Legislative Reform (Lloyd’s) Order 2008

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.)