Memorandum by Names' Action for Compensation
and Defence in Europe
I understand that the House of Lords Constitutional
Committee may be investigating the regulatory powers being exercised
by the FSA.
As you are doubtless aware, the European Commission
has instituted infringement proceedings against the UK Government
for its failure to apply European Directive 73/239, as modified
by subsequent Directives, with regard to the regulation of Lloyd's.
The "competent authority" of the United Kingdom that
is supposed to regulate Lloyd's of London is the FSA. The failure
of the FSA to fulfil that task is a matter of current investigation
by the European Commission.
I and others have provided a great deal of evidence
to the Commission in support of the contention that neither the
FSA nor prior competent authorities, the Treasury and the DTI,
have regulated Lloyd's properly and that was why the Court of
Appeal has made the finding that Lloyd's had no auditing system
in place, as it was required, under Insurance Companies Acts of
1974 and 1982, to have. As a result of it not having an appropriate
audit system in place which made provision for outstanding liabilities,
30,000 Names joined Lloyd's on the basis of Lloyd's misrepresenting
the quality of the audit systems. The Court of Appeal having held
that, it is an open question as to whether or not any Names are
ever going to see any compensation for the loss they have suffered
as a consequence of that misrepresentation.
Key to the issues is whether or not it is permissible
for the UK Government to delegate powers that should be administered
by a competent authority of the United Kingdom to one of the regulated
bodies, ie the Society of Lloyd's, a private society. On the face
of it, the idea that a regulated body can itself be a regulator
seems anomalous. It clearly did not work.
Currently the FSA maintains that it does not
have responsibility for a significant number of the managers involved
in the conduct of Lloyd's business, and that it is not responsible
for the protection of the Names and members of Lloyd's even though
the amendment to the Directive in 1991 does maintain that the
regulatory regime of 73/239 is intended to apply to the members
of the Society as well as to policyholders. There therefore appears
to be a lacuna in English law where the FSA disclaims a responsibility,
the Government nominates the FSA as being the "competent
authority" and the European Commission maintains that the
Government has no competent authority exercising responsibility
as required by the Directives.
It seems to me it would be entirely proper for
your Committee's review of the regulatory powers of the FSA to
encompass these issues. If I and colleagues could be of assistance
on giving evidence on the matter to your Lordships, we would be
very happy to assist.
I am enclosing a copy of a report I did for
the European Commission in 2001 which might help you to understand
the points I am making in more detail [not printed].
21 February 2003