Revealed: the letters that spared Lloyd's

The Government has finally released the secret letters that it used to persuade the European Commission there were no fundamental problems with the supervision of Lloyd's of London in the 1980s - a period when the insurance market was plunged into chaos and thousands of investors lost billions of pounds.

The Government has finally released the secret letters that it used to persuade the European Commission there were no fundamental problems with the supervision of Lloyd's of London in the 1980s - a period when the insurance market was plunged into chaos and thousands of investors lost billions of pounds.

The letters, sent by Sir Nigel Sheinwald, then the UK's ambassador to the Commission, in 2002 and 2003, are replies to threatened enforcement orders from Brussels. They have been released, after four months of pressure by The Independent on Sunday, under the Freedom of Information Act.

The Commission argued that the regime which allowed Lloyd's to regulate itself, under the supervision of first the Department of Trade and Industry (DTI) and then the Treasury, turned a blind eye to lax accounting systems, market abuses and even fraud. In two letters sent to the Government, the Commission claimed that regulatory failures had taken place for nearly 20 years.

However, after a detailed rebuttal by the Government, the Commission dropped its threats.

Westminster's response has been secret for more than two years. An FoI request, lodged in January, was fobbed off by both the Foreign Office and the Treasury until last week, when they released three letters sent to Brussels between 30 April 2002 and 24 March 2003.

In the key letter, Sir Nigel argues that the Commission's investigation was out of date, as changes in the law had brought Lloyd's under the supervision of the Financial Services Authority at the end of 2001.

He goes on to defend the regulatory regime prior to that, in particular dismissing criticisms of the way Lloyd's was supervised when asbestosis claims brought billions of pounds of losses, and forced many Lloyd's names into bankruptcy.

In particular, he plays down the importance of a 1982 letter to the Council of Lloyd's from Neville Russell, the auditors for many of the market's syndicates, which said: "It appears that ... syndicates ... are unable to quantify their final liability with a reasonable degree of accuracy." Sir Nigel argues that all Neville Russell was doing was pointing out differing views on how to account for liabilities.

The letter was not only withheld from the DTI but from Ian Hay Davison, the senior accountant who was brought in to sort out the problems of Lloyd's in 1983. Sir Nigel says that "given the lapse of time", it was no longer clear whether the letter had been withheld from the DTI. And anyway, he argues, it was not relevant that the DTI should see the document.

Mr Davison has argued that insiders at Lloyd's kept key information from him, including the Neville Russell letter. However, Sir Nigel chose to use quotes from shortly after Mr Davidson joined Lloyd's, when he appeared to praise its regulatory structures, to argue that he was happy with what was going on.

Sir Nigel is now the Prime Minister's chief adviser on foreign policy issues.