Select Committee on Constitution Written Evidence

Memorandum (Name and address supplied)

  This paper deals with the regulation of Lloyd's of London.


  Lloyd's of London is a private body governed by a private Act of Parliament. [118]Lloyd's is governed by a ruling Council whose powers are defined in the Lloyd's Act, 1982. The Council [of Lloyd's] shall have the management and superintendence of the affairs of the Society and the power to regulate and direct the business of insurance at Lloyd's [...][119]In other words, Lloyd's is a self-regulating organisation.

  Under section 14 of the same Act, Lloyd's enjoys statutory civil immunity from suit from members of the Lloyd's community. [120]This provision was originally suggested (as one of a number of options by Sir Henry Fisher, [121]whose report formed the basis of the Lloyd's Act. The argument in favour of statutory immunity was that it was necessary to give protection to the Council in regulating the market. [122]It was described as a very necessary provision for the effective regulation of the market by a subsequent Lloyd's Chief Executive and Deputy Chairman. [123]

  This provision was considered vital by the then Chairman of Lloyd's, [124]and it became a political football with certain members of Lloyd's opposing it for a variety of reasons. [125]Ultimately, immunity was "bought" at the cost of "divestment" (a separate issue relating to the internal structure of the Society). [126]With the benefit of hindsight, the suspicion has arisen that the issue of statutory immunity was bound up with secret concern over the extent of asbestosis losses, and the concealment of that concern from the membership of Lloyd's at large.[127]  Even at that time, the issue of statutory immunity attracted strong opposition within Parliament. Lord Fortescue stated: In a country governed by the rule of law, an aggrieved party is surely entitled to go to Court for redress. Lord Napier and Ettrick put it: I submit that there can be no genuine justification for it at all. I say to Lloyd's: "Have you no faith in the Courts? If you have done your job properly, what have you to fear?" Lord Mishcon described statutory immunity as: a very innovatory and, possibly, a wrongly innovatory provision to have written into a statute an immunity from suit for anyone or any institution. It was a question of balance. [128]Ultimately the provision was approved.

  Subsequently in 1986, Sir Patrick (now Lord) Neill, QC, was commissioned by the then Secretary of State for Trade and Industry to report on the Regulatory Arrangements at Lloyd's. [129]The terms of reference for this report were: To consider whether the regulatory arrangements which are being established at Lloyd's under the 1982 Lloyd's Act provide protection for the interests of Members of Lloyd's comparable to that proposed for investors under the Financial Services Bill. [130]This report does not venture into the issue of statutory immunity, but it softens the rigour of section 14 by requiring Lloyd's to establish an independent Ombudsman to investigate complaints by Names against the Corporation [of Lloyd's] [131]and to create a Names' Interests Committee, effectively a feedback mechanism for reviewing investor protection external to Lloyd's and the internal Lloyd's investor protection procedures. [132]

  Lloyd's undertook to implement the recommendations of the Neill Report in full: Exclusion of Lloyd's from the FSA was on the basis of compliance (fully implemented within two years) by Lloyd's with the recommendations of the Committee of Inquiry into Regulatory Arrangements at Lloyd's chaired by Sir Patrick Neill, QC in December 1986. [133]

The Names' Interests Committee was established by Lloyd's in 1987. It was subsequently secretly disbanded in 1993. [134]The references to the Names' Interests Committee in the Lloyd's Byelaws[135]were not amended so, in effect, from 1993 Names were trading at Lloyd's with a protection which was illusory and the promise that Lloyd's had complied completely with the Neill recommendations was false. In 1995, Lloyd's allowed evidence, not submitted by itself, to be put before the Treasury Select Committee indicating the existence of the Names' Interests Committee, and did not refute that evidence. [136]

  Further, the scope of statutory immunity has been extended to exclude any judicial oversight of Lloyd's. In evidence presented to the Treasury and Civil Service Select Committee, the effect of subsequent judicial interpretation of section 14 was described: In the past Names have pressed for a judicial review of Lloyd's. The present Lord Chancellor [Lord MacKay] said in 1982 "Judicial review will be available as a remedy for oppressive or unfair acts . . . Lloyd's will not be placed above the law' (Hansard, 1/4/82). In 1992, Leggatt LJ said `Lloyd's is not a public law body . . . as places it within the public domain and so renders it susceptible to judicial review" (1 LLR 176 [1993]). We believe that Parliament and Names were misled about the availability of judicial review and that in practice this remedy is not available. [137]

  Under the Financial Services and Markets Act, 2000, Part XIX, at sections 314-324, inclusive, Lloyd's was brought within the regulatory scope of the Financial Services Authority: indeed, the Lloyd's writing paper is now adorned with the footnote: Lloyd's is regulated by the Financial Services Authority.

  The current state of the law relating to the issue of Lloyd's Statutory immunity is now being reviewed by the Courts through litigation. [138]Two arguments are being advanced in an attempt to breach it; either it should be read narrowly as only applying to Lloyd's own objects, [139]or, in the alternative, that statutory immunity breaches the Human Rights Act 2000 at Article 6(1), the Right to a Fair Trial. [140]

  In conclusion, the whole raison d'etre of statutory immunity was that it was necessary to ensure effective regulation. That responsibility has now moved to the FSA (which does not itself enjoy statutory immunity). Statutory immunity almost certainly contravenes the Human Rights Act, 2000 and is anyway repugnant to the English legal tradition.


  As already noted, the Lloyd's Act, 1982 gives the Lloyd's Council [. . .] the power to regulate and [the power to] direct the business [. . .][141].

  The only recourse that a member of Lloyd's currently has in a complaint against Lloyd's is through the Lloyd's Members' Ombudsman.

  Two articles are appended to this paper, unedited, 20 February 2001 and 21 February 2001 [not printed] which originally appeared in the Los Angeles Times. These articles show a payment, from the central funds of the Society, with all the appearance of a bribe, being paid to an American Insurance Commissioner in indemnification for legal costs, and subsequently being falsely accounted for.

  It is of interest that the payment was routed through the Lloyd's Legal Services Department, which links it directly to the Chairman of Lloyd's.[142]

  It is fair to say that Members of the Society of Lloyd's did not expect their subscriptions to be used in a manner which is illegal[143]. This matter was the subject of a complaint to the Lloyd's Members' Ombudsman, Sir Brian Hayes, (the only avenue available to a member of Lloyd's) who first acted outside his Byelaw authority[144], breached the confidence of the complaint[145], took an average of seven weeks to respond to each letter, and eventually had the governing Byelaw altered (without notice[146]) to condone the continuing breach of Byelaw of not referring complaints to the Names' Interests Committee[147]. There can, regrettably, be little doubt that Sir Brian simply covered up and ignored a valid complaint made by a member.

  In any case, the Members' Ombudsman Scheme falls short in a number of other areas: Lloyd's clearly consider that the terms of the Members' Ombudsman's remit are sufficient to place him in the realm of an independent conciliator, it being a requirement that the MOS [Members' Ombudsman Scheme] is operationally independent of Lloyd's. However, Lloyd's does provide a number of support functions to the Ombudsman, and it is therefore possible that the degree of independence required by the FSA is not met. Further, although the Ombudsman himself is independent, he is still an appointee of the Council of Lloyd's. It is perhaps to be regretted that the FSA has not sought to impose a scheme which operates, and is seen to operate, with a greater degree of independence from Lloyd's[148].


  Lloyd's is regulated by the Financial Services Authority who sub-contract their regulation back to Lloyd's. As previously noted, Lloyd's has statutory immunity and the FSA does not. This arrangement prevents transparency and accountability.

  Lloyd's itself defined its business model last year as a "franchise". There is a very real danger, under such a model, that Lloyd's does not prosecute cases such as theft, fraud, and breach of agency/contract, as such, but prefers to define wrongdoing in terms of breaches of technical Byelaws. In other words, the concept of fair and effective regulation comes second to the public relations interests of presenting Lloyd's as a "clean" market. In addition, because of the way in which regulation is created and enforced through Lloyd's-practitioner bodies, the suspicion arises, through differential treatment (typically of underwriting losses and in the allocation of central costs between members) that "favoured sons" are treated more leniently in disciplinary matters and that the Lloyd's rules are weighted to favour the interests of those deciding such allocation.

  A number of examples are available: (1) the regulatory proceedings initiated against Motor syndicate 963, Crowe, where the underwriter (Andrew Wallace) channelled business to a company in which he had an interest, and so made an unlawful secret profit[149]. No criminal charges were brought. (2) Cox Syndicate Management Ltd./Cox Insurance Holdings plc. last year transferred approximately £163 million to Lloyd's, which in turn took over the entire Cox liabilities, effectively mutualising them across the Society at large. There are a number of difficulties with this deal: (a) it is extremely doubtful whether it is infra vires Lloyd's powers; (b) the deal was made secretly, by the Council, without the authorisation of the membership as a whole; (c) Michael Dawson, the Cox CEO, was simultaneously a member of the Lloyd's Regulatory Board, and negotiating with Lloyd's Corporation staff; (d) simultaneously, Lloyd's is pursuing "refuseniks" for payment of their underwriting losses, whilst here agreeing to a sweetheart deal.

  In the event of disputes arising between Names and their underwriting Agents, Lloyd's mandates its own arbitration scheme, the Lloyd's Arbitration Scheme (LAS). By and large, this appears to work reasonably well, although it does have flaws. One of the greatest flaws is that the arbitration rules[150] themselves are not a public document; Lloyd's both charges an "administration fee" for use of the LAS[151] (which it itself mandates in disputes) and generally appoints the arbitrator[152]. However, the single greatest flaw in the scheme is the imposition of confidentiality[153]. This has a number of consequences; it prevents the creation of precedents and the refining of market practice and best practice to take account of quasi-judicial decisions; more importantly, it can leave one member, in identical circumstances, unrecompensed through ignorance of both his rights to arbitration and a pre-existing favourable decision.

  Such a situation appears to have arisen on syndicate 1204, where Arbitrations have been sought against the Managing Agent and Members' Agent on the grounds that, when the syndicate increased its size, it was not disclosed that directors of the Managing Agency had declined to take up their "pre-emption" rights; information which would have affected the decisions of other Names. It is understood that at least three arbitrations have been held, and awards made to Names varying between 100 per cent and 50 per cent of their losses. However, the decision in these arbitrations has not been publicised to other members of the syndicate and Lloyd's has declined to take any disciplinary action on its own account.

  It cannot be satisfactory that Lloyd's, as regulator, will enforce the payments of underwriting losses on the one hand, while all the time knowing that a Name is not liable for those debts.

  On a related topic is the wider attitude of regulators. Currently, there is a dangerous confusion as to who regulates Lloyd's, with Lloyd's pointing at the FSA and the FSA pointing at Lloyd's. There can be very little doubt that it is a poisoned chalice, but currently no-one appears to be prepared to accept responsibility.

  Added to this confusion of roles is a confusion of ambit. In evidence to the Treasury Select Committee, the DTI, Lloyd's then regulators, stated: Our regime is a light touch regime. It is designed primarily to protect the policy holders. It is designed to ensure that the policy holders get paid. It is not there to protect capital, be it the capital provided by share capital insurance companies, or the capital provided by Names for Lloyd's[154]. In other words, noone is actually looking after the interests of investors in Lloyd's.

  Subsequently, both Lloyd's and the FSA have stated that "regulation cannot prevent losses occurring". This, while a truism, creates such a broad definition of a regulator's responsibilities as to be worthless. In the 20 years since the passing of the Lloyd's Act, 1982, Lloyd's has effectively wiped out its entire capital twice: firstly during the loss period 1988-92, and secondly 1998-2002. If regulators have entirely failed to prevent such catastrophic destruction of investors' wealth, with consequent weakening of insurers' stability, what is the point of them?

  In 1995, the Treasury and Civil Service Select Committee came to the following conclusion concerning the regulation of Lloyd's (their emphasis). It is a matter of regret that while so much appears to have changed, ultimately things have stayed the same: Our main concern is that regulation at Lloyd's should give assurance that the regulatory failures of the past will not recur. It is evident that no form of regulatory regime can give a 100 per cent guarantee of efficacy but there is much evidence to suggest that the performance of regulation at Lloyd's in the recent past has fallen below acceptable standards.[155]


118   Lloyd's Act, 1982. See also the preamble to the Lloyd's Act, 1871. Back

119   Lloyd's Act, 1982, s 6(1). Back

120   Lloyd's Act, 1982, s 14. Back

121   Fisher, Sir H (1980) Self-Regulation at Lloyd's: Report of the Fisher Working Party. Lloyd's, p 34. Chapter 6: Liability of the Council and Corporation of Lloyd's. At item 6.07 Fisher recognises the danger of law-suits against the Council and posits three alternatives: (a) insurance; (b) letters of indemnity from members; and, (c) statutory immunity. Back

122   Hodgson, G (1986) Lloyd's of London: A Reputation at Risk. Penguin, p 310. Back

123   Davison, I (1987) A View of the Room: Lloyd's Change and Disclosure. Weidenfeld and Nicholason, p 49. Back

124   Sir Peter Green. Back

125   It was opposed, for example, by Malcolm Pearson, now Lord Pearson of Rannoch. Back

126   Hodgson, G (1986) Lloyd's of London: A Reputation at Risk. Penguin, p 315, quoting Posgate: There will be no Lloyd's Bill without divestment. Peter Green will not give way on immunity. So in the end he will come to me and say "Ian, you must help us for the good of Lloyd's". Back

127   See the judgment of Cresswell J in the case The Society of Lloyd's v. Sir William Otho Jaffray, Bt and others, chapter 19 (The Years in Question 1978 to 1988), in particular the sub-section dealing with The Calendar Year 1981. In the discovery relating to this case, two hitherforto secret documents were revealed by Lloyd's, these being the first "Asbestos White Paper" of September 1981, Discussion Document on Loss Occurrence Definitions in respect of Reinsurance Contracts covering Casualty Business, and the second "Asbestos White Paper" of December 1981, Occurence Coverage on Excess of Loss Contracts covering Casualty Business. Back

128   Hodgson, G (1986) Lloyd's of London: A Reputation at Risk. Penguin, p 324. Reporting the second reading of the Lloyd's Bill in the House of Lords, 1 April 1982. Back

129   Neill, Sir N (1986) Regulatory Arrangements at Lloyd's. HMSO, p 4, item 2.1. Back

130   Subsequently, the Financial Services Act, 1986. Back

131   Neill, Sir N (1986) Regulatory Arrangements at Lloyd's. HMSO, p 38, item 7.16 Recommendation 29. Back

132   Neill, Sir N (1986) Regulatory Arrangements at Lloyd's. HMSO, p 40, item 7.28 Recommendation 36. Back

133   Treasury and Civil Service Committee (1995) Financial Services Regulation: Self-Regulation at Lloyd's of London. HMSO, Vol II Minutes of Evidence and Appendices, p 82 item 7. Memorandum submitted by Lloyd's of London. Back

134   Letter to Michael Holman from Sir Brian Hayes, Lloyd's Members' Ombudsman, dated 13 August 2001. Back

135   eg, The Members' Ombudsman Byelaw, Number 13 of 1987, s 7(4). Back

136   Treasury and Civil Service Committee (1995) Financial Services Regulation: Self-Regulation at Lloyd's of London. HMSO, Volume 1, Report, together with the Proceedings of the Committee. p viii, item 11 refers to the Names' Interests Committee. The Names' Interests Committee is also reported in vol. II, p 19 (Memorandum submitted by Lloyd's Names Associations' Working Party). That document dated: 1 December 1994, quoting a diagram printed in Lloyd's: A Route Forward; Report of the Task Force (The Rowland (Task Force) Report) (1992) Lloyd's, London. Back

137   Treasury and Civil Service Committee (1995) Financial Services Regulation: Self-Regulation at Lloyd's of London. HMSO. Fourth Report: Together with the Proceedings of the Committee, Minutes of Evidence and Appendices. p 23, Appendix 2: Letter from Mr Christopher Stockwell, Chairman of Lloyd's Names Associations' Working Party dated 8 February 1996. Back

138   Laws v- The Society of Lloyd's. This case is, at the time of writing, currently being heard. Back

139   [...] The objects of the Society shall be: The carrying on by Members of the Society of the business of insurance of every description including guarantee business; The advancement and protection of the interests of Members of the Society in connection with the business being carried on by them as Members of the Society and in respect of shipping and cargoes and freight and other insurable property or insurable interests or otherwise; The collection publication and diffusion of intelligence and information; The doing of all things incidental or conducive to the fulfilment of the objects of the Society. [Lloyd's Act, 1911. S.4]. Back

140   Article 6: Right to a Fair Trial: 1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice. Back

141   Lloyd's Act, 1982, s 6(1). Back

142   Treasury and Civil Service Committee (1995) Financial Services Regulation: Self-Regulation at Lloyd's of London. HMSO, Volume 2, item 16, p 83 (Memorandum submitted by Lloyd's of London): The Legal Services Directorate, which provides legal services to the regulators and to other areas of the Corporation is now a separate directorate with 47 staff, reporting directly to the Chairman of Lloyd's. Back

143   Anti-terrorism, Crime and Security Act, 2001. s 108, 109. See also: the Public Bodies Corrupt Practices Act 1889; the Prevention of Corruption Act 1906; and, the Prevention of Corruption Act 1916. Back

144   The Members' Ombusdman Byelaw (Number 13 of 1987). Back

145   Ronaldson, C (editor) (2002) A Practitioner's Guide to the FSA Regulation of Lloyd's. City and Financial Publishing. Dingwall, S and Chipperfield, S: Chapter 7, Complaints and Compensation, p 198: The process [ie the investigation of a complaint made to the Ombudsman] takes place in private, and no detail which may identify the parties or the complaint may be released (except on confidential terms to those persons necessary to enable the investigation to be completed). Back

146   Ronaldson, C (editor) (2002) A Practitioner's Guide to the FSA Regulation of Lloyd's. City and Financial Publishing. p 94 (Ronaldson, C) Chapter 3: Supervision Part 1: The Supervisory Approach: It is also an obligation under the Lloyd's Sourcebook that (having regard to the materiality and urgency of a proposed change to a byelaw) Lloyd's consults with interested parties on proposed byelaw changes and informs the FSA of the extent of those consultations and the responses received. Again, what action the FSA will take if it considers that this consultation process has not been adequate is unclear. Back

147   Amendment Byelaw (Number 9 of 2001), s 4(b). Back

148   Ronaldson, C (editor) (2002) A Practitioner's Guide to the FSA Regulation of Lloyd's. City and Financial Publishing. Dingwall, S (solicitor) and Chipperfield, S (barrister): Chapter 7, Complaints and Compensation, p 198. Back

149   Lloyd's reference: 002/2002. Back

150   Tier 1 Arbitration Scheme Rules (1999). Back

151   Rule 3(1)(e). Back

152   Rule 7(1). Back

153   This is a common law presumption, perhaps reinforced by Rule 6(2). Back

154   Treasury and Civil Service Committee (1995) Financial Services Regulation: Self-Regulation at Lloyd's of London. HMSO, Volume 1, p x. Back

155   Treasury and Civil Service Committee (1995) Financial Services Regulation: Self-Regulation at Lloyd's of London. HMSO, Volume 1, p xxvii. Back

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