Lloyd’s consults on ways to tackle misconduct

Following suit after the FCA’s and PRA’s consultation on diversity and inclusion Lloyd’s has announced that it is proposing to implement a “suite of changes to modernise and streamline its approach to dealing with poor conduct and behaviours in the market which includes dealing with financial and non-financial misconduct.”

Firms have until 16 December 2024 to respond to the consultation.  This article considers what Lloyd’s  is proposing, particularly in relation to non-financial misconduct, and what employers should be doing in response. 

What is the position now? 

Currently, firms who want to understand Lloyd’s position and approach to non-financial misconduct (e.g. discrimination, harassment, bullying, alcohol and drug abuse) have to rely on a mix of sources including Lloyd's Enforcement Bye-Law; a May 2019 bulletin setting out its approach to discrimination, harassment, bullying, drugs or alcohol; various “Dear CEO” letters; market bulletins on specific enforcement proceedings; and Principle 13 of doing business at Lloyd's (“Culture”).

Taken together, it is clear that Lloyd’s has an active interest in ensuring those who are subject to its jurisdiction tackle both financial and non-financial misconduct.  But to date, firms have lacked a comprehensive framework setting out Lloyd’s expectations, and what firms should be doing to comply with those expectations.  

Firms have also faced uncertainty when trying to determine what needs to be reported to Lloyd’s and when, with the Enforcement Bye-Law requiring those subject to the enforcement jurisdiction of Lloyd's to make a report “as soon as reasonably practicable” where they believe that a person has committed or intends to commit misconduct or has contravened certain bye-laws, without further guidance on materiality thresholds or other considerations.    

What is Lloyd’s proposing and why? 

Lloyd’s is consulting on a proposed new “Market Conduct and Behaviours Framework” based on a single market conduct and behaviours overarching objective, which is “to advance and protect the interests, reputation and culture of the Lloyd's market and its people through the promotion of good conduct and the timely intervention into and remediation of conduct that fails to meet Lloyd's expectations.” 

Underpinning the framework will be that Lloyd’s will operate in accordance with a set of “market conduct and behaviours operating principles”. 

Lloyd's proposals are borne from the recognition that their current processes for dealing with issues of poor conduct can be unclear and may cut across firms’ own intervention processes.  It recognises that the current definition of misconduct in the Enforcement Bye-Law is imprecise and requires its Enforcement Tribunal to interpret the definition on a case by case basis leading to uncertainty in past cases.  

Reading between the lines, the proposals are likely to be at least in part motivated by recent challenges to decisions taken by its Enforcement Tribunal. At the heart of its proposal is greater certainty around what “misconduct” means for enforcement purposes, thereby making clearer the remit of Lloyd’s enforcement powers going forward.

How will Lloyd’s approach non-financial misconduct? 

Lloyd’s is proposing an expanded definition of misconduct which makes clear, in relation to non-financial misconduct, that: 

• “Improper” conduct will amount to misconduct (alongside discreditable conduct and conduct that is detrimental to Lloyd’s); 
• Whistleblowing protection is paramount - acts of intimidation of whistleblowers, publication of whistleblowers’ identity, and discussion of a whistleblower's involvement in alleged or actual misconduct (other than for the direct purpose of an investigation or proceedings) will, for example, amount to misconduct; 
• Any acts of harassment (sexual or otherwise), bullying, discrimination or any improper abuse of power or authority over individuals in a more junior position will amount to misconduct. Harassment has the legal definition set out in the Equality Act 2010 and Statutory Codes of Practice, whereas bullying is defined as unwanted behaviour from a person or group that is either (a) offensive, intimidating, malicious or insulting; or (b) an abuse or misuse of power that undermines, humiliates, or causes physical or emotional harm to someone. In assessing whether conduct amounts to bullying, regard must be had to all the circumstances, and Lloyd's sets out a set of factors to consider (to the extent applicable) including  whether the conduct is repeated, the duration of the conduct, the impact of the conduct, the seniority of the individual, whether the person has received previous sanctions or warnings, and whether the conduct would justify dismissal.
• Alcohol and drug abuse will be scrutinised. Misconduct will include conducting Lloyd’s business or representing a Lloyd’s business when either under the influence of alcohol where it leads to unprofessional behaviour or behaviour that risks bringing the Lloyd’s name into disrepute, or under the influence of, or in possession of illegal drugs. 
• Misconduct does not need to take place in a professional setting to amount to misconduct for the purposes of the Bye-Law.  In particular, where there is a “material connection” to the Lloyd’s market, such as the presence of other market participants, the conduct may fall within Lloyd’s jurisdiction. Lloyd’s has made clear it will be following the approach of the FCA when considering whether alleged conduct took place inside or outside the workplace, but that even if the conduct takes place outside the workplace, it may have a legitimate interest in dealing with the issue if it engages the “market conduct and behaviours overarching objective” (for example where an individual has committed a criminal offence such as fraud that could undermine the reputation of the Lloyd’s market.)  In practice, this may mean that more out-of-work conduct will be considered relevant and reportable to Lloyd's than to the FCA.

The definition of misconduct also goes wider, and includes as additional examples of misconduct acts of dishonesty, failing to be open and transparent, the creation of misleading or false documents, and breaches of fiduciary duties. 

The amended Enforcement Bye-law provides that firms are expected to report where there is, or there is suspected, material misconduct (though at this stage there is no guidance as to what “material” means precisely). However, Lloyd’s makes clear that it is not seeking to be a proxy HR function for firms and not every matter involving potential poor behaviour or misconduct will need to be reported to Lloyd’s.

A failure to report a matter to Lloyd's may be relevant to that firm’s “Culture Principle rating” and could in some circumstances amount to misconduct itself by the firm, and poor behaviour or misconduct at firm-wide level should always be reported at the earliest opportunity.  

What should firms do? 

Lloyd’s has taken an increased interest in non-financial misconduct in recent years, as is clear from recent enforcement decisions and sanctions issued. However, the absence of clear provisions in its Enforcement Bye-law has meant there has been a lack of clarity around Lloyd's expectations. 

Seen in this light, Lloyd’s proposals offer welcome clarity to firms, though as usual there remain a number of grey areas and firms will be expected to exercise their judgment to determine when misconduct is “material” thereby triggering reporting obligations. 

While any change to the Lloyd's bye-laws will not come into force for some time and are of course subject to consultation: 

• It is clear that Lloyd’s, like the FCA and PRA, are committed to tackling non-financial misconduct within firms and protecting whistleblowers.  That direction of travel is likely to continue.   
• To a large extent, it is likely that the proposals are an attempt to “codify” Lloyd's existing approach and ensure that its enforcement actions are not vulnerable to legal challenge.  Therefore, for firms, the proposals offer a helpful insight into what Lloyd’s expectations are now. 
• There is an overlap with what the FCA and PRA are expecting of firms in terms of tackling non-financial misconduct, and also the new Duty to Prevent Sexual Harassment due to come into force on 26 October 2024 – for example, Lloyd’s will take into consideration the failure by a firm to respond adequately to an issue or indicators of widespread cultural issues and consider these aggravating factors, and that is likely to also be relevant to a court’s assessment of a firm’s failure to comply with the new duty, where the issue relates to sexual harassment. Read our article on the new duty as it relates to insurers here.
• With that in mind, firms should be reviewing their policies and procedures and ensuring that:
  • These are sufficiently robust to tackle and address allegations of misconduct (both financial and non-financial);
  • These offer sufficient protection to whistleblowers and keep their information confidential; and
  • Managers and HR staff are given regular training on firm policies including  how to recognise a potential whistleblower and how to deal with allegations of misconduct when they arise
  • Consider responding to the consultation where there are areas of uncertainty. 

Relevant links

Proposed New Conduct Framework - Lloyd's (lloyds.com)
Report (lloyds.com)
Market bulletin (lloyds.com)