‘the Society, and the members of the Society, taken together’.
Amendment 97 corrects a minor error in the clause relating to Lloyd’s by aligning the approach taken to the cases on which the PRA need not consult on a proposed direction under section 316.
Clause 37 deals with changes to the regulation of Lloyd’s of London brought about by the changes to the regulatory regime. It deals mostly with the implications of the changes to the FSMA provisions. Many Members will be familiar with the difficulties that Lloyd’s have encountered in the past, especially after the extreme losses in the 1980s. It is worth taking time to look at particular circumstances and the court cases against Lloyd’s by various consortia of names, in order to assess whether the provisions in the 2000 Act have been sufficiently effective in preventing further difficulties.
Presumably, the Minister is broadly content with the framing of part 19 of the FSMA arrangements. Obviously, there are changes regarding the responsibilities that various regulators will have, but I assume that he feels that the regime is effective. I want to make a couple of points on some of the detail. It is curious that clause 37 seeks to split the regulation of Lloyd’s between the PRA and the FCA. A part of me is slightly anxious about having two regulatory bodies scrutinising one organisation in this way. The PRA will capture the micro-prudential issues, and presumably the FCA will capture the conduct issues.
The organisation, the market and the syndicates at Lloyd’s are obviously not split into neat micro-prudential and conduct arrangements, so I am slightly nervous about the potential confusion that might arise regarding the two separate organisations and their roles in relation to a unique institution. Can the Minister reassure the Committee about having two split regulatory bodies for Lloyd’s of London? Is he relaxed about that? I am sure he will say that he does not think there is a problem, but he can understand why some of us might have anxieties.
Most of the clause replaces the word “authority” with “regulator”. We have changes downstream as the legislation splits the responsibilities between the PRA and the FCA. The bulk of clause 37 is specifically about the role of the PRA in relation to the regulation of Lloyd’s. Where will the FCA’s responsibilities end in respect of Lloyd’s activities, and where will the PRA’s begin? How do we draw that line in the insurance market arrangements? It is a little confusing, and hard to see how the regulators will work with one another. How will Lloyd’s know which elements of its activities will fall under the PRA’s responsibilities and which will fall under the FCA’s? I would be grateful if the Minister gave the Committee an insight into the architecture within Lloyd’s, and say which elements will not be covered by those two regulators.
On one level, the treatment of Lloyd’s within the regulatory framework is an exception, although on another it proceeds along the same lines as the regulation of any financial services business. The role of the PRA in relation to a general insurer is to look at its solvency and at how it manages risk on its balance sheet, but the sale of insurance to policy holders is a conduct issue and therefore regulated by the FCA. Lloyd’s is not dissimilar; it is an insurance market, so its solvency is regulated by the PRA and its conduct issues by the FCA.
I accept what the Minister is saying, but does he agree that Lloyd’s is exceptional and very different from a general run-of-the-mill insurer because of the involvement of the names and the syndicates, which perhaps makes it a little more complicated to regulate?
I do not dispute that that makes it more complicated to regulate, but we should not avoid the fact that one part of the regulation of Lloyd’s concerns solvency, while another is about how the market conducts itself and its business. Members of Lloyd’s, including names, are not authorised persons in FSMA unless they carry out other regulated activities, and that is a distinction. Professionals who enter into insurance contracts on behalf of names, and who manage their risks, are authorised in the same way as other financial services firms. In part, the distinction is about how Lloyd’s raises its capital, because that capital is provided by the members or names. Provision of capital is not an authorised activity, although the work of managing agents and the way that risks are placed involves traditional insurance business, which is phenomenally successful. That is one of the reasons why the UK has the third largest insurance market in the world and the largest in Europe.
Lloyd’s is very successful, and because of that exceptionality it has a particular regime that is set out in part 19 of FSMA. That does not mean, however, that it should be treated as so different that the normal division between prudential and conduct issues does not apply to it or its operations. I believe that the regime is effective and proportionate, and we work closely with Lloyd’s on these matters. I know that the shadow Chancellor worked closely with Lloyd’s when he was Minister with responsibility for the City, and that led to some reforms to the governance of the market. Lloyd’s can be accommodated within the framework, although some complications require it to have a separate part of the Bill.
I am grateful for the Minister’s response, but I want to examine more closely some of the things that concerned me when I read the clause. As my hon. Friend the Member for Nottingham East made clear, clause 37 amends sections 315 and 316 of FSMA 2000 to split the regulation of Lloyd’s between the PRA and the FCA, and the Minister has made clear his belief that that split regulation will be just as effective for Lloyd’s as for every other financial service.
Will the Minister clarify proposed new subsection (7)(c) which states that
“if it was required by subsection (1)(b) to consult the other regulator and proposes to give a direction which differs from the draft published under subsection (1) in a way which is, in the opinion of the regulator, significant, it must again consult the other regulator.”?
I worry that there may be some confusion about which regulator is responsible for which part, and who is consulting whom. Perhaps the Minister will clarify that point.
Reference has been made to scandals, or at least the problems—let us put it that way—of Lloyd’s in the 1980s. I am privileged to represent a few constituents who were stung, if I can use that term, in the 1980s when they became names at Lloyd’s, following a massive call on the names at the time. New names were not informed that they would be called on almost immediately because the previous several years had returned massive profits to the existing names. As the Minister will know, that resulted in a lengthy court case between the different consortia and syndicates of names, which was settled only a few years ago. That left a bad taste in the mouths of many who were quite happy to act as names at the time, but felt they had not been told the truth back then.
FSMA 2000 aimed to ensure that the regulatory regime did not allow that situation to occur again. Was the Minister satisfied that the regulatory regime worked? In spite of all he has said this afternoon, is he satisfied that the split between the PRA and the FCA will not cause further confusion? I refer again to the paragraph I have just read. As I was reading it—I am not a lawyer—it seemed that there could be some confusion or passing the buck between the PRA and the FCA in the case of Lloyd’s. I would be grateful if the Minister clarified that.
I do not think there is confusion in many people’s minds, apart from the hon. Gentleman’s. We have gone through the reform with Lloyd’s. Although there are exceptions to Lloyd’s and areas where it has a bespoke regime, the same principles apply to Lloyd’s as to any other financial services business. In subsection (6), which amends section 318 of FSMA, proposed new subsection (3A) towards the bottom of page 121 says that a direction under subsection (1) may be given by the FCA in pursuit of its operational objectives, or may be given by the PRA in relation to its general objective, so the authority for the direction is clear. If the PRA issues a direction, it must consult the FCA. If the FCA gives the direction, it must consult the PRA. That is relatively straightforward. There is a danger of the hon. Gentleman creating confusion where there is clarity, as there is in so many other areas of the Bill.