LONDON—The U.K. government has clarified how its proposed dual regulatory system would affect Lloyd's of London, saying Lloyd's would have one lead regulator but also would be subject to another regulatory body.

While Lloyd's cautiously welcomed the proposals, the trade group that represents managing agents in the market cautioned that the change could result in a complicated three-part regulatory system for such entities.

In a second consultation document on its proposals to replace the FSA, which has regulated insurance, the U.K. Treasury this month said the FSA would be replaced by two new bodies. One would be the Prudential Regulation Authority, while the other would be the Financial Conduct Authority, which previously was named the Consumer Protection and Markets Authority.

The PRA will regulate financial institutions that carry significant risk on their balance sheets, while the FCA will regulate business conduct, according to the government's proposals, which were formulated in response to the global banking crisis.

The public can comment on the proposals through April 14 and draft legislation is slated for spring.

The government proposes that, given the importance “of prudential supervision in ensuring that the claims of Lloyd's policyholders are met,” the PRA should be the lead regulator for Lloyd's as a whole.

“However, the FCA will also play a significant role by regulating conduct in relation to certain activities of Lloyd's, its members and other participants in the Lloyd's market including the dealings with policyholders, customers and investors,” according to the statement.

The government proposes that the Society of Lloyd's, which regulates businesses that operate in the Lloyd's market, and Lloyd's managing agents should be “dual-regulated firms” under the new system.

Members' agents and advisers and Lloyd's brokers would be regulated by the FCA, according to the proposals.

The proposals say that the two regulatory bodies would be required to coordinate their regulation and a memorandum of understanding would be issued to set the areas that should be coordinated.

The proposals also state that clear areas of responsibility for each regulator will be set out to ensure that there is no duplication of regulation.

While Lloyd's welcomed the proposed “twin peaks” regulation, it also said more clarity is needed to ensure there is no duplication of regulation.

“The move to twin peaks regulation means it is inevitable that we will be subject to oversight by both the PRA and the FCA,” Lloyd's General Counsel Sean McGovern said in a statement. “We welcome the acknowledgement that the unique nature of Lloyd's will be recognized in the practical implementation of the new regime and that the PRA will be our lead authority. We hope this will minimize the risk of supervisory duplication,” he added.

David Gittings, CEO of the Lloyd's Market Assn., which represents managing agencies at Lloyd's, said, however, that he fears the new regime would mean managing agents would effectively be subject to three sets of regulation.

Currently, there is a memorandum of understanding to try to minimize regulatory overlap between the FSA and the Society of Lloyd's, Mr. Gittings said.

While the government proposals outline how the PRA and the FCA would coordinate, no mention is made of how they would coordinate with the Society of Lloyd's, which will continue to have regulatory oversight of managing agencies, he said. A memorandum of understanding is needed to explain how three bodies would avoid duplication of regulation, he said.

Some Lloyd's managing agencies are small businesses and regulatory oversight by three bodies “seems disproportionate,” he said.

In addition, Mr. Gittings said, the regulatory burden is increased by the fact that insurers are preparing for Solvency II, the risk-based capital regulatory regime that goes into effect for E.U. insurers and reinsurers at the end of 2012.

Another part of the government's proposal would allow regulators to make public details of any investigation into regulated companies before those investigations are complete, which drew criticism from legal circles.

Law firm Reynolds Porter Chamberlain L.L.P. said the proposal “is contrary to the principles of natural justice and makes nonsense of the existing statutory requirement of confidentiality.”

In a statement, Steven Francis, a regulatory partner at the London-based law firm, said the proposal runs the risk that a company's reputation could be severely damaged even if an investigation found no wrongdoing.