This blog post was first published in www.compliancemonitor.com and www.i-law.com on September 25, 2024.

#MeToo is on the eve of a new chapter in the United Kingdom. Non-financial misconduct has been high on both the regulatory and political agenda in 2024. Q1 ended with a sobering indictment of culture in financial services, with the Treasury Select Committee reporting that “overall there has been a disappointing lack of progress on sexual harassment and bullying, including serious sexual misconduct … serious problems which should have been rooted out still persist.”¹ The Financial Conduct Authority has previously singled out the London insurance market as having “a long way to go in having an inclusive culture … areas for improvement include preventing and handling non- financial misconduct”² and now the Society of Lloyd’s is taking formal steps to address these criticisms by consulting on amendments to its byelaws to clamp down on non- financial misconduct (‘the Consultation’).³ The proposals are based around the introduction of a single market conduct and behaviours overarching objective:

“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.”

The proposed new Lloyd’s Market Conduct and Behaviours Framework (LMCBF) aims to drive cultural change within the industry and reinforce Lloyd’s expectations that market participants maintain and demonstrate the right behaviours to support a well- functioning, safe and inclusive market.

What behaviours are the proposals designed to address?

The proposals introduce an additional category of ‘improper’ conduct that requires notification to Lloyd’s (see below for more detail on the notification obligations) and has the potential to lead to Oversight and/or Enforcement action. The Consultation defines such improper conduct as including but not limited to:

1. Non-financial misconduct: acting in any way that amounts to harassment, bullying, discrimination or an improper abuse of power or authority over more junior individuals, or conducting Lloyd’s business under the influence of illegal drugs or alcohol where it leads to unprofessional behaviour or behaviour that risks bringing the Lloyd’s name into disrepute;
2. Dishonesty: acting dishonestly in any way, misappropriating money or property, or creating or using false or misleading documents;
3. Unacceptable business conduct: breaching fiduciary or agency obligations, failing to organise or control a firm’s business in a responsible manner or to maintain proper records and systems for the conduct of its business and the management of risk, or failing to deal openly and honestly with relevant parties; and
4. Bringing Lloyd’s or the Lloyd’s Market into disrepute: this includes damaging the Lloyd’s brand, failing to manage or safeguard properly monies or other assets held on behalf of policyholders or members and failing to deal with Lloyd’s in an open, honest and transparent manner, including not reporting matters of misconduct.

Do the unacceptable behaviours have to occur in the workplace to fall within the LMCBF?

No. Similar to the FCA, Lloyd’s has said that conduct need not take place in a professional environment to qualify as misconduct, provided there is a “material connection to the Lloyd’s market, such as the presence of other market participants.” Lloyd’s intends to align its approach to that of the FCA and has stated 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.”⁴

How are firms expected to deal with unacceptable behaviours under the proposals?

Lloyd’s expectation is that most issues will be dealt with through firms’ own internal processes, which is one of the reasons Lloyd’s views effective speaking up and robust internal investigation processes – including the engagement of external advisers to investigate issues where necessary – as paramount for firms.

If any internal investigation, grievance procedure or subsequent disciplinary procedure on the part of a managing agent or syndicate is not sufficiently robust to meet the outcomes expected under the Culture Principle,⁵ this could impact the rating against that Principle (which in turn can affect Lloyd’s Oversight of a firm and the application of interventions).

What are firms’ reporting obligations to Lloyd’s under the LMCBF?

Lloyd’s proposes a ‘pre-investigation’ filter process through which firms should disclose cases to Lloyd’s at an early stage. Firms will be expected to exercise their own judgment as to when a matter should be raised at this filter stage based on the materiality of the issue and having regard to the behaviours captured by the LMCBF. The Consultation states that it will be important for firms to disclose the underlying nature of the issue such that Lloyd’s is able to have an informed discussion with the firm, and contains two further important cautions for firms and individuals alike:

1. Failing to deal with Lloyd’s in an open, honest and transparent manner in relation to an instance of misconduct could in itself amount to misconduct; and
2. Matters of poor behaviour or misconduct that apply at a firm-wide level (rather than individuals) should always be raised with Lloyd’s at the earliest opportunity.

Could the new LMCBF lead to more enforcement activity by Lloyd’s?

Yes, although Lloyd’s has explicitly stated in the Consultation that it does not intend to become more directly interventionist. To date, Lloyd’s has operated two distinct processes to deal with poor conduct and behaviours, namely Market Oversight and Enforcement. Under the LMCBF, Lloyd’s proposes to operate a single holistic process that will utilise both its Oversight and Enforcement interventions. The proposals introduce a new set of eight operating principles including:

1. There will be a presumption that Lloyd’s will use its Oversight powers unless Enforcement criteria are triggered. Enforcement powers will normally only be used where Oversight powers are insufficient or inappropriate to achieve Lloyd’s objectives;
2. Lloyd’s will not tolerate any managing agent or syndicate that is classified as ‘underperforming’ due to poor culture or behavioural issues. Lloyd’s will therefore use its powers under the proposed LMCBF to drive early remediation, failing which Lloyd’s will consider taking action to remove that firm’s permission to operate within the Lloyd’s market; and
3. Lloyd’s will always have regard to its wider legal obligations (for example, under financial crime legislation) and its obligations to regulators and law enforcement bodies.

The proposals make clear that Enforcement may be used either separately, or in addition to Oversight intervention, for example where publicity of outcome is appropriate to provide market confidence.

How will Lloyd’s decide whether to use its Market Oversight or Enforcement processes when dealing with unacceptable behaviours under the proposed LMCBF?

Lloyd’s will use ‘triage’ criteria to decide on which process to use and proposes to establish a cross-functional internal group called the Misconduct Evaluation Group (MEG) to undertake the initial filtering process once an issue has been reported. MEG will comprise of senior members of the Lloyd’s Legal, Oversight and Culture teams.

The MEG will consult with the firm when undertaking the filtering process to ensure that Lloyd’s understands the issue(s) and core facts. The MEG will then decide if the matter is:

1. de minimus or does not have any features that speak to the Lloyd’s market conduct and behaviours overarching objective, such that there is no continuing role for Lloyd’s;
2. specific and should be referred to an appropriate team within Lloyd’s for monitoring; or
3. systemic and should be referred to the Designated Executive Directors (being the Lloyd’s General Counsel and Chief of Markets) with recommendations for formal action to be taken by Lloyd’s either through Oversight intervention (which is where the presumption will lie) or Enforcement.

How will Lloyd’s decide on the appropriate sanction?

Sanctions will be tailored to the conduct at issue and the timeliness and effectiveness of remedial action by the firm. A critical factor in determining the appropriate action is whether the firm or individual in question has sought to address the issue itself at an early stage and as part of its Enforcement process Lloyd’s is proposing to introduce an Early Account Scheme (EAS). This will allow firms to investigate allegations within pre-agreed parameters and, where appropriate, to take disciplinary or remedial action themselves. Lloyd’s will then assess the outcome and take this into account in determining any further regulatory action or sanction.

The Consultation identifies a series of aggravating and mitigating factors that Lloyd’s will consider when deciding how to address a matter.

1. Mitigating factors include firm efforts to undertake a culture review, implement appropriate policies and training, and take appropriate disciplinary action; and
2. Aggravating factors include sexual misconduct, failure of the firm to respond adequately to issues, repeated incidents and indicators of widespread cultural issues.

The proposals include an escalating range of potential interventions and sanctions:

1. Examples at the lower end of the scale include a requirement to write to Lloyd’s explaining actions or undertake appropriate training; and
2. Examples at the upper end of the scale include a requirement that a firm undertakes certain actions, failing which they will no longer be suitable to be registered as a Lloyd’s broker/coverholder, the removal of Lloyd’s passes and formal Enforcement action.

Are there any other noteworthy amendments included in the proposals?

The consultation contains several other significant amendments including the introduction of:

1. A new category of misconduct involving deliberate or repeated breaches of the Principles for Doing Business at Lloyd’s;⁶
2. A new category of misconduct specifically aimed at those who may mistreat witnesses and whistleblowers; and
3. Amendments designed to ensure that any firm operating as a syndicate (irrespective of corporate structure) can be brought into Lloyd’s jurisdiction so that the same expectations can apply as they would for a traditional Managing Agency structure.

What steps can firms take now, ahead of any proposed changes coming into force?

The Consultation is open until 16 December 2024 and while the proposals may change before the LMCBF is formally introduced, the political and regulatory environment is such that its introduction seems an inevitability. Lloyd’s and the FCA are both seeking to align their proposals to address the very real and persistent problem of non-financial misconduct in the UK.

Irrespective of whether Lloyd’s chooses to use its Oversight or Enforcement processes (and indeed whether the FCA chooses to use its Supervisory or Enforcement powers), any intervention is likely to be costly for firms, potentially both financially and reputationally. Neither Lloyd’s nor the FCA will be hesitant to take action once their proposals are formally introduced.

Firms should take advantage of the time currently available to them to consider the proposals of both Lloyd’s and the FCA in detail, and take steps to address proactively potential gaps in firms’ workplace culture apparatus. Initial steps should include a review of:

1. Policies and procedures;
2. Training;
3. Internal investigation and escalation processes; and
4. Culture,

to mitigate the possibility of falling foul of either Lloyd’s, the FCA, or worse still, both.

The #MeToo movement has driven change at a faster pace across the Atlantic and lessons can be learned from the mistakes, and enhancements, made by firms in the United States. Having good policies and training in place is important to establishing the foundation for respectful and inclusive workplace culture, but as numerous companies in the US have seen, how these words are translated into action is what really matters. Setting a strong tone at the top regarding the type of workplace leadership seeks to create, what behaviour is expected of employees, and making clear that inappropriate conduct will result in disciplinary action, is critical. The same is true of having multiple channels through which employees can report misconduct; robust and well-documented procedures for investigating allegations of sexual harassment, discrimination, bullying and other workplace issues; and a commitment to taking action when employees engage in inappropriate conduct even if those employees are high performers. The uneven application of disciplinary action when it comes to senior leadership has placed too many companies in an unfavourable spotlight and caused reputational harm to the firms involved. Finally, we expect it will only be a matter of time before regulatory efforts focus more on senior leadership and board oversight. Numerous public companies in the US have seen regulators – and stockholders – seeking to hold board members accountable for workplace culture issues. Ensuring that management and directors receive a regular cadence of reporting on workplace culture issues will well-position firms to identify and remedy issues early on.

¹ https://committees.parliament.uk/publications/43731/documents/217019/default/. https://www.wilmerhale.com/en/insights/blogs/wilmerhale-w-i-r-e-uk/20240411-sexism-in-the-city.

² www.fca.org.uk/publication/correspondence/wholesale-insurance-market-priorities-2023.pdf

³ https://assets.lloyds.com/media/37541725-584f-4b73-a15f-11e83d286794/ConDoc_final%20060924.pdf.

⁴ While cited in the Lloyd’s Consultation, this is taken from the FCA’s notice to provide information addressed to Lloyd’s insurers and intermediaries dated 6 February 2024 (www.fca.org.uk/publication/correspondence/culture-nfm-survey-letter-insurers- insurance-intermediaries.pdf) which was the topic of a client alert on 9 February 2024 (www.wilmerhale.com/en/insights/client- alerts/20240208-toxic-culture-review-fca-statutory-demand-for-non-financial-misconduct-data).

⁵ The Lloyd’s Culture Principle is that “Managing agents should be diverse and create an inclusive and high-performance culture”. Under this principle, inclusive behaviour should be fostered “with zero tolerance for inappropriate behaviour”: www.lloyds.com/conducting-business/market-oversight/principles-for-doing-business-at-lloyds/culture.

⁶ www.lloyds.com/conducting-business/market-oversight/principles-for-doing-business-at-lloyds.