UK faces probe over Lloyds

Date: 20/01/2000

By Peter Chapman

AN investigation has been launched by the European Commission into the UK government's role in the dramatic near-collapse of the world-famous Lloyds of London insurance market in the early 1990s.

The move follows a complaint lodged by a group of investors in Lloyds insurance syndicates who faced financial ruin after US courts began awarding massive compensation to workers suffering from asbestos-related diseases.

John Pascoe, one of the Lloyds investors known as 'names' who appealed to the Commission, said their complaint focused on the UK government's failure to ensure the Lloyds market was audited as required by EU insurance legislation.

Pascoe argues that a proper audit, in line with Union rules, would have shown from the early 1980s that Lloyds was likely to face these claims and that there were insufficient reserves to cover them.

He says Lloyds' management failed to supply such an audit and was not forced to do so by the British authorities. "The UK put in place the Insurance Act in 1982 implementing the directive but it was not properly applied," he insisted.

He also claims the UK breached EU law when judges refused to allow complainants in a British case on the issue to appeal to the European Court of Justice.

Pascoe said hundreds of new Lloyds names who unwittingly joined the market during the 1980s and early 1990s would not have invested had they known they would be made liable for claims which are still increasing and are likely to run into billions of euro.

In a complex web of deals, the Lloyds syndicates which the names joined accepted premiums to cover any outstanding claims on old policies taken out by asbestos companies. These policies dated back as far back as the 1930s and 1940s, and were bought to cover health claims from their workers.

The names were financially ruined because it was a condition of their membership of Lloyds that they face 'unlimited liability' for any claims which they could not cover with their initial investments.

A spokesman for Financial Services Commissioner Frits Bolkestein confirmed this week that an official investigation was under way. He said the Commission was still waiting for a reply to an 'informal letter' sent to the UK government asking for information about its application on the EU's first 'non-life' directive.

"The point at issue concerns reserves. There are certain rules laying down reserves to cover potential claims," he explained, although he added that it was too early to say whether the investigation would lead to court action.

But Pascoe believes it will be difficult for the UK to avoid legal action over the issue, and predicts that the government could be forced to foot the bill for the losses incurred by Lloyds names "both in the future and in the past".

He also warns that defeat for the UK would raise question marks over the continued existence of the market. "The complaint puts into question the whole of the Lloyds operation. The ramifications are enormous," he said.

An investigation has been launched by the European Commission into the UK government's role in the dramatic near-collapse of the world-famous Lloyds of London insurance market in the early 1990s.