PROPOSAL 8: REPEAL THE "DIVESTMENT"
PROVISIONS
32. The divestment provisions were the most extensively debated
provisions of the 1982 Act, and evidence and submissions on them
took up considerable time at the Committee stage of the 1982 Bill.
They required Lloyd's brokers and managing agents to divest their
interests in each other with the aim of preventing conflicts of
interests. Such conflicts include those arising from situations
such as brokers placing business with a managing agent who is
preferred over another not on the basis of advantage to the policyholder
but because of a connection with the broker. They also include
conflicts arising from a managing agent placing business with
a capital provider for reasons of association with a broker rather
than in the fair interests of that capital provider.
33. The provisions are now believed to be obsolete for two
principal reasons. First, they are structure-based rather than
effects-based and do not prohibit all associations, which means
that they are vulnerable to circumvention and complex to administer.
Secondly, since 1982 the FSA has promulgated conflicts of interest
principles with full and specific applicability to Lloyd's.
34. The proposal would therefore remove the divestment provisions,
but add a requirement of additional disclosure upon managing agents.
Managing agents will be required by a combination of byelaws and
amendments to Accounting Regulations[28]
to set out, in syndicate business plans, the parameters under
which they will conduct business with associated brokers, to identify
any associations with brokers, and to report regularly both to
Lloyd's and to syndicate members the proportion of business with
associated brokers.
35. In consultation, 40 respondents were in favour, one expressed
reservations, and four were against. We note the objections that
were made to the adequacy of FSA control, but we note also the
inadequacy of the current regulatory provisions and the proposal
for additional disclosure. As noted in paragraph 32, it is correct
that the divestment provisions were the subject of extensive debate
at the time of the 1982 Act. However, they are clearly no longer
an ideal solution. The proposed regime has attracted a large majority
of support and would appear to have substantial merit, and the
impact assessment notes that the effectiveness of the new disclosure
mechanism will be the subject of continuing review by the FSA,
as well as being re-examined at the time of the five-year review
of the LRO. We suggest that the FSA set a date for an active review
of the effectiveness of the new measures after an appropriate
period of implementation.
36. We agree that the proposal removes a burden and, given
the additional regulatory supervision that will be put in place
to require disclosure alongside existing safeguards, we believe
that the proposal meets the LRRA requirements in relation to necessary
protections, rights and freedoms, although in the light of concerns
about financial regulatory matters we strongly recommend an early
review of the effectiveness of the new regime.
OTHER PROPOSALS
37. There were several additional proposals for other reform
from consultation respondents and by way of other submissions,
including a proposal to remove Lloyd's immunity from liability
in damages under section 14 of the 1982 Act. While acknowledging
that these additional proposals might merit further consideration,
we do not believe that they need hinder progress of this particular
draft Order.
15 Managing agents are the administrators of Lloyd's
syndicates Back
16
The principal difference between the draft LRO that was circulated
on consultation and the LRO as laid is that the former envisaged
a statutory nine-year cap on the Chairman's term of office; but
see paragraph 20 Back
17
That is, capital capacity Back
18
ED paragraph 4.4 Back
19
See footnote 8 Back
20
http://www.frc.org.uk/CORPORATE/COMBINEDCODE.CFM Back
21
See ED paragraph 4.36 Back
22
Section 6(7) confirms the power of the Council and the Committee
to act by persons, committees, sub-committees and other bodies
whose members may include persons who are not members of Lloyd's,
and through employees, but this is an agency power rather than
a delegation power. Back
23
See section 6(5) and the subsections to which that refers Back
24
See section 8(3) of the 1982 Act Back
25
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32002L0092:EN:HTML;
the directive's objective is to further the creation of a single
market in insurance by creating greater standardisation of national
rules on insurance mediation Back
26
See the annex to the report containing the correspondence Back
27
See the impact assessment annexed to the ED, at paragraph A28 Back
28
See ED paragraph 5.54 Back