Under the Lloyd’s Act 1982 and Lloyd’s byelaws, the register of members of Lloyd’s is split between Working Members and External Members and the External category is then further divided into Individuals and Corporates. The distinction between Individual External Members (IEMs) and Corporates was introduced following the Pen Kent review of 1998 and was designed to group together, for purposes of voting in Council elections, those members whose interests are most closely aligned.
The External category has the right to elect six members to the Council of Lloyd’s and these are allocated based on the proportion of overall capacity held by the members of each constituency. If the proportion of capacity held by IEMs is between 10% and 33% of the total (judged over a four year period), the IEM constituency has the right to elect two members of Council.
Until the recent change, the byelaw definition of IEMs included (in addition to unlimited Names) corporate vehicles such as NameCos, SLPs and LLPs, but only as long as the members of the vehicle were ‘connected’, which often meant they had to be family members. This often precluded from the definition corporate vehicles which were groupings of unrelated individuals and also some newer structures, for example family trusts, through which individuals invest in Lloyd’s.
This had two significant consequences:
- Individuals in corporate vehicles which did not pass the ‘connected’ test were included in the Corporate constituency where they were dwarfed by corporate capital. In a real sense they were disenfranchised.
- The proportion of capacity held by IEMs had dropped to 10.17% of the total in 2014 and there was a real prospect of it dropping below the magic 10% in 2015; as a result we would have lost one of our Council seats. As a result, the ALM asked the Corporation staff to review the definition of ‘connected’ and also to reassess the classification of corporate vehicles. As it happened, they were pleased to do so because the old definition created a considerable burden for them, requiring detailed analysis of the ultimate ownership of corporate structures.
The New Definition
The ALM has worked with Corporation staff to produce a new definition which will replace the ‘connected’ test. Under the new byelaw, all unlimited liability Names will automatically be classed as IEMs and corporate entities must assess their own voting classification in accordance with the following rules: n Three types of corporate entity will automatically be treated as Corporate; these include members owned by managing agents, Lloyd’s brokers, investment funds and publicly traded companies. All other corporate members will be permitted to elect in good faith to be in either the Individual or the Corporate constituency.
The new byelaw was approved by Lloyd’s Council on 24th September. During the consultation process which preceded this, corporate members were asked to make their election. The outcome was that a number of vehicles will move from the Corporate constituency and become IEMs. If the new byelaw had applied for 2014, the IEM constituency would have increased to 10.9%. It is likely to be a little lower than that for 2015, but because the percentage is calculated over a four year period, the decline will be relatively gradual. This outcome was essentially all that the ALM was seeking at this stage.
Realistically, the proportion of capacity provided by IEMs will continue to decline. The percentage has declined by about 1.5% even over the period since 2008 when Names’ capacity has remained constant, simply because of the growth of corporate capital. A reasonable guess at this stage is that the 10% limit will again be threatened in about five years’ time.
The Council paper does provide for a further review in a few years’ time to reflect any further changes to the nature of the vehicles through which individuals underwrite. The change that would make a significant difference to the percentages would be to draw the distinction on the basis of aligned vs corporate rather than on ownership. This would have been a much more significant change to the thinking at the time of the Pen Kent review and the ALM decided not to press for it at this stage.
Apart from the injustice of effective disenfranchisement, the factor that most supported the change was the Corporation’s push for private capital. It would be strange for private capital to have such a positive endorsement in Lloyd’s strategy and then to find itself dwarfed in the corporate constituency.
Partly because of this, the ALM had strong support within the Corporation and an enormous amount of work was done on the analysis, on the definition and on the consultation; this was all much appreciated. It was also much appreciated that there was virtually no resistance to the change amongst the corporate community