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LONDON-Intermediaries placing business at Lloyd's of London should be subject to more stringent regulations, according to a discussion document issued last week.
A working group chaired by John Young, who also is a member of the working group that recently published proposals for updating Lloyd's overall regulatory system (BI, May 27), suggested that the seven types of intermediaries channeling business into the Lloyd's market should be subject to more consistent regulation across the board.
Some types of intermediaries, such as syndicate service companies, which are owned by agencies and channel business directly to specific syndicates, are not bound to the same regulatory requirements as registered Lloyd's brokers.
The document notes that the regulations governing brokers and other intermediaries have been in place for almost 10 years.
According to the document, the regulations are "neither sufficiently comprehensive in. . .scope, nor in step with intermediary regulation elsewhere in the financial services sector in certain key respects."
The document proposes introducing a more compliance-oriented culture of regulation that would apply to all types of intermediaries placing business at Lloyd's.
All 153 Lloyd's brokers are required by law to be approved by the Insurance Brokers Registration Council, as are all brokers operating within the United Kingdom.
However, Lloyd's brokers currently are exempt from two areas of compliance.
One compliance area relates to accounting procedures, while the other relates to errors and omissions liability coverage requirements.
The Insurance Brokers Registration Council in March proposed lifting the Lloyd's brokers' exemption from IBRC accounting standards.
Although the working group considered Lloyd's withdrawing from broker regulation and leaving it up to the IBRC or alternatively Lloyd's taking over the entire responsibility for regulation, it decided the best course is to strike some sort of balance between the two.
The Lloyd's document questions the financial requirements of Lloyd's brokers, pointing out that inflation has eroded the levels set almost 10 years ago. In the introduction to the document, Sir Alan Hardcastle, chairman of the Lloyd's Regulatory Board, noted that the "current financial requirements are on the one hand potentially inadequate for the largest broker, but on the other hand represent too high a hurdle for the smaller broker and may act as an unnecessary barrier."
Also, the document comments on an "inconsistency" in the way different brokers deal with certain transactions.
It calls for brokers to distinguish insurance brokering accounts-clients' funds-from their own assets in their reporting.
Capital requirements should be consistent across the different types of intermediaries, it suggests, but it notes that "brokers with substantial asset margins and well-developed management and internal control processes present a lesser regulatory risk." As a result, it proposes that though the levels should be equalized, the stronger brokers should be monitored less frequently than others.
What's more, it recommends a more "risk-oriented regulatory approach."
Central to the document's proposals is the development of a set of core principles for all Lloyd's brokers, supported by codes of conduct.
"This is the modern approach, and it is certainly more flexible," the document says.
Other features include ensuring "sound and prudent management" within Lloyd's brokers, including the registration of directors and senior employees, and introducing a continuing education program.
The document recommends that the requirements for Lloyd's brokers to carry errors and omissions insurance, in force since the beginning of 1991, should be revised.
Most likely there will be an increased cost of regulatory compliance, the document says, but this should result in "some commensurate benefit" the document concludes.
The document will go back to the Regulatory Board in the fall, after comments on it are received by the end of September.