Since 1997 – the “Year of the Broker” – Lloyd's has relieved its broking community of somewhere in the region of £1.3m in regulatory fines and costs as a result of numerous disciplinary proceedings. Following the transfer of the regulation of Lloyd's brokers to the General Insurance Standards Council (GISC) in July, brokers are promised a less adversarial regime with settlement being the preferred solution to regulatory shortcomings. To what extent though is Lloyd's relinquishing its regulatory powers, and what other issues will Lloyd's brokers and Lloyd's managing agents face as a result of this profound change to regulation?
In some quarters there is a misconception that the concept of a Lloyd's broker has disappeared. This is not true and a register of Lloyd's brokers will still be maintained. It will be a pre-requisite for any broker wishing to place business in the Lloyd's market that they are regulated by GISC but also, and more importantly, that they are “suitable” in Lloyd's eyes. Lloyd's published proposed accreditation standards are scheduled for October.
Although there has been a change in the regulator, there has been no change in the primary legislation, which sets the framework for Lloyd's regulatory powers and obligations. The Lloyd's Act 1982 remains intact and consequently so do the prohibitions on managing agents being associated with Lloyd's brokers.
But the Intermediary Amendment Byelaw highlights the changes relating to the regulation of Lloyd's brokers. Importantly, Lloyd's brokers (and their employees) will still be subject to the fixed penalty and summary proceedings regime of the Misconduct & Penalties Byelaw for matters occurring prior to July 3 2000. Lloyd's brokers will also be subject to the Misconduct & Penalties Byelaw after July 3, although in this case Lloyd's only sanction will be to remove the offending broker from the register if they are no longer deemed “suitable”.
Lloyd's will also not be able to require a Lloyd's broker or its employees to give evidence or produce documents in relation to a Lloyd's inquiry or investigation. Finally, Lloyd's brokers are excluded from the ambit of the Sneak's Byelaw although there is an ambiguity in the drafting which may mean that the byelaw continues to apply to directors and employees of the Lloyd's broker.
Whether the GISC regime results in substantive regulatory change or proves to be less adversarial in practice will no doubt depend to a large extent on the personalities who drive the GISC and, in particular, its Enforcement Committee. Certainly via the proposed Warning Notice procedure, there is an attempt to encourage settlement (although cynically it could be argued that this procedure could be misused as a fixed penalty procedure).
The GISC rulebook is, in many respects, less prescriptive and certainly more user-friendly than the miscellany of Lloyd's byelaws, codes of practice and other regulations that currently govern broker regulation. There is likely to be more emphasis on monitoring visits (to be carried out by Ernst & Young as a sub-contractor of the GISC) than on the current method of paper reporting.
One area that brokers will need to concentrate on will be how they deal with their agents, for example, under delegated authorities from underwriters. The GISC rules will require written agreements to be in place with agents and sub-agents. These agreements will need to set out responsibility for compliance, including the Competence and Training Requirements, and the parties will have to consider the need for compensation in the event of breach.
This area will also be of particular importance to service companies (when, rather than if, they become regulated by the GISC) who have delegated underwriting authority and who either sub-delegate that authority or appoint agents to market certain schemes or products.
Those who appoint agents must also be aware of the need for due diligence on the agent and be able to demonstrate that proper controls and procedures are in place and ensure compliance with the GISC rules.
The change in regulation to GISC, which presents a major challenge to managing agents, is that of broker credit risk. There are three forces at work. First, the requirement for Lloyd's brokers to enter into a security and trust deed has been removed. Second, the rules on segregation of insurance monies developed by GISC are broadly in line with the existing Insurance Brokers Registration Council rules and will not constitute trust accounts. GISC is, however, reviewing whether a move to trust accounts will be possible. Thirdly, the Code of Practice on Managing Credit Risk issued in July places a regulatory requirement for managing agents to have “effective procedures in place to determine the creditworthiness and suitability of the intermediaries”.
At a time when the capital providers are often aligned with a managing agent it is arguable that managing agents would be commercially driven to monitor credit risk themselves in any event. However, agents are now faced with yet another regulatory requirement and one which will be difficult to fulfil.
A proper understanding of the credit risk a broker poses would require access to, and analysis of, current financial information on that broker.
Managing agents will no doubt consider forming sub-committees of the board to look at broker security, with a documented protocol for reporting and monitoring. The thorny issue of liability for premium will also need analysis.
It is still too early to see how profound the effects of the regulatory change will be on Lloyd's brokers. On a day-to-day basis it is possible that no significant change will be felt initially, although the Competence and Training Requirements and responsibility for agents are two areas which will require immediate attention. However, over a time, as GISC's regulatory style and culture develops, particularly in the area of monitoring and training, the long-term effects will become evident. For managing agents, the work starts now and establishing a robust regime for monitoring broker credit risk will be on everyone's agenda.