HL Deb 25 July 1994 vol 557 cc517-20

2.39 p.m.

Lord Peyton of Yeovil asked Her Majesty's Government:

Whether they will replace the system of self-regulation at Lloyd's with one of independent supervision.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)

My Lords, the Government have no plans to intervene in the market to change the regulatory arrangements which were approved by Parliament in 1982 by private Bill procedure. Lloyd's new management has overhauled its self-regulation arrangements within that legal framework and the Government consider this to be the best way forward for the regulation of the Lloyd's market.

Lord Peyton of Yeovil

My Lords, I did not table this Question as a plea on behalf of wounded Names. It is an attempt to explore the Government's mind as to what will be the likely impact on the City of London and on the revenue. Also, if he can go so far, can the Minister give a clue as to the Government's thinking on the effect of decisions in the American courts upon the insurance industry, which could be catastrophic?

Lord Mackay of Ardbrecknish

My Lords, my noble friend asked me a number of questions. With regard to the general issue, in the UK insurance industry as a whole overseas receipts over the past 10 years are very positive despite the difficulties that the Lloyd's insurance market in particular has had not only in this country but also abroad, as my noble friend rightly pointed out. The problem is that insurers are legally bound to pay claims which the courts—including the courts in the United States—have determined to be valid. Any insurer who repudiates such claims would quickly find that it had no customers, apart from being held in contempt of court. It is a difficult issue. But, looked at in the round, the whole insurance industry of the United Kingdom is still a positive asset and a great overseas earner.

Lord Desai

My Lords, does the Minister agree that self-regulation, which failed in the personal investment sector, has rightly been put by the Government to autonomous supervision in the PIA? Does he feel that it is time that the same logic applied to the Lloyd's business as well? Should not we abandon self-regulation and have some proper supervision?

Lord Mackay of Ardbrecknish

My Lords, the Neill Committee examined whether the protection given to names was comparable with that envisaged under, say, the Financial Services Act. Recommendations were made to bring the protection up to the standard expected. Lloyd's has implemented every recommendation addressed to it. There is a considerable difference between investment and insurance. Undoubtedly, anyone who goes into insurance without appreciating that it is a risky business has been badly advised. After all, that is why we insure, even if it is against rain on the school fete day.

Lord Marlesford

My Lords, does my noble friend recognise that the one element of regulation for which the Government are still responsible in respect of Lloyd's is determining whether it is solvent? Is he aware that that exercise is about to be carried out next month? In view of the widespread suspicions and doubts that exist, will he assure the House that the Department of Trade and Industry will take some independent financial advice in determining whether Lloyd's is solvent rather than relying on advice from Lloyd's itself? Furthermore, given that my noble friend has just told us what a good thing the insurance industry has been over the years, is he aware that over the three years from 1991–92 to 1993–94, the taxpayer has had to pay back £876 million of tax revenue against Lloyd's losses? Does he appreciate that for the previous nine years—it is not just a matter of a short time—the net tax deficit is £185 million? Does he accept that there is therefore a rather wider interest in this Question than just for members of Lloyd's and the DTI?

Lord Mackay of Ardbrecknish

My Lords, with regard to the latter part of my noble friend's question, I drew attention to the total insurance market in the United Kingdom, whereas he has drawn attention to the specific problems of Lloyd's. Undoubtedly, over the past few years, for a variety of reasons, especially in the United States, claims have been considerable. There have been a number of natural disasters as well. Many people have claimed back tax on their losses. But, overall, as I said, the United Kingdom still greatly benefits from insurance both at home and abroad.

As for the first part of my noble friend's question, I can assure him that the Department of Trade and Industry will look carefully at the report, which I understand will be published next month. We have no reason to believe that Lloyd's is insolvent. It continues to pay all valid claims. But the report which is out next month will be looked at carefully.

Lord Bruce of Donington

My Lords, does the noble Lord agree that in retrospect it would have been far better if the Government had taken the advice of my noble friend Lord Williams of Elvel in the course of the passage of the Financial Services Bill?

Lord Mackay of Ardbrecknish

My Lords, I am not sure that the Government would always be wise to take the advice of the noble Lord, Lord Williams of Elvel. Occasionally, perhaps they might do so, but not necessarily always. The noble Lord, Lord Bruce, did not tell me what that advice was. Perhaps I may remind him of the Answer I gave some moments ago about the Financial Services Act. We believe that the Financial Services Act is about investment whereas the business of Lloyd's is about insurance. As I explained, that carries a considerable element of risk.

Lord Harmar-Nicholls

My Lords, is my noble friend aware so far as Lloyd's is concerned—I speak as one of the recent walking wounded—that Lloyd's has tradition and experience behind it? Do not the people who join it know perfectly well the commitments that they are taking on when they do so? Will he accept that, from my experience in other spheres, I cannot see that central control could be anything like as good as internal control by the people who know what Lloyd's is all about?

Lord Mackay of Ardbrecknish

My Lords, I thank my noble friend for underlining the point that those people who become names at Lloyd's are very well aware of the fact that they are entering a risk business from which, naturally, they hope to make profits but on which occasionally—in this case unfortunately it has happened over the past three years—they make losses.

Lord Monson

My Lords, does the Minister agree that the trouble with the proposal of the noble Lord, Lord Peyton, is that it would be tantamount to shutting the stable door after the horse has bolted with its saddlebags stuffed full of gold bullion?

Lord Mackay of Ardbrecknish

My Lords, I am not sure that I would go quite so far as the noble Lord. Certainly, we believe that the changes which have taken place in recent years to improve the regulatory system at Lloyd's will mean that the situations which occurred in the early and mid-1980s will not occur again.

Lord Williams of Elvel

My Lords, does the noble Lord agree with me that the Question put by the noble Lord, Lord Peyton, sought to ensure the future of those activities which at the moment are conducted under the Lloyd's umbrella and that it was not to look at the past of those names who may or may not have lost money? The Government may or may not have been wise not to accept my advice, but does the noble Lord appreciate that Lloyd's is a society and not a trading organisation? Will he accept that it is a society of members who may or may not trade under the Lloyd's umbrella? Given the mess—we would all agree that there has been a mess, I think—would it be better for the Government even now to consider whether Lloyd's, as a society, is right for the next century to protect all the activities which, as the noble Lord and I agree, are important for the financial services and economy of the country; or does he fuel that Lloyd's is an anachronism, in which case do the Government have long-term plans to put the insurance activities of Lloyd's on a proper basis?

Lord Mackay of Ardbrecknish

My Lords, as I explained some moments ago, we believe that it is up to Lloyd's to maintain and improve the standards of its regulatory systems. It has recently established separate regulatory and market boards of the council. As I mentioned earlier, the recommendations of the Neill Committee in 1986 and 1987 to bring protection up to the standards expected have been implemented.

The Earl of Harrowby

My Lords, will the Minister accept that I do not agree with everything that the noble Lord, Lord Williams of Elvel, said? Does he agree that the most useful thing that he could do at the moment would be to support Lloyd's in trying to curb the excesses of the American courts? Is not that the vital short-term issue?

Lord Mackay of Ardbrecknish

My Lords, the problem of the huge settlements being awarded in American courts goes a good deal wider than being just a problem for Lloyd's itself. The whole insurance industry both in this country and in America is gravely concerned about those excessive awards. I believe that they are a very real problem. The insurance industry as a whole will simply have to look to the courts in America to be perhaps more realistic.

Lord Peyton of Yeovil

My Lords, is my noble friend aware of the fact that, whatever changes in regime there may be, it is only fair to admit that those who are at present in charge of Lloyd's affairs are doing their very best and doing a great deal better than any of their predecessors?

Lord Mackay of Ardbrecknish

My Lords, I am grateful to my noble friend for that question. It underlines the point I was trying to make earlier that in fact the position has greatly improved since the early 1980s, when many of the problems that we are discussing arose.