A View From The Exchange: UK's Lloyd's of London tackles non-financial misconduct

On 12 September 2024, Lloyd’s of London (“Lloyd’s”) published a consultation setting out proposed rules to expressly include non-financial misconduct in its Enforcement Byelaws for the first time.

Two years after Lloyd's issued its first fine for non-financial misconduct by employee of Atrium Underwriters, Lloyd's proposals are a welcome attempt to tackle culture in the heart of the Square Mile.

Non-financial misconduct has been an area of increased focus for UK regulators for the past few years. In September 2023, the FCA and PRA published consultations on Diversity & Inclusion that included measures to bring non-financial misconduct within their regulatory jurisdiction.

More recently, on 25 October 2024, the FCA published results from its survey issued to over 1,000 wholesale firms in February 2024. Final rules are expected by the end of this year.

We examine below Lloyd's new proposed rules against the backdrop of the FCA and PRA's recent findings.

Non-financial misconduct is misconduct

Lloyd's new conduct framework intended to clarify the types of behaviour that Lloyd's regards as misconduct, covering financial and non-financial wrongdoing. A few points stand out:

1. What is non-financial misconduct? the proposed amendments to Lloyd's Enforcement Byelaw include an expanded definition of "misconduct". In addition to "discreditable" and "detrimental" conduct, the concept of "improper" conduct has been introduced alongside a non-exhaustive list of behaviours capable of amounting to misconduct. This includes the harassment or bullying of another person, and conducting Lloyd's business when under the influence of alcohol or drugs. It clarifies that misconduct can be discreditable even where there is no effect on Lloyd's. We note that Lloyd's has chosen words to describe misconduct which differ from those used by the FCA in its consultation.
2. Conduct outside work: the revised Byelaw expressly notes that misconduct "need not take place in a professional environment" provided there is a material connection to the Lloyd's market. In this, Lloyd's has aligned with the broad approach that the FCA took in relation to its proposed amendments to FIT, but is wider than the FCA's proposed changes to its conduct rules, COCON.
3. Support for whistleblowers: a chapter of the consultation paper is dedicated to supporting individuals affected by poor conduct or behaviour, although details of the support that will be provided to affected whistleblowers are notably absent. As with the FCA's consultation, acting improperly towards a witness or whistleblower is included within the revised definition of "misconduct".
4. (Another) Early Account Scheme: Lloyd's states that it "will not seek to become more directly interventionist." Underpinning this desire is the introduction of an "Early Account Scheme". Firms will be able to investigate allegations within pre-agreed parameters, with a view to securing reductions in sanction for good collaboration. Here Lloyd's has aligned with the PRA. Unlike the PRA's new policy, reductions are not specified, but cooperation is to be considered as a mitigating factor.

The FCA's survey says...

Lloyd's proposals are timely given the FCA's survey findings indicate that there has been a significant increase in reported incidents of non-financial misconduct over the past 3 years.

Whilst this information is caveated by the FCA – for example, the Covid lockdowns in 2021 minimised opportunities for in-person misconduct and an increase in reported incidents may indicate a "healthy speak up culture" – the numbers are likely to be regarded by many as the sign of a growing trend.

Relevant points in the FCA's survey for Lloyd's market firms include:

1. Rise in reported incidents: for London wholesale insurers, for example, the number of incidents more than doubled, from 102 in 2021, to 239 incidents in 2023. Reports for London market intermediaries similarly grew from 89 in 2021 to 246 in 2023.
2. Types of misconduct: for all firms, the highest category of non-financial misconduct was "other" at 36% for London market insurers and 43% for intermediaries – which may indicate why Lloyd's wants to retain some discretion as to which behaviours it regards as "improper" and to be able to take action even without evidence of harm to Lloyd's or its markets.
3. Whistleblowing: although 90% of insurers and 95% of market intermediaries had a whistleblowing policy in force in 2024, only 15% of incidents detected by insurers, and 6% by market intermediaries, were detected through formal whistleblowing channels. This suggests whistleblowing processes may not be well-utilised, even where they are in place.
4. Governance and management information: 37% of insurers and 39% of market intermediaries have no formal governance structure or committee that decides on the outcomes and disciplinary action for non-financial misconduct cases. Similarly, 44% of insurers do not receive any management information on non-financial misconduct. This is the area that the FCA will likely pay the most supervisory attention, as it pushes for non-financial misconduct to be considered a business critical issue.

What happens next?

Lloyd's consultation is open until 16 December 2024. Whilst its consultation may benefit from the headwinds created by the FCA survey, the timing of Lloyd's consultation is somewhat premature. It has published its proposals without waiting to receive the data from the FCA's non-financial misconduct survey. The risk of a lack of alignment to the FCA and PRA rules, in addition to the use of different terminology to classify non-financial misconduct, could result in Lloyd's firms managing compliance with different standards for different regulators.

In any event, firms should review existing policies and procedures now to ensure they can adequately monitor and investigate employees that are being naughty (and not nice). If it wasn't already obvious to firms, what happens at the Christmas party should not stay at the Christmas party.

Authors: Neil Donovan, Partner; Eleanor Robinson, Senior Expertise Lawyer; Anthony Asindi, Senior Associate