Lloyd’s of London strives for change: A new era of accountability amid misconduct scandals

Introduction

Lloyd’s of London (Lloyd’s), the renowned insurance market, has been actively addressing issues of misconduct within its operations. In recent years Lloyd’s has recognised the need to foster a culture of integrity and accountability, particularly in light of various allegations and complaints of bullying and sexual harassment running rife and boorish, laddish behaviour continuing unchecked on a regular basis.

In 2019 nearly one in twelve employees who responded to a Culture Survey commissioned by Lloyd’s reported having witnessed sexual harassment at work, and almost a quarter said they had witnessed the excessive consumption of alcohol.  Furthermore, 22% of respondents said they had seen people ignoring inappropriate behaviour, failing to call it out or report it onwards. Whilst Lloyd’s has attempted to shake off its poor image –  famously imposing its largest ever fine of more than £1m on Atrium Underwriters, for systematic bullying and the sexual harassment of female staff on an annual “boys night out” – the culture of Lloyd’s appears to have been resistant to change.

Pressure from the regulator

Lloyd’s reputation – and that of the insurance market in London in general – has also clearly been vexing the Financial Conduct Authority (“FCA”).  Although Lloyd’s has its own regulatory framework and governance structure, it must adhere to the standards set by the FCA as part of the broader regulatory environment in the UK.

In September 2023 (the same month in which the FCA and the Prudential Regulation Authority published consultation papers on a package of measures designed to promote diversity and inclusion in the financial services sector) the FCA published a Dear CEO Letter on Insurance Market priorities which specifically discussed poor governance and culture in the Lloyd’s and London Market, identifying this as a root cause of recent major conduct failings.  This letter was followed by a mandatory survey letter in February 2024 which focussed on gathering information about incidents of non-financial misconduct – including bullying, sexual harassment and discrimination.

Due to increasing scrutiny and pressure to improve workplace culture and address issues related to harassment and discrimination, in September 2024 Lloyd’s announced plans to introduce a suite of changes to modernise and streamline its approach to dealing with poor conduct and behaviours in the market, including both financial and non-financial misconduct.  As part of the announcement, Lloyd’s explained that it would be making substantive changes to its Enforcement Byelaw firstly as it accepted that its current processes for dealing with issues of poor conduct could be considered unclear and may cut across firms’ own intervention processes, and secondly, to provide greater certainty as to potential outcomes.

Framework for Dealing with Misconduct

Lloyd’s uses two processes to deal with matters of concern relating to financial and non-financial misconduct.  The first is Oversight intervention, which according to Lloyd’s is the primary method for driving the behaviours and expectation of those that operate in the Lloyd’s market. For managing agents this may include intervention under Principles Based Oversight such as adjustments to a firm’s Culture Rating or overall syndicate rating, requirement to put in place a remediation plan or requirement to be subject to a skilled person review. Other action can include the removal of Lloyd’s passes or of any authorisation to operate at Lloyd’s – including for entities and individuals who do not fall within Lloyd’s enforcement jurisdiction, such as coverholders, Lloyd’s brokers, Delegated Claims Administrators and others.

The second process is Enforcement action. Lloyd’s may bring formal enforcement proceedings under its own Enforcement Byelaw against firms and individuals subject to Lloyd’s enforcement jurisdiction. Sanctions can include formal suspension from the market, fines and publication of public censure notices.

Lloyd’s has accepted that there is a need for a wide ranging rework of the Enforcement Byelaw.  It is presently not clear as to the types of poor and unacceptable conduct or behaviours that are covered by it and requires interpretation by Enforcement Tribunals on a case-by-case basis. This is not an ideal approach in an area that demands clarity, and which Lloyd’s accepts caused uncertainty in the past.

Proposed Changes to the Enforcement Byelaw

The Enforcement Byelaw already makes reference to misconduct that could be termed either “discreditable” or “detrimental”. However, Lloyd’s proposes to bolster the definition of misconduct by including a broader category of behaviour termed “improper conduct”.  In order to provide greater clarity on the sort of behaviour that is likely to fall into these categories, Lloyd’s plans to insert a non-exhaustive list of examples of cases that may lead to Enforcement action.

Lloyd’s is also proposing to make two further key amendments to the byelaw that will increase the scope of misconduct that can be considered.  The first is to disabuse the market that it will be necessary to demonstrate that Lloyd’s has suffered harm at an institutional level in order for misconduct to have occurred.  Lloyd’s is keen to explain that it considers that “some conduct (for example, illegal drug-taking, harassment or bullying)” “inherently unacceptable by its very nature and ought to be actionable as such, irrespective of whether or not tangible harm to Lloyd’s or the Lloyd’s market can be demonstrated.”

The second issue is the thorny problem that regulators and companies have been struggling with over recent times, that is, how to deal with misconduct that occurs outside of the workplace.  Lloyd’s proposed method is to follow the FCA’s stated approach – namely that conduct need not take place in the professional environment in order to qualify as misconduct.

The FCA’s current position is that it has an interest in incidents that take place at the office, working from home, working offsite, and social situations related to work. This can include incidents that happened in any work-related capacity or event and may include events that have been organised through work, including staff social events, off-site training and conferences, client entertainment or sponsored events. It would not include private events organised by members of staff among themselves with no other connection to work. Lloyd’s approach will echo this, meaning that it will be able to consider any misconduct under its Enforcement Byelaw so long as there is a material connection to the Lloyd’s market, such as the presence of other market participants.

Interestingly, and again in line with the FCA’s approach, Lloyd’s also proposes that even if the conduct takes place outside the workplace, Lloyd’s may have a legitimate interest in dealing with the issue, for instance, if an individual has been convicted of a criminal offence such as fraud, since that could undermine the reputation of the Lloyd’s market.

Conclusion

Lloyd’s proposed changes to its Enforcement Byelaw are commendable and reflect a necessary evolution in response to contemporary societal expectations, particularly in the wake of the #MeToo movement. However, it is important to recognise that these changes may provoke resistance among some stakeholders who are accustomed to the longstanding traditions and culture within the institution. Whilst the proposals may not be groundbreaking in a broader context, their implementation could signify a significant shift for Lloyd’s and its member firms.  It remains to be seen if they will be sufficient to reshape the work environment, increase inclusion and diversity, and ultimately repair Lloyd’s tarnished reputation.

This article was first published by Thomson Reuters Regulatory Intelligence on 7 October 2024.