The European Commission is set to take action against the UK government over the regulation of Lloyd's of London in a move that could force changes at one of the world's largest insurance markets.

After an investigation of more than a year, the Brussels authorities are understood to believe that some of the rules governing the 300-year-old insurance market could be in breach of European Union law on insurance. The Commission's decision to open formal proceedings against the UK is the first step towards taking legal action could trigger a wave of multimillion-pound lawsuits against the government from some of the 20,000 individuals who incurred large losses at Lloyd's in the early 1990s.