rose to move, That the Grand Committee do report to the House that it has considered the Legislative Reform (Lloyd’s) Order 2008.
The noble Lord said: The order that the Committee is considering today seeks to do two things: to modernise the governance arrangements at Lloyd’s, and to remove restrictions that impede the future development of the Lloyd’s market. As the Committee will be aware, Lloyd’s is one of the world’s largest markets for wholesale insurance and a leading part of the London insurance market. In 2007, Lloyd’s members underwrote gross written premiums of £16.3 billion and achieved a profit before tax of £3.8 billion.
When the Government’s proposals were discussed at an extraordinary general meeting on 21 May, 99 per cent of those Lloyd’s members on a capacity-weighted basis who voted supported the proposals. The vast majority of those who responded to the public consultation also supported the proposals. In view of this, I do not propose to detain the Committee with a lengthy explanation of each and every reform, but there are one or two general points that I would like to make.
The first is that the governance reforms are all about ensuring that Lloyd’s has the right people in place at the right time to meet the challenges that it faces. The Lloyd’s market has changed enormously since 1982, and the Government believe that the rules now need to be updated to reflect modern standards and to ensure the governance arrangements are as effective as possible. The market-related reforms are also geared to ensuring that Lloyd’s is able to retain its competitive position, reflected in the figures that I quoted earlier. Removing the rule that gives Lloyd’s brokers near-exclusive rights of access to the Lloyd’s market will give managing agents greater freedom to seek new routes to reach clients around the world and to bring business to the market, as well as supporting efforts that the market is already making to maximise efficiencies and drive down operating costs.
The changes to the ways in which conflicts of interest are managed are intended to provide more effective protection for policy holders and to complement initiatives already being undertaken by the Financial Services Authority in pursuance of its principles-based approach to regulation. It is of course right that we should be cautious in making these changes, and I might able to anticipate some concerns of the Committee.
In consultation, it was suggested that removing the restriction regarding market access could allow poor-quality business into Lloyd’s and that the move to a more principles-based approach to managing conflicts of interests would remove an important protection for investors. I understand those concerns, but the Government do not believe that they are well founded, as we made clear in the explanatory document laid with the order we are considering today.
As far as market access is concerned, Lloyd’s has made it clear that it will introduce a by-law to ensure that all brokers accessing Lloyd’s are subject to the same prudential controls as currently apply to Lloyd’s brokers. In addition, managing agents are already required by FSA rules to monitor and assess their sources of business and distribution mechanisms. This means that all brokers bringing business to Lloyd’s will be treated equally and there will be no drop in standards.
On conflicts of interest, we need to remember that the current rules are not completely effective, because they are limited to prohibiting certain associations between managing agents and Lloyd’s brokers. It is possible for them to be circumvented and they would not apply to associations between managing agents and non-Lloyd’s brokers. In a world where non-Lloyd’s brokers have access to the market, they will not be able to achieve their aim.
In that context, the Government believe that a principles-based approach will provide a more transparent and therefore more effective method of enabling the Financial Services Authority to monitor associations between managing agents and intermediaries. That will work better than the current rules and provide better protection for investors.
As befits this situation, the Government’s proposals have a very practical focus. They aim to reduce burdens on Lloyd’s resulting from the Lloyd’s Act 1982 by removing restrictions and unnecessary bureaucracy. They are not intended to change the more fundamental or constitutional aspects of Lloyd’s governance arrangements. This is not because we seek to forestall discussion of such changes but merely because they are, quite rightly, outside the scope of the instrument before the Committee today.
The Committee will recognise that Lloyd’s is a great British success story. It has been so throughout its 300-year history and it is in our national interest that it remains so for the future. This order is intended to support the excellent work that Lloyd’s is doing and I commend it to the Committee. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Legislative Reform (Lloyd’s) Order 2008. 13th Report from the Regulatory Reform Committee.—(Lord Davies of Oldham.)
I thank the Minister for that introduction to the order. The document produced by the Treasury was a model of clarity and comprehensiveness. I found it, for those of us who do not live our lives worrying about the minutiae of the way in which Lloyd's operates, a particularly helpful document. Given that I spent some time criticising the Treasury for not telling us what it was up to, it is only fair to say that this is a particularly useful piece of work.
The governance proposals in the order seem to be perfectly sensible second-order changes and I have no comment on them. The two more significant changes are those in Articles 9 and 10. I can absolutely see the competition arguments for the Article 9 changes, expanding the number of people who can place business at Lloyd's. I am reassured by Lloyd's intent to require that additional people involved in the market have the same prudential standards as those of Lloyd's brokers. I hope that those standards will be in place when the order takes effect and be rigorously policed.
I have rather more concerns about the second substantive change, removing the prohibition on associations between managing agents and Lloyd’s brokers. This provision, which is now being repealed, was introduced for a good reason, as there was a broadly perceived conflict of interest in the same organisation being able to undertake both functions. Once the changes have been made in Article 9, I can absolutely see why the changes in Article 10 follow on, but there is a real danger that the same conflicts of interest as applied before will rear their heads again.
I have received very detailed representations from an individual who felt—so far as I can see, quite fairly—that he lost out significantly as a result of those conflicts of interest being in operation before the change that we are now repealing. He is very concerned that, once this goes through, the regulatory regime will not be strong enough in practice to stop conflicts of interest re-emerging to the detriment of those doing business through Lloyd’s. I know that that concern was expressed by at least one of the people who made representations in the consultation process.
How is this conflict of interest to be avoided in future? The answer is that Lloyd’s is putting some rules in place and the FSA will also be keeping an eagle eye on how the new system operates. I am concerned about whether the FSA’s eagle eye will be sharp enough and whether its oversight will be sustained sufficiently from the start to avoid the likely conflict of interest that will emerge. If it were possible for the happy situation to arise in which the FSA’s oversight was effective, I would absolutely be able to see why, from a competitive market position, Lloyd’s would benefit from this change, but I remain concerned that the FSA will not be able to undertake that oversight as effectively as we would like. There is no way, a priori, of knowing whether that will be the case, but I hope that the Treasury will keep a very close watch on matters and that the FSA will report regularly on how it is exercising its oversight in that area. There was a major scandal in this area in the past and we do not want another one.
I am grateful to the noble Lord, Lord Newby, and I very much appreciate his anxiety in relation to his last point. On his earlier point concerning how soon the controls will be in place, there will be a slight delay following the passage of this order before the mechanism is in place, but I assure him that it will be very short and that it should not give cause for concern. Lloyd’s has published its draft by-law imposing the standards. It is intended that it will be in force in the new year, so all the work has been done and it will follow very rapidly on the passing of this order.
I turn to the question of whether the new system will provide sufficient protections, and I agree with the noble Lord, Lord Newby, that this is absolutely critical. The new rules will require additional disclosure from managing agents, so more information will be available. They will have to reveal any broker associations in their syndicate business plans and say how they intend to manage them. They will also have to report regularly to Lloyd’s and to syndicate members the proportion of business that they have done with associated brokers, so that information will be provided. Most of those who responded to the document to which the noble Lord referred thought that this protection would be adequate and, indeed, that it was likely to prove better than the existing system.
On effectiveness, the FSA raises its head, and I am conscious that the noble Lord and I have debated such issues in a wider context in recent months. The FSA has rules on conflict of interest in financial services and has been operating these for a number of years. I recognise the pressure on the FSA with regard to crucial issues with the banking system in recent months and over the past year or so. But it has not been suggested that the FSA has failed to enforce the conflict of interest regulations. Our proposals will ensure that the FSA, Lloyd’s and syndicate members have much greater information at their disposal, which will ensure that the actions of managing agents are subject to monitoring at all three levels, assisting enforcement in this area. That point has been considered. The initial information and the necessary protection which the noble Lord has identified is a crucial aspect of the order with regard to the governance of Lloyd’s.
To end on a most unexpected note, I believe I heard—although I may have misheard—the noble Lord, Lord Newby, offering some praise to the Treasury. This is a rare event.
I never thought that for one moment, nor did I assume that it would be catching to the Opposition Front Bench. On this occasion it has been registered, however, and I do not propose to detain the Committee any further; I feel that I must move post-haste back to the Treasury with the glad tidings.
On Question, Motion agreed to.