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10.43 pm
The Economic Secretary to the Treasury (Ms Patricia Hewitt): I thank the hon. Member for Cotswold (Mr. Clifton-Brown) for his kind remarks and his welcome to me at the Dispatch Box. I also thank him for raising this extremely important issue in the House tonight, and I congratulate him on his success in obtaining
the debate. I am especially grateful to him for giving me notice of the points that he wished to raise; that is especially helpful to a new Minister. I appear to be the first new Minister in the current round of Government changes to speak in an Adjournment debate.
I also take this opportunity to pay a very warm tribute to my predecessor, my hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell). She was, if I may coin a phrase, tough on pension mis-selling and tough on the causes of pension mis-selling. I shall follow her excellent example. I wish her well--as do all my hon. Friends--in her new portfolio.
I turn to the extremely important issues that the hon. Gentleman has raised. Reform of the regulation of Lloyd's is long overdue. Lloyd's itself has recognised the need for stronger independent oversight, and the Government announced in January their proposals to provide that oversight through the new Financial Services Authority. Those proposals, like the rest of our reforms, will create a modern and flexible system of independent statutory regulation, capable of coping with the radical changes that will affect all financial markets. We will publish the financial services legislation, in draft, later this week and consult extensively on that draft legislation. I have no doubt that the hon. Gentleman and his colleagues will wish to comment during that consultation period. The hon. Gentleman referred to Stephen Walton, who is now a member of the team that has been preparing that legislation.
As hon. Members will know, for most of its long history, Lloyd's has been a successful part of this country's financial services industry, making an important contribution to the economy and the balance of payments. Indeed, only a few weeks ago, I had the pleasure of meeting Eric Hammouthe and his colleagues at a very helpful briefing that was arranged for relatively new Members of Parliament to inform us about the Lloyd's position. I was obviously not aware then that I would be rising to respond to this Adjournment debate so soon after that briefing.
As the hon. Gentleman said, in the late 1980s and early 1990s, Lloyd's was hit by an unprecedented financial crisis, suffering losses of £8 billion between 1988 and 1992. The causes of that crisis have been well analysed. They were primarily a combination of both natural and man-made disasters, but they were certainly exacerbated by some bad underwriting decisions and practices. I am aware that some names have made allegations of fraud. The Serious Fraud Office has reviewed very substantial amounts of material put forward by those names, and has found no evidence to support their allegations. If the hon. Gentleman or other hon. Members have any new evidence, I shall of course be happy to pass it on. I am conscious of the fact that many names were hit very hard. The vast majority shouldered their losses honourably, and I am pleased to say that the legitimate claims of policyholders have continued to be met in full.
Lloyd's responded to the disastrous losses with its reconstruction and renewal plan, which involved the creation of a new insurer, Equitas, to reinsure the old liabilities. Equitas's provisions for future claims were set after a massive exercise by consulting actuaries, and this was reviewed in detail by the Government Actuary's Department before Equitas was authorised to begin operations. Nothing has happened since then to suggest that the provisions were inadequate; nor does the funding
of Equitas depend on any annual contribution from Lloyd's. In the almost two years since it began operations, Equitas has made extremely encouraging progress--although of course there is still a long way to go.
Since reconstruction and renewal, Lloyd's has shown considerable vigour in returning to profitability and renewed financial strength, as shown by the ratings that it has received from major independent agencies. As the hon. Gentleman has pointed out, that has been accompanied by some quite profound changes at Lloyd's. Corporate capital has been admitted, and now accounts for 60 per cent. of Lloyd's capacity. Some of that represents names converting to trade with limited liability, but some is from overseas, including the major insurance centres of the United States of America and Bermuda.
The involvement of overseas capital providers with Lloyd's is testimony to the continued strengths of the market and there is every sign that they wish to maintain and develop those strengths. One strength of the Lloyd's market is the common security for all Lloyd's policies that is underpinned by the central fund. The council of Lloyd's has reaffirmed its commitment to common security, which is the basis for the system of licences that Lloyd's holds to trade in world markets.
As hon. Members will know, Lloyd's has been largely self-regulating under the Lloyd's Acts. As the hon. Gentleman rightly said, the Treasury supervises its solvency under the Insurance Companies Act 1982, but less extensively than for insurance companies. Nevertheless, one requirement of that Act is that all premiums have to be paid into trust funds, with deeds approved by the Treasury. There is no question of the joint asset trust fund, or any other trust fund, being wound up without the Treasury's approval, and I can confirm that no such proposal has been made to us.
Since the crisis, Lloyd's has greatly improved its own regulation, which today is generally acknowledged to be in good shape, but we need to ensure that that standard is maintained. More fundamentally, we need to build a modern system of regulation, with proper statutory oversight, capable of responding to whatever future lies ahead. Regulation must be one step ahead of change, not one step behind, and Lloyd's, like the Government, believes that businesses that are well regulated, and seen to be so, will be in a better position to compete in global markets.
The first priority of all insurance regulation is the protection of policyholders. As the Government announced in January, we believe that holders of policies written at Lloyd's should enjoy the benefits of the same kind of supervisory regime as those with policies issued by other insurers. That is why we intend to give the FSA much more extensive prudential supervision powers over Lloyd's. Those will be more like the powers that it will have for insurance companies, including checks on key individuals and comparable powers of intervention and discipline. They will also include a requirement for FSA authorisation of managing agents, the people who are responsible for running underwriting syndicates. We also intend that the FSA should be able to authorise and regulate Lloyd's members direct, if it considers that necessary in the future.
Those powers are intended to give the FSA flexibility to cope with whatever may be the future shape of Lloyd's in a rapidly changing global financial services
marketplace. If Lloyd's were ever to become simply a group of insurance companies, with no common security, each one could be regulated like a normal insurance company--something with which all insurance regulators are familiar. If a diverse market continues, with common security, that will be reflected in its regulation. Whatever happens, we are determined that the security of policyholders should not be compromised.
I come now to capital providers. Members' agents advise members of Lloyd's in which syndicates they should participate. Their activity--advising names and potential names--is very like that of financial advisers, and we therefore propose that they should be authorised and regulated by the FSA. That will give increased protection to members of Lloyd's, some of whom have suffered from bad advice in the past.
Of course, the main risk to members is the risk to which they are exposed through the contracts of insurance which they underwrite. The enhanced prudential supervision arrangements which I mentioned should help to reduce those risks, but insurance is inherently about risk, and those who choose to trade in it must accept that. We do not intend to provide protection against underwriting losses, over and above that needed to give security to policyholders.
Mr. Clifton-Brown:
The thrust of my whole speech was that the time lapse between now and when the FSA comes into operation could be a year or more. Meanwhile, matters need to be investigated under the present regulatory regime. Will the Minister undertake to have a thorough look at all the issues that I have raised this evening? Will she assure us, in particular, that if an application is made to wind up the society of Lloyd's, the Government will not allow the joint American trust fund to be wound up until the names under reconstruction and renewal have been properly and adequately considered?
Ms Hewitt:
I thank the hon. Gentleman for that intervention. I was about to deal with his point about the transition period before the new Act comes into effect. My officials and the FSA are already in active discussion with Lloyd's about how the new regime will work and how the transition should be managed. All those concerned are aware of the danger that regulatory attention might slip in the transition period, and will work closely together to ensure that that does not happen. I shall happily undertake to write to the hon. Gentleman in more detail on the points that he raised. Clearly, if a proposal were made to wind up the joint trust fund, we would have to look at it, but, as I said, no such proposal has been made.
I should like to say something about capacity auctions, in which the hon. Gentleman is interested. Participation in a syndicate recently moved from being a privilege to a right, with the result that a market has developed in trading capacity on different syndicates. That market currently operates through a series of auctions run by the corporation of Lloyd's. In some
ways, that market is similar to markets regulated under the Financial Services Act 1986, and I propose that the FSA should have new powers over Lloyd's.
Questions have been raised recently about whether advice given to names wishing to sell their capacity in the auctions has been wholly impartial and in the best interests of names. I am reassured to see that Lloyd's own regulatory division has taken up the issue and reminded agents of their duties and obligations in giving best advice and avoiding conflicts of interest.
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