The one big investor-backed institution in the city of London, which has escaped the control of the 1986 Financial Services Act, is Lloyd's of London.

However, the world's largest insurance market has only managed to retain its much-prized self-regulatory powers by agreeing last week to a major change in the constitution of its main governing council. The change will shift the balance of power away from working members of Lloyd's in favor of investors, or "Names," and independent members of the council.While Lloyd's has long-maintained that its 30,000 Names, who put at risk their entire personal wealth to back the market, are not really investors in the traditional sense, the government decided that these people are entitled to the same protection as that provided for other investors under the new act.

It therefore ordered an independent inquiry into the way Lloyd's runs its affairs to determine if the insurance market's backers are any more at risk than other investors.

This inquiry, which published its findings last week, did indeed conclude that the current regulatory arrangements at Lloyd's "do not provide protection equivalent to that available to investors in general."

However, it added that this situation could be rectified if Lloyd's makes some changes, the most important of which is to shift the balance of power of its ruling council away from working members of Lloyd's in favor of Names and independently nominated members of the council.

To do this the number of working Lloyd's members on the council will be reduced from 16 to 12, and the number of outside members (nominated by Lloyd's and approved by the governor of the Bank of England) doubled to 8.

Lloyd's, which wasted no time in agreeing to implement the change, has been told by Trade and Industry Secretary Paul Channon that it has a year to make some headway in carrying out the report's 70 recommended reforms. The alternative, Mr. Channon warned, is that he will legislate to ensure the changes are made.

It is likely that Lloyd's will do its utmost to satisfy Mr. Channon, since its main aim, ever since the Financial Services Act was first mooted, has been to avoid losing its powers of self-regulation.

The government has come under considerable criticism from some politicians for its initial decision not to include Lloyd's within the scope of the act, particularly in view of the scandals that have rocked the Lloyd's market over the past few years.

These scandals, which involve total sums far in excess of anything so far unearthed in the Guinness affair, have resulted in money belonging to Names apparently being filtered away by syndicate members and brokers.

However, Sir Patrick Neill, who headed the government inquiry, strongly praised the work Lloyd's has carried out in improving its self-regulation since the 1982 Lloyd's Act and in rigorously investigating scandals and punishing those involved.

But these changes to date do not adequately protect the interests of Names, Sir Patrick claims, and therefore the need for carrying out the reforms he recommends.

These include not only a mandatory examination for new underwriters, but the provision of more information to prospective new Names; giving Names more freedom to chose between agents and syndicates; appointing an independent ombudsman to hear complaints from Names; and improving arrangements for compensating Names against losses that arise otherwise than as a result of normal underwriting risks.

For the full story: Log In, Register for Free or Subscribe