed a task force chaired by Mr. David Rowland, then the chairman of Sedgwick, to review the workings of the market. The task force report published in January 1993 recommended reform of the market's governance through the separation of market development and regulatory tasks at council level by the setting up of separate market and regulatory boards. The task force also recommended the strengthening of names' rights. These included: the right to ongoing participation in a syndicate; the right to request the council to replace the managing agent of a syndicate; the right to approve major syndicate transactions; right of access to syndicate information and a right to regular meetings of names on a syndicate.
Sir Jeremy Morse, a nominated member of the council, was asked to chair a working party to carry forward the governance recommendations. It reported in June last year. He recommended slimming down the Council of Lloyd's to reflect its reduced role without affecting the majority nominated and external members had over insiders. The regulatory board comprises four insiders, four external and four nominated members together with the head of regulation and the solicitor to the corporation, neither of whom may be names. Sir Jeremy's recommendations were implemented on 1st January this year.
The Lloyd's business plan published in April this year, which many noble Lords mentioned and mostly with approval, advocates yet further moves to make regulation at Lloyd's more overtly independent. The regulatory board is developing plans for reshaping regulation at Lloyd's. The council's aim is to create a structure that replicates the operation of external 1732 regulation as closely as possible. That will be achieved by stripping out administrative functions undertaken by regulatory departments, to achieve greater clarity of purpose, and more intensive training of regulatory staff and adoption of new regulatory principles. There is a firm conviction of the need to tackle the problems.
Despite these extensive changes, names who have lost heavily are understandably suspicious of the circumstances of their losses. Lloyd's has responded to their grievances in a number of ways. It has used its by-law powers to create a system of independent loss reviews which investigate the causes of losses by individual syndicates and provide a report for the names on those syndicates. Each loss review has been led by a senior figure, typically a senior partner of a large accountancy practice or some other figure commanding authority. I believe that many names have welcomed that approach and found the reviews objective in their reporting.
Many names suffering losses on so-called LMX syndicates sought investigation into these alleging fraud. Lloyd's asked Sir David Walker, then chairman of the Securities and Investment Board, and a nominated member of the Council of Lloyd's, to investigate the allegations. No evidence of fraud was brought before Sir David's inquiry.
However, Sir David did find inadequate standards of professionalism care and diligence on the part of a number of members and managing agents. He also noted regulatory weaknesses at least with the benefit of hindsight. In particular, he was surprised that some managing agents had failed to monitor their aggregate risk exposure and that capital adequacy rules contained no element of risk weighting. The regulatory board has either implemented his recommendations or is working on those which are outstanding.
Sir David also analysed the complaint which was mentioned by several speakers today that insiders fare better than external names. He did not find any systematic or large-scale preference for working names. He also observed that, providing it was not immodest, a better performance of the investment of insiders was to be expected.
My department has a role to play in the regulation of Lloyd's, but it is directed at policyholder protection. It is concerned with general oversight of the market and with solvency. The Council of Lloyd's deposits annually with the Secretary of State a statutory statement of business done by members in the previous year. It must, and always does, demonstrate that members of Lloyd's both individually and taken together are solvent as defined in UK and European law. The purpose of those requirements is to ensure that Lloyd's can pay all valid claims from policyholders. It is not the Government's responsibility to become involved in the day-to-day administration of Lloyd's, or to intervene in individual disputes.
We have to be clear on what regulation can and cannot do. Several of the reinsurance contracts between Lloyd's syndicates have resulted in disputes between those who wrote them and their names and those who wrote the original business. Unfortunately, 1733 regulation cannot prevent losses arising from adverse developments in the market or from poor underwriting. The emergence of losses does not mean that there has been fraud or negligence; but, if there is a suspicion of that, evidence should be provided and passed to the relevant authorities.
I shall try briefly to reply to some of the specific points that noble Lord have raised during the course of the debate. I should like to say to my noble friend Lord Harrowby that. I, for one, hope that he will not hesitate to let us hear him speak in future and that he will join us more regularly in debate. We benefited greatly from his contribution. He raised a point that was also mentioned by my noble friend Lord Marlesford. The Government are active in representing the interests of the British insurance industry in Washington, both in opinion forming and in the legislative process.
The noble Lord, Lord Peston, raised the matter of introduction of corporate capital. The rules for introducing corporate capital are still being developed. They will seek to strike the proper balance between the interests of new capital providers and the mechanisms such as the central guarantee fund which ensure the solvency of names and the payment of all valid claims. The Government are working with regulators at Lloyd's to ensure that corporate capital providers are not subject to double regulation by both the DTI and Lloyd's. The Inland Revenue and Lloyd's are working on the appropriate tax regime for corporate capital.
While doubting the value that the DTI may bring to the issue —for which remarks I forgive him—my noble friend Lord Lucas of Chilworth pointed out that regulatory shortcomings, as the reforms have shown, do not necessarily add up to regulatory failure. The 1734 noble Lord, Lord Peston, also asked me what aspects of the matter were being looked into. I believe that he referred to it as a "worst case scenario". My officials, in conjunction with those at Lloyd's, monitor its financial position regularly in the manner to be expected of prudential regulators.
I would say in reply to my noble friend Lord Alexander of Tunis that the events to which he referred occurred before the Neill committee of inquiry took place. That inquiry found no grounds for bringing self-regulation to an end. I do not believe that changing the legislation would do anything to help the present management of Lloyd's secure effective regulation in the meantime. What we have seen at Lloyd's is a decade and more of perpetual improvement. I was pleased that most noble Lords seemed to agree, particularly my noble friend Lord Renwick, that what is now needed is a period of stability. Those who call for new legislation to make regulation statutorily independent need to take a view on how long they believe this would take and what they think the impact of uncertainty caused by planning legislation would be on those currently charged with implementing the reforms recently recommended.
I am sure it will be felt that the contributions of your Lordships this afternoon have made a worthwhile input to the debate, which has certainly continued elsewhere for some time. I am sure that this is a subject to which we shall return. As my noble friend Lord Marlesford said, the new management at Lloyd's—and I am sure all others involved —will read Hansard with interest, and I would suggest it will be of value to them.
§ House adjourned at twenty-four minutes before six o'clock.