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Clifford Chance

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The regulatory challenges of the Future at Lloyd's

The role of the UK regulators will become prominent as Lloyd’s develops its vision for the future.

The broad market support for the Future at Lloyd’s strategy since its launch in May, is both welcome and timely.

With the “blueprint build” now well underway, stakeholders are beginning to think about how to approach the inevitable challenges that lie ahead, to make this bold vision a reality.

One area that we expect will become increasingly prominent in these discussions is the role of the UK regulators – the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), as regulatory support becomes critical to implementation.

In some areas, the regulators and Lloyd’s already appear to be well attuned.

There is a lot for the FCA, in particular, to like in the Future at Lloyd’s plans. Lloyd’s desire to focus on bringing value to the distribution chain is strongly aligned with recent strategic announcements we have seen from the FCA (and this topic has been discussed previously in this column).

Similarly, Lloyd’s and the FCA are well aligned with their innovation Lab and regulatory sandbox initiatives, respectively, which both promote innovation within the insurtech sector.

Where more challenges lie, however, is how Lloyd’s will regulate the new capital that it hopes to attract to the market. Ultimately, this could become a fundamental question of Lloyd’s role as market regulator going forward.

While Lloyd’s can, of course, streamline its own internal approval processes, PRA and FCA approval is also required for matters such as establishing new managing agents or introducing new capital structures.

If Lloyd’s wants to cut the regulatory red tape for potential participants, it is hard to see how it can do so without taking a greater responsibility for participants with the regulators and this is not necessarily a straightforward task.

A good example is to consider how to manage the potential introduction of insurance-linked securities (ILS) to Lloyd’s risks.

This is one of the most exciting options being considered to open up third-party capital to Lloyd’s.

However, an ILS application requires substantive regulatory engagement and the digital platform structure that is currently under consideration also brings its own complexities as it would put Lloyd’s at the centre of the risk allocation process.

If Lloyd’s assumes the role of platform provider and sponsor for the ILS, it is not clear how this would sit with Lloyd’s own role as market regulator.

While this raises some interesting questions, if Lloyd’s can successfully reposition itself as both market sponsor and facilitator without jeopardising its independence as a regulator, it has the opportunity to add real value to the market, strengthen its already unique position in the sector and, with that, go a long way to achieving one of its key strategic aims.

When the blueprint is published on 30 September, we will, no doubt, find out more. Nevertheless, it promises to be an interesting journey in realising the Future at Lloyd’s strategy.

This article first appeared in Insurance Day