Letter to the Regulatory Reform Committee
from Cotesworth 535 / 536 Action Group
As Chairman of the Cotesworth Action Group [CAG],
I am a listed consultation respondent to the proposed LRO.
In the July 2008 response to consultation document,
our proposal is outlined in section 4.40, together with the Government
response in 4.41-4.46, in which reasons are put forward as to
why our proposal is not necessary.
The reasoning outlines the role of the Lloyd's Ombudsman
and states that where members believe that they have suffered
injustice in consequence of maladministration, the Lloyd's Ombudsman
has substantial powers under the Members' Ombudsman Byelaw to
investigate any complaint within his jurisdiction, and to make
recommendations to facilitate the satisfaction, settlement or
withdrawal of any complaint—
including recommendations
that ex gratia payments of money be made.
However, the Government's response fails to point
out that, under the Members' Ombudsman Byelaw, Lloyd's are not
obliged to accept or implement the Ombudsman's recommendations
and it is exactly this situation, where Lloyd's unreasonably fails
to accept the recommendations of the Ombudsman, that we wish to
address by way of our revised proposed amendment.
In situations where the Lloyd's Ombudsman had upheld
a complaint by a member, or members, of Lloyd's against Lloyd's
treatment of a Members Compensation Scheme [MCS] application,
and Lloyd's decided to take no action to remedy the maladministration
found by the Ombudsman, the member would have no right of appeal
against Lloyd's decision, and no means of legal redress, however
unreasonable, unjust or unfair Lloyd's decision.
Lloyd's sits, in effect, as judge and jury on cases
where it has been found guilty of maladministration and is uniquely
(for a private body) protected from suit and thus there is no
appeal process available against a decision by Lloyd's, made by
itself, about itself, even if Lloyd's is clearly in the wrong.
In circumstances where Lloyd's disregards an Ombudsman finding
of maladministration in relation to issues as serious as alleged
dishonesty or fraud in the market, the Lloyd's member should have
a right of suit against Lloyd's.
Our amendment is designed to prevent miscarriages
of justice in relation to MCS applications. We have restricted
the amendment to situations where Lloyd's fails to accept and
implement the Lloyd's Ombudsman's findings in relation to a complaint
about Lloyd's handling of an MCS application, since it is especially
important that Lloyd's deals reasonably and fairly with MCS applications,
because these applications, by definition, involve allegations
that there has been dishonesty and / or fraud in the Lloyd's market.
The present situation allows Lloyd's to ignore with
impunity the findings of the Ombudsman in such cases. Our proposed
amendment would therefore reduce the likelihood that Lloyd's members
would be deterred from investigating and presenting an MCS claim
(for losses suffered as a result of dishonesty ,want of probity
or fraud), by the fact that, even if the Ombudsman found that
Lloyd's had treated their claim unfairly and recommended that
Lloyd's compensate them or not impose a prohibitive litigation
requirement, Lloyd's could, with impunity, ignore such recommendations
and thereby prevent applicants receiving compensation or a finding
being made that there had been dishonesty or fraud at Lloyd's.
Our amendment would introduce an additional, very
limited exception to the immunity from suit under the Lloyd's
Act 1982 — Lloyd's
is already open to suit for libel, slander, personal injury and
breaches of Human Rights legislation. The exception to immunity
would only apply to any decisions taken by Lloyd's after the LRO
became Law, and so would not be retrospective.
Our precise proposal is that there should be an amendment
to clause 14(3)(e) of the Lloyd's Act 1982, in the form of a new
(iii), providing other, very limited, exception to the immunity
from suit, if "the act or omission complained of' (the wording
in the Act)
"or (iii) was a failure to accept and / or implement
reasonable findings and / or recommendations of the Lloyd's Ombudsman
in relation to a complaint about the maladministration by Lloyd's
of an application to the Lloyd's Members Compensation Scheme."
The Government raised three principal objections
in relation to our original amendment:
(a) that the amendment would have retrospective
effect
(b) that there were "non-legislative means
of securing [our] objective"
(c) that the "Society would be required
to devote significant resources both in terms of cost and management
time) to contesting such claims [that the Society had failed to
handle MCS applications reasonably and fairly)]"
Our revised amendment is not subject to any of these
objections because
(i) it is not retrospective
(ii) there are no non-legislative means of dealing
with a failure by Lloyd's to accept and implement recommendations
of the Ombudsman in relation to L1oyd's maladministration
of an MCS application
(iii) MCS applications are very rare —
only two substantial applications
in twenty years—so instances where the Ombudsman found that
an application to the MCS had been maladministered by Lloyd's,
and Lloyd's then failed to accept and implement the Ombudsman's
recommendations in relation to that maladministration, should
be very much rarer still. Indeed, they ought not
to occur at all. The
prospective waste of Lloyd's time and resources is therefore not
a relevant consideration.
Furthermore, Lloyd's does not need protecting from
the possibility that Lloyd's might choose
to incur the costs
of contesting a claim based on its failure to implement the Ombudsman's
reasonable recommendations, rather than actually implementing
those recommendations. Our revised amendment could not therefore
be said to contravene section 3(2) (d) of the Legislative and
Regulatory Reform Act 2006 [LRRA] (as the Government said our
original amendment appeared to do.)
The Government also said that it is "not entirely
clear how [our previous] amendment can be said to "reduce
or remove a burden with the meaning of section 1(3) of the 2006
Act." Our revised amendment clearly does remove such a burden
for the following reasons:
The definition of a burden in the Act includes, according
to the Treasury March LRO proposal, both a 'financial cost' and
an 'obstacle to efficiency, productivity or profitability.'
Applications to the MCS, and complaints to the Ombudsman
about the treatment of such applications, are likely to be expensive
undertakings. If Lloyd's were to disregard and/or fail to implement
the findings of the Ombudsman that it had maladministered an application
to the MCS, all the financial cost of applicants to the MCS would
be wasted. More generally, the efficiency of any appeal
process is compromised if the findings of the appeal can be ignored
with legal impunity and successful appellants thereby prevented
from receiving any compensation for the injustice they have been
found to have suffered, or even for the costs of the appeal process.
Moreover, the absence of any available legal redress
for MCS applicants in a situation where Lloyd's failed to accept
a finding, or implement recommendations by the Ombudsman in relation
to an application alleging that there had been dishonesty or fraud
in the market, compromises the efficiency and effectiveness of
regulation in
the Lloyd's market, and effective regulation is a factor that
contributes indirectly to the profitability of the market, because
it enhances confidence in that market.
Regrettably, there is currently an apprehension among
many underwriting members that Lloyd's might ignore reasonable
recommendations by the Ombudsman in relation to an MCS application.
This apprehension has arisen for two principal reasons.
First, Lloyd's views the existing MCS as providing
discretion for them to require applicants to litigate against
agency individuals as a means of proving their claims against
an agent, and Lloyd's recent draft proposals for a future MCS
propose that such a requirement should be the norm rather than
the exception.
MCS applications are (to be) determined by a 'Panel,'
The "guidance" as to what that Panel should take into
consideration when deciding whether or not to make an exception
to the rule of required litigation, does not include the affordability
of that litigation. Prima facie,
the affordability of
an application is a basic and highly relevant consideration for
a compensation scheme designed to provide investor protection
for individual underwriting members of Lloyd's, as part of the
regulatory framework.
Lloyd's have acknowledged that this was the intention
of the Scheme, for in a consultation document issued in August
2007, they stated that:
"the [MCS] Scheme was implemented as a consequence
of a recommendation in the 1986 report of the committee of enquiry
into the regulatory arrangements at Lloyd's chaired by Sir Patrick
Neill QC. The Neill report stated that:
'Names should have at least the same degree of
protection as will be available to investors' in general
under the SIB 's compensation scheme
[the SIB was the forerunner of the FSA]'."
However, unless our amendment is incorporated, Lloyd's
recent proposals could frustrate the purpose of the scheme, because
a requirement to litigate would make it far more difficult
for applicants to obtain redress for dishonesty or fraud or want
of probity. than if the Agent had remained solvent.
By virtue of their contracts with underwriting agents,
underwriting members are both required, and able, to bring claims
against underwriting agents under Lloyd's Arbitration Scheme,
A single individual, or a small group of individuals, can bring
a claim for dishonesty or fraud provided the claim(s) do not exceed
£lOOk. A single individual, or a small group of individuals,
could not possibly afford to secure a Court judgment as a precursor
to obtaining compensation. Unless "affordability" is
regarded as a legitimate consideration in a decision about whether
or not to impose a litigation requirement, individuals or small
groups, could only obtain compensation for dishonesty or fraud
if their agent remained solvent. But this would defeat the purpose
of the MCS which is to provide a route for compensation for such
claims if the agent is insolvent or otherwise unable to pay.
The situation would not be much better for larger
action groups with a larger total of individual claims, because
Lloyd's recent MCS proposals state that a default judgment against
the agent would not be acceptable. MCS applicants would therefore
be obliged to obtain a judgment against an agency individual or
individuals, as a proxy for a judgment against the agent itself.
In cases (like the CAG's), where it is unclear which agency individual
would be held to have caused them loss from dishonesty or fraud,
applicants would be obliged not only to sue a number of individuals
rather than a single agent, but would also have to overcome the
legal difficulties that arise in relation to suits against agency
individuals (with whom applicants have no contract) and which
do not arise in suits against an agent (with whom all potential
applicants would have contracts.) The extra costs and risks would
in most cases render litigation unaffordable even for larger groups
of potential MCS applicants.
In practice, therefore, MCS applications, however
strong the claims on which they are based, are extremely unlikely
to be pursued unless the requirement to litigate is removed or
waived.
In these circumstances, the Ombudsman might well
take a different view from Lloyd's as to whether it was appropriate
to exclude affordability as a consideration relevant to the crucial
issue of whether or not a litigation requirement should be imposed.
There is therefore considerable room for disagreement between
Lloyd's and the Ombudsman as to the situations in which an exception
to the litigation rule should be made.
Potential applicants would need to have confidence
that in the event of such a disagreement, Lloyd's could not simply
ignore the recommendations of the Ombudsman, without the applicant
at least having the right of appeal to a Court. Without such a
right, it is very doubtful if any application to the scheme will
ever be made in the future, however strong the applicant, or applicants'
case, and the intention of the scheme to provide to underwriting
members "at least the same degree of protection as will be
available to investors in general," will be wholly frustrated.
In this context, it should be noted that it is not
just the GAG which considers that a requirement to litigate would
prevent any application being made to the MCS, or being pursued
once made. An article in the most recent edition of the ALM News
(a bi-monthly Newsletter for independent capital providers at
Lloyd's) argues that a litigation requirement would constitute
"a huge deterrent to [Lloyd's members] seeking
compensation for dishonesty against a bust agent"
and that
"no claim under the MCS will ever be made by
a responsible Action Group in future if a requirement to litigate
against the directors [of an underwriting agency] is imposed."
What applies to an action group, obviously applies
a fortiori to
an individual, or a small group of individuals.
Secondly, the judgment in the 2003 Stirling Cooke
Brown case
gives rise to a reasonable apprehension that Lloyd's might wish
to minimise the likelihood of there being a finding that there
had been dishonesty or fraud at Lloyd's, for in this case, where
the judge found that a Lloyd's underwriter had been dishonest,
Lloyd's was criticised in the judgment for failing to comply with
the Court's request to provide the Court with documents in its
possession or to give any reason for that failure—
the judge had to reach the finding of dishonesty
without the benefit of the documents requested from Lloyd's.
A situation where Lloyd's could with legal impunity
ignore a reasonable finding by the Ombudsman that Lloyd's had
exercised their discretion unreasonably or unfairly to impose
an onerous litigation requirement on MCS applicants constitutes
a deterrent to any MCS application being made, and to the investigation
of potential dishonesty or fraud or want of probity that would
necessarily have to precede any MCS application.
Where investigation is less likely, transgression
is more likely to occur. Efficient and effective
regulation should increase, rather
than decrease, the deterrence to dishonesty and fraud in the market.
The incorporation of our proposed amendment is therefore
also justified under Section 2 of the LRRA in which a minister
can make a Legislative Reform order "for the purpose of securing
that …. . regulatory
activities should be carried out in a way that is transparent,
accountable, proportionate, consistent" and 'targeted only
at cases in which action is needed."
Our proposed measure will achieve that very purpose,
because it will provide a disincentive to Lloyd's to disregard
reasonable findings and recommendations of the Ombudsman in relation
to maladministration of an MCS application that seeks redress
for dishonesty and fraud in the market (when that redress would
not otherwise be available because the agent is unable to pay.)
As observed above, the MCS was introduced as a result
of Sir Patrick Neill's review of the "regulatory arrangements
at Lloyd's." Our proposed amendment would both reduce a burden
on individual members who consider that they have grounds to make
such an MCS application, and enhance the effectiveness of regulation
in the market. As such, our proposed amendment would serve both
the interests of individual members of Lloyd's and have
public policy benefits, for it is in the public interest that
there be the utmost confidence in the integrity and regulation
of financial markets of which Lloyd's is a significant part. There
are therefore no grounds for considering that our revised amendment
would contravene any part of Section 3 of the LRRA.
Further, there is no good reason why our revised
amendment should be regarded as "highly controversial."
Lloyd's has very recently acknowledged, in its 26 August 2008
proposals for the future MCS scheme, that the MCS "helps
promote overall confidence in the market." If Lloyd's were
to argue that it needed to retain the right to ignore with legal
impunity reasonable findings or recommendations by the Ombudsman
that it had maladministered an MCS application, that would undermine
confidence in the market, for a crucial ingredient in the
trust and confidence in any financial market is that there will
not be barriers or disincentives to the investigation of dishonesty
or fraud.
I therefore hope that you will support this proposed
amendment, which has been revised in the light of the Government's
comments, and the very recent (26 August) Lloyd's proposals for
the future of the MCS.
31 August 2008
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