The government was under fire after the EC issued a damning report into its regulation of the Lloyd's market.

The European Commission issued a formal warning and demand for facts on 21 January.

The UK has two months to come up with its answers after which the EC will decide if the government has broken European law.

The EC acted after complaints that the UK government failed properly to implement European insurance directives relating to Lloyd's.

Tuesday's letter of formal notice - the official equivalent of a rap over the knuckles - is the second it has issued on the subject.

The commission said in a statement: "Based on the information currently available and after examination in the light of past failings, the commission still has concerns about the current regulatory and supervisory framework."

It said auditing arrangements should have improved under FSA regulation. But the FSA, it said, seemed to be letting Lloyd's regulate itself.

The commission will also demand information to answer complaints about links between Equitas and Lloyd's.

Roy Perry MEP said the announcement gave ammunition to Names who might sue the government for compensation."This is a very strong statement," he said.

"Clearly the British government's previous responses were unsatisfactory."

William Jaffray, the veteran Name campaigning for compensation from Lloyd's, said: "This turns the climate in our favour. The British government has not been dealing properly with matters at Lloyd's."#