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LONDON-Tougher regulations unveiled by Lloyd's of London will require up to 6,000 executives in the market to pass muster as "fit and proper" individuals, with those short of the mark facing a range of penalties, including fines and expulsion.

The new regulations are a top priority of the Lloyd's Regulatory Plan 1996, which is the market's first attempt to pull the various elements of its self-regulation into one cohesive direction. The plan outlines a number of changes the Lloyd's Regulatory Board has committed to making this year, in what it describes as "a period of rapid and unprecedented structural change."

At the end of the year, the LRB will review its achievements against the stated objectives and set new goals for 1997.

Launching the board's plan last Wednesday, LRB Chairman Sir Alan Hardcastle admitted that Lloyd's strategy was heavily influenced by last year's Civil Service and Treasury Select Committee investigation into the adequacy of self-regulation at Lloyd's (BI, Aug. 28, 1995; July 31, 1995).

"We feel we have addressed the concerns raised," Sir Alan said.

The review of the current state of regulation at Lloyd's, which took most of 1995 to complete, was conducted under the aegis of Rosalind Gilmore, the then-director of regulation who unexpectedly quit her post late last year (BI, Oct. 9, 1995).

"There is a very heavy imprint of (Ms. Gilmore) in the document," said Sir Alan. Ms. Gilmore was involved right up to the board's agreement on the content of the plan late last year, "and we are hoping to retain her on the regulatory board," he said.

Lloyd's plan sets out a number of objectives for the market's new regulatory framework, with the aim of raising professional standards and providing greater protection for policyholders and investors. Those objectives include:

Specifying security standards for policyholders.

Having proper safeguards to protect members' interests.

Promoting fair treatment for all members.

Promoting transparency, or openness, in the market's operations.

Promoting highly competent underwriting through codes of practice.

Demanding that market professionals hold appropriate qualifications.

Authorizing "only those individuals and entities that are fit and proper, meet standards of sound and prudent management and meet high standards of market behavior and practice."

Paramount to both the Lloyd's Council and the LRB is policyholder security, the plan states, and Lloyd's members "must be realistic in their expectations of what can be achieved through regulation."

It also warns names that "regulation cannot second-guess the commercial wisdom of underwriting decisions," though in its role as regulator of Lloyd's managing agents, the LRB does look closely at managing agency controls over syndicate underwriting.

As the market structure changes under Lloyd's Reconstruction and Renewal Plan, the LRB will constantly review the changes to ensure that "new types of business are regulated appropriately." Also, the developments in the market will be "quality-controlled" so that all providers of underwriting capital are treated fairly and to promote "the principles of sound and prudent management," according to the regulatory plan.

Over the coming year, the LRB will be prioritizing its input into the so-called R&R plan's changes. But it also will focus on ensuring high standards of market professionalism, improving the enforcement process for disciplinary measures, developing a risk-based capital project started last year, formalizing members' rights into a guide and looking at how regulation may have to be changed as corporate capital continues to increase its proportion of the market capitalization.

As the LRB's first task, between 4,000 and 6,000 market executives-including underwriters, agents and brokers-will have to go through an authorization process. Directors and certain senior managers of companies that fall under the Lloyd's regulatory banner will have to submit evidence proving they are "fit and proper." Although past tests have been conducted along these lines, they have looked at the overall composition of the board rather than at individuals.

Sir Alan said he expects that some of the people reviewed will not attain authorization, suggesting that once they see the requirements they won't even apply.

The authorization process will make it a lot easier to punish wrongdoers, explained David Gittings, Lloyd's recently appointed director of regulation. Also, individuals still will be subject to Lloyd's disciplinary power even if they have been expelled from the marketplace in a worst-case scenario.

And the new tariff of penalties and fines will make the process "very much more streamlined," Mr. Gittings said. The individual will have a good idea of the penalty they face, he added.

By the end of the year, the LRB plans to introduce a system of vicarious liability that would hold Lloyd's companies liable for the actions of their employees, in addition to unveiling new rules on conduct and a more rigorous system of penalties.

As part of the drive to increase professionalism in the market, the report states the intention to publish "core principles of behavior," consistent with those required in the Financial Services Act 1986. There has already been consultation with the market, said Mr. Gittings, who said he hoped the requirements will be published later this month.

Other priorities for the LRB over the year are:

Introducing criteria of sound and prudent management to be met by agents.

Developing risk based capital in the light of last year's consultation.

Refining the disaster scenario reports agents have been required to supply to their capital providers since last year.

Moving to annual accounting, rather than the current three-year system.

Reviewing the role of auditors to see whether they should have some statutory "whistle-blowing" requirements.

Looking at reimplementing compulsory errors and omissions insurance for underwriting agents.

Compulsory E&O cover for agents was dropped in the early 1990s when the supply of agents E&O coverage dried up.

Sir Alan said the LRB thought that there should be some requirement for E&O cover but conceded that the cost of coverage-which would have to come from outside the Lloyd's of London market-would be "hideous."