David H K Mainwaring

Outline of speech to be given in opposition to the Chairman’s resolution at the Lloyds of London EGM to be held on 12th Sept 2002

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Mr Chairman 

You ask this meeting to vote for your resolution. It reads

“That this meeting approves the proposals set out in the Chairman’s Strategy Group Consultation Document published on 19th July 2002 and requests the Council to proceed with the implementation of the proposals, after considering responses to the consultation, in such manner as it shall think fit”

The resolution should be rejected because it’s wording it too wide.

I believe the examples, which I will give, will justify my call for its rejection.

Mr Chairman, The examples concern Lloyd’s current and past dishonesty. 

I will then move on from that to cover some vital matters that are not discussed in the consultation document.  They will, I believe, prove that the consultation process has been rushed and is ill thought out.	

1) My first example concerns the culture of dishonesty at Lloyds. It covers both criminal and civil matters. It goes back for at least 25 years. But to avoid being accused of looking backwards I will give you an example of downright dishonesty, which occurred last month.

Lloyd’s have just issued an EU lobbying paper for distribution in Brussels. In the document they seek to give the impression that Lloyd's and it's system of auditing  escaped serious criticism by the Court of Appeal in the Jaffray judgement which was handed down on 26th July.

I will quote from the document. 2nd page third paragraph. Lloyd’s state:

" Further, the Court of Appeal made no criticism of the audit system during the period. They found that there was a regulated audit system at Lloyd's , the purpose of which was to ensure that proper estimates of outstanding liabilities were made in the context of both the calculation of the RITC and the assessment of solvency , which were in practice interlinked."

Mr Chairman, do you and Mr Prittjohn believe your own dishonest publicity? Do you hope and expect that your misrepresentations will influence the European Parliament and the EU Commissioners ?

In case you have forgotten the wording of the Court of Appeal judgement in the Jaffray case I will remind you what the Law Lords in fact said 

“In answer to the question whether there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities, including unknown and unnoted losses, is. No.

They also found that the brochures on which prospective names relied contained misrepresentations. The misrepresentations were made to at least 22,000 names.

In light of the dishonesty contained in the Lloyd’s briefing paper, which was issued last month, I call on you to publish a correction and to place advertisements in the British and International financial press to that effect. As a result of this deliberate dishonesty I call on you to dismiss forthwith the individual with overall responsibility, namely Nick Prettjohn.

If you fail to do so, the world will know that the Council supports the making of misrepresentations by Lloyd’s. Immediate dismissal is your only option.

The sooner that Lloyd’s puts its culture of dishonesty behind it the better.

You may be shocked by my words. 

However to prove the culture of dishonesty has thrived at the highest levels of Lloyd’s for many years I will ask you to read the letter from Mr Hiscox to Mr Miller (section 249 of the Jaffray judgement). This letter refers to the investigations into Sir Peter Green’s activities and the failure of Lloyd’s to call theft. THEFT. It challenges Lloyd’s to bring criminal charges against Sir Peter.

Lloyd’s failed to bring the criminal charges or report the matter to the Police for further investigation.

I also refer you to the letter from Sir Peter Green to Mr Miller (section 233 of the Jaffray judgement) It outlines the outstanding horrors that Mr Millar would have to contend with during his chairmanship, which had not been disclosed to the Names. 

I remind you of section 4 of the Lloyds Act 1911 which places a statutory obligation to collect and disseminate. This letter proves intentional failure to disclose vital information to Names.

My second example concerns Lloyd’s dishonesty in the field of accountancy, auditing and solvency certificates.

Mr Chairman. The auditing problem continues today

In the Lloyd’s global accounts for 2001your auditors Ernst & Young sign off the Audit Certificate with the following words:  “We do not express an audit opinion on the financial information set out in the global results”. 

Your complacency beggars belief. This qualification on your accounts is even more serious that the qualification on the 2000 accounts.

Your accounts must therefore be considered unreliable.

Mr Chairman. It is difficult to understand how you could possibly sign the Lloyd’s solvency certificate this year. Further  in light of the Court of Appeal judgement in the Jaffray case, how your predecessors signed the solvency certificate in any year since 1978.

The accounting scandal at Lloyds is worse than Enron because it has gone on for over 25 years. It has already affected over 33,000 Names but in the future it could affect Lloyd’s policyholders world wide.

If you do not dismiss Mr Prittjohn you will demonstrate to the world your contempt for financial accounts and the integrity of the Lloyd’s solvency certificate.

I now refer to another example of Lloyd’s failure to fulfil its statutory duty under section 4 of the Lloyd’s Act 1911.

The recent Jaffray trial has shown that by the late 1970’s that Lloyd’s knew of the asbestos and other problems facing the market. When asking for the Members support for the Lloyd’s Act 1982 not only did your predecessors fail to pass this information on to the Council members, who had been elected by the external Names, the Names themselves -  but they also failed to inform Parliament.

Further Lloyd’s gave Parliament an undertaking that Names would be protected, by E&O insurance, from the negligence of their agents. In return they sought and were given immunity from suit Clause 14 Lloyd’s Act 1982.

Lloyds later unilaterally withdrew the E&O insurance on which Names had relied for protection.

This made the planned R & R scheme inevitable
Nothing has changed? Lloyd’s are not be trusted with this the resolution it has proposed to this meeting.

I will now refer to reports in the financial and insurance press, which were published on 8th Sept this year, I will then ask one question.

Dan Roberts writes

Two-hundred and fifty of the world's largest companies will on Monday petition the US Supreme Court in an attempt to halt a new asbestos compensation crisis that will claim a record number of bankruptcies this year.

If his article is to be believed the Asbestos crisis continues to deteriorate.

Mr Chairman, At the time of R & R your predecessor referred to, talked about and produced finality statements which were relied upon by Lloyd’s and Names. Please will you do the honest thing. Will you now confirm to this meeting that those statements were indeed finality statements. Will you now confirm that the current market will take full responsibility for any future liabilities to Names should Equitas declare partial insolvency at any time in the future? 

If you fail to do so, you will again prove to the world that Lloyd’s word is not to be trusted and that it is a dishonest corrupt organisation.

I now move on to your Strategy Document. I wished to criticise it in a constructive manner through correspondence. You dismissed my letter with the following words “Given that you are litigating against Lloyd’s in the Jaffray action it would not be appropriate for me to comment” etc

I will therefore take this opportunity of raising some of the issues, which would have been dealt with in correspondence

FIRSTLY

The New Capital providers complain that the cost of doing business at Lloyd’s is too high.

The Problems of the Lloyds Brokers have not been addressed.

	It has been estimated that between 1945 and R&R
         that
Underwriters in total made an overall loss of £6 billion
But Lloyds Brokers made an overall profit of £75 billion 

The updated estimate covering a period from 1945 to 2001 would suggest the following:-
Underwriters in total made an overall loss of £12 billion
But Lloyds Brokers made an overall profit of £100 billion

Further more a small number of brokers dominate and possibly intimidate the Underwriters.

Why should the Lloyds brokerage rates continue to be higher than the rates, which are acceptable elsewhere in the international market?

SECONDLY

The Issue of Ownership has not been addressed

	It is my understanding that the Society of Lloyd’s is owned in equal shares by its members.

At the time of R&R the membership collectively paid in the order of £8 billion to fully reserve the market and “offer a clean market for the future”

The consultation Document indicates that it wishes to get rid of Unlimited liability Names.

The value of the Lloyds brand must be worth £1.5 – 2 billion. The £8 billion paid at the time of R&R together with other assets must increase Lloyd’s total value to say £5 billion . 

It is well known that in a franchise system, that the franchisees pay substantial sums to the franchisor on joining the franchise and or by annual levies.

If Lloyds wants to get rid of the Names, why have they not proposed to buy them out? Such levies from the franchisee could raise the sums required to pay the retiring Names.

If the Franchisees can’t or won’t pay the required sums it proves that your proposed franchise system is not viable.

If this matter is not settled amicably it is likely to be brought before the courts.

I would  suggest that the 13-16,000 remaining names will be looking for an average of say £300,000 each.

Your recent letter suggesting that closing open years would enable thousands of names to leave the society is hardly honest unless such a payment is made to them.

The matter of the ownership of Lloyds was not addressed in the consultation document. It must be addressed now

THIRDLY

Why does the Council want to get rid of the Unlimited liability Names anyway?

	I understand that unlimited liability Names provide
        between 20% to 25% of Lloyd’s capacity. (Not an
        insignificant proportion)
	
	Historically Names’ capital has been reliable and has
        seldom been withdrawn before death.

Why not have separate syndicates for Unlimited Liability Names using 3 year accounting and syndicates with annual accounts for the corporates?

After R&R David Rowland made two major observations and commitments.

1)	That Lloyds must be run on a business-like basis and that a Business Plan was essential.
2)	That the “Open Account” problem was the largest problem facing Lloyd’s and that it must be tackled immediately.

Over the 8 intervening years neither of these issues have been resolved. What confidence can any one have that that the future will be different from the past?

Now I would like to turn to but one of the Flaws in the Franchise proposals

	The Council now wishes to “supervise” syndicates 
through the franchise system.

In the past the Council has refused to accept any
duty of care relating to Underwriting and have claimed that they did not have the expertise
to supervise Managing Agents. The Courts have agreed that Lloyds did not have a duty of care to the Names.

How will Lloyd’s suddenly obtain the expertise, which they have admitted they have not had in the past? 

I refer to my earlier comments. How will Lloyd’s ensure that the franchisees will have and maintain accountancy systems which conform with the requirements of the Insurance Companies Acts.

With the franchise system, if Lloyds fails to “supervise” and if as a result Syndicates make losses Lloyds will be sued. 

In light of the Human Rights Act it will be for the Courts to decide whether Lloyd’s will be protected by Clause 14. 

The franchise system could well spell the end of Lloyd’s 

In my opinion no thinking person could support the resolution for this reason alone.

I will now point out but one flaw in the Corporate Capital commitment

It is well known that the Central Fund is under severe pressure.

Lloyds is drawing down £350 million of its Central Fund re-insurance.

On my calculation of timing I would calculate that the majority if not all calls on the Central Fund to date relate to events prior to the attack on the World Trade Centre.

The Lloyds Corporates are usually subsidiaries of major international insurance entities. 

The Consultation Document does not require the Corporate’s Holding Companies to guarantee or support their underwriting subsidiaries at Lloyd’s. If the holding companies were to be required to guarantee their subsidiaries, they would be in the same position as an unlimited liability Name. 

If this approach were taken the Central Fund would be protected and the integrity of the Lloyds policy would be enhanced.

Lloyds should not be competing with an off-shore, unregulated and insecure insurance market in Bermuda.  

If Lloyd’s bases it’s standards on integrity and the security for the Policy holders the business will flow to Lloyd’s.
 
Finally I understand that the Corporates are not tied to Lloyd’s. They can withdraw from the market.

Without full Corporate commitment the proposals covered by the resolution are doomed to failure.

To call an EGM before the consultation process had been completed indicates a rush, possibly panic, but certainly lack of planning and incompetence.

Mr Chairman, I must ask you if there is a sinister reason for the rush? May I remind you – there was a sinister reason for the rush at the time of the Lloyds Act 1982….

If Lloyds is to have a future this resolution should be rejected.

Mr. Chairman, you should go back to the drawing board and then bring a resolution or resolutions, which support specific clear proposals. 

Failing that the Names should be prepared to call an EGM to challenge each bye law,if they feel that the new regulations are not in their best interests, or they may take legal action to challenge the resolution in other ways..

This meeting should not give the Council the power to act “in such a manner as it shall think appropriate” 

Last but not least. I believe that what ever is the outcome of the vote it will be in valid. I will remind you of my meeting last week with Hugh Walsh. I pointed out to him that I believe that you had a statutory duty under the Lloyd’s Act 1911 in relation to this meeting. You are required co collect and to disseminate information to members. You collected the first draft of my speech. I requested that you should distribute it before the Corporates had cast their votes. You refused to do so.

I urge you all to vote against the resolution.