Consultative papers relating to the Financial Services and Markets Bill - plans for the future regulation of Lloyd’s

United Kingdom
In November 1998, the FSA issued Consultation Paper 16 on its approach to its responsibilities under the Financial Services and Markets Bill relating to Lloyd's. Under the Bill, the FSA is given reserve powers in relation to Lloyd's, and this paper explains the extent to which the FSA plans to regulate Lloyd's directly, and the extent to which it will allow Lloyd's to continue to regulate itself under either directions from, or monitoring by, the FSA.

The FSA has two principles which will guide its approach to regulating Lloyd's:

  • advising on participation at Lloyd's is to be treated like any other investment advice, and therefore those that advise others on whether and how to invest at Lloyd's will need to become authorised; and

  • the 'consumer' at Lloyd's whom FSA needs to exercise its powers to protect is the policyholder, and the risk which they need to be protected from is that valid claims may not be paid. To manage this risk, Lloyd's will be required to exercise its powers under FSA's direction.

The main impact of these principles is that FSA style regulation and regulatory values, which Lloyd's has attempted to introduce itself over the last year, will be monitored and, if necessary, enforced by FSA, especially in relation to prudential supervision, underwriting strategies and the adequacy of the monitoring/control of risks.

Authorisation/approval and grandfathering

The Society of Lloyd's itself is to be authorised by the Bill. In addition, managing agents, members agents and Lloyd's advisers will require authorisation to the extent to which they advise on participation at Lloyd's.

Individuals carrying on (to be) specified functions at the Society and within organisations providing advisory services will also require authorisation. Members of Lloyd's themselves are not to be authorised yet, but this will be kept under review by FSA.

Whatever grandfathering provisions FSA eventually decides to use will include authorisation at Lloyd's, and therefore those who are currently active in the (to be) regulated markets will be likely to be 'grandfathered' under the new regime. However, the FSA reserves the right to require a further proof of fitness and properness by any organisation or individual.

Those who control 10% of the capital or voting rights of an authorised entity will require prior authorisation unless grandfathered. Subsequent changes of control will have to be notified.

Prudential supervision of the Lloyd's market

The Lloyd's market is unusual in that its make up includes individual members, who contribute to a Central Fund. However, the EC solvency requirements and overall policy approach of the FSA will require a number of layers of prudential protection:

  • Lloyd's as a whole must, as a minimum, meet the EC levels required of insurance undertakings;

  • FSA will maintain the 'individual solvency test' for members;

  • FSA will continue to impose the 'combined solvency test' introduced in 1997;

  • the Lloyd's Statutory Statement of Business will be amended to follow more closely the returns submitted by ordinary insurance companies to HM Treasury;

  • FSA is to reassess the Lloyd's risk based capital model to satisfy itself that it adequately reflects members at risk; and

  • FSA will audit the continuing aggregation of risk exercises undertaken by the Lloyd's Market Risk Units.

However, in relation to the above proposals, FSA is aware of the complicated nature of the Lloyd's market and remains open to alternative proposals.

Managing agents

FSA will exercise its powers to require Lloyd's to make rules for managing agents to protect policyholders (rather than members of Lloyd's). FSA will consult on the appropriate capital requirements for managing agents. FSA will only monitor managing agents in areas where Lloyd's does not do so, and where Lloyd's does so FSA will satisfy itself that Lloyd's arrangements are satisfactory.

Members agents/Lloyd's advisers

Members agents and Lloyd's advisers are to be supervised by FSA direct, who will make rules for them and monitor their activities. Lloyd's will be required to make rules relating to the conduct of capacity auctions (as opposed to the giving of advice on participation in them). The FSA will consult on appropriate capital requirements for members agents and Lloyd's advisers.

Syndicate capacity market

The FSA has announced that these are unlikely to be given Recognised Investment Exchange status, and therefore likely to be regulated by Lloyd's in accordance with rules approved by FSA. FSA considers it very unlikely that HM Treasury will extend the market abuse regime to include activities on the syndicate capacity auction market.

Custodianship and fund management

Funds are managed at Lloyd's in a number of ways:

  • by Lloyd's itself. Members' funds held by Lloyd's are to be subject to the normal FSA custody and administration regime. Premium funds which are held in accordance with trust deeds approved by HM Treasury (soon FSA), and which are the equivalent to the reserves of an ordinary insurance company, are also to fall under the normal FSA custody and administration regime (rather than the less onerous investment management rules); and

  • by members agents, which are effectively client funds and will be dealt with under the client money regime.

Investigations, discipline and enforcement

FSA will have the full range of powers to gather information on, intervene in relation to, and discipline those that it regulates at Lloyd's (including the Society of Lloyd's itself). In addition, FSA will be responsible for monitoring the investigations, discipline and enforcement action of Lloyd's itself.


The new regime should bring little change in relation to the handling of complaints at Lloyd's. Complaints by policy holders, which currently go to the Investment Ombudsman Bureau, will go to the new Financial Services Ombudsman Scheme. Lloyd's Complaints Department will continue to deal with complaints from policy holders and members who choose to complain to Lloyd's direct, and its approach and decisions will be monitored by FSA.


FSA is still consulting on the compensation regime to be used at Lloyd's, but its intention is to give policyholders at Lloyd's a similar level of protection to that afforded to policy holders of any other insurance undertaking by the Policyholders Protection Board (and soon, the Financial Services and Markets Compensation Scheme 'FSMCS'). The FSA considers that the choice is between continuing to exclude Lloyd's from the industry-wide compensation arrangements (relying upon the Central Fund) or allowing policyholders access to the FSMCS to ensure industry-wide equality if the central fund is unable to meet the claim of a Lloyd's policyholder (in which case, the FSA would need to consult on how such a measure should be funded). The FSA does not intend to allow names access to its compensation arrangements.

Cost/benefit analysis

HM Treasury Insurance Directorate currently has around 5 staff working on the regulation of Lloyd's. FSA plans to expand this to 20 at an extra cost of £1.3m, which would be spread throughout the Lloyd's market. In addition, there will be increased compliance costs in order to comply with FSA's new requirements, and the requirements which FSA will impose on Lloyd's.

However, the introduction of a more rigorous regulatory regime should improve market confidence and have the benefit of bringing Lloyd's even further into line with the standards elsewhere in the financial services industry.