Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Regulators Tighten the Reins: Scrutinising Non-Financial Misconduct Rules in Lloyd’s

Skadden Publication / The Standard Formula

Sebastian J. Barling Robert A. Chaplin Ben Lyon Usman A. Sawar Abraham Alheyali Caroline C. Jaffer Wilf Odgers

Financial services regulators are intensifying their scrutiny of non-financial misconduct (NFM) within the financial services industry.

Related to this, the insurance marketplace Lloyd’s of London published a consultation paper (“Lloyd’s: A modernised framework for dealing with poor conduct and behaviours in the market”) on 12 September 2024 (the Consultation Paper) proposing extensive changes to its regulatory powers in respect to conduct matters.

The changes aim to modernise the framework within the Lloyd’s market for addressing poor conduct and behaviours, covering both financial and NFM. Responses to the consultation paper are due by 16 December 2024.

The Consultation Paper does not propose any changes to Lloyd’s current enforcement perimeter, and as such these proposal will be relevant to:

  1. Lloyd’s brokers.
  2. Underwriting agents.
  3. Members of the Society of Lloyd’s.
  4. Any person who submits to the enforcement jurisdiction of the Society of Lloyd’s.

Key Points

Key points in the Consultation Paper include:

  • A proposed new Lloyd’s Market Conduct and Behaviours Framework (LMCBF). This will be based on a single overarching objective (supported by eight principles) looking at “market conduct and behaviours”. The purpose of the LMCBF 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.”
  • A non-exhaustive list of behaviours that could result in Lloyd’s bringing enforcement action under the LMCBF. The behaviours fall into four broad categories:
  1. Dishonesty.
  2. NFM (including harassment, bullying or conducting Lloyd’s business whilst under the influence or drugs or alcohol).
  3. Unacceptable business conduct (including breaching fiduciary obligations).
  4. Bringing Lloyd’s into disrepute (including failure to report matters of misconduct to Lloyd’s).
  • These behaviours will be incorporated into the Lloyd’s Enforcement Byelaws via the existing concepts of “detrimental” and “discreditable” conduct, as well as the proposed newly introduced concept of “improper” conduct. 
  • Lloyd’s is proposing that, particularly for NFM, it also looks beyond behaviours that take place in the immediate workplace, i.e., behaviours where there is a material connection to the Lloyd’s market, such as situations where there is a presence of other market participants (including in social settings).
  • It is made clear that the LMCBF will not replace any other applicable frameworks or reporting obligations (including those of the Financial Conduct Authority (the FCA), discussed further below). In addition, Lloyd’s will report to other authorities (such as the FCA) where necessary.
  • The LMCBF will also seek to increase the protections and improve the treatment of whistleblowers. This includes looking to provide them with a designated individual to support them, as well as ensuring that those who mistreat whistleblowers are held to account. 

Sanctions for Misconduct

The Lloyd’s regime for sanctioning misconduct remains unchanged in respect to any proven allegations of misconduct. Some of the sanctions for misconduct that Lloyd’s can impose on market participants include:

  1. Exclusion or suspension from the Society of Lloyd’s.
  2. Revoking or suspending a relevant person’s permission to enter the Lloyd’s premises.
  3. A fine.
  4. An order of restitution.

Nonetheless, the Consultation Paper does contain additional details on how decision making will be exercised in respect to the LMCBF, as well as a list of aggravating and mitigating factors that will influence these decisions.  

The Financial Conduct Authority and the Prudential Regulation Authority 

Lloyd’s is not alone in considering the introduction of new offences relating to NFM. The FCA and the Prudential Regulation Authority (the PRA) are also implementing reforms broadly in parallel. 

On 18 December 2023, the FCA closed its consultation period on diversity and inclusion (D&I) matters. The consultation paper noted that alongside the PRA, the FCA was considering new regulatory proposals that “better integrate … NFM considerations into staff fitness and propriety assessments”. Other proposals include requiring firms to “collect, report and disclose certain D&I data” and to “recognise a lack of D&I as a non-financial risk”. 

More recently, the FCA has signaled new measures set to be unveiled by the end of 2024 aimed at embedding NFM within its regulatory framework. These proposals would enable the FCA to investigate and take decisive enforcement action against individuals and firms implicated in NFM. 

In preparation for this policy shift, the FCA conducted a recent survey, collecting NFM-related data from over 1,000 regulated firms, including investment banks, insurers and insurance intermediaries. These firms provided information about NFM-related incidents and their detection and outcomes. The data collection also examined employment hearings, the use of non-disclosure agreements (NDAs), and the specific locations and circumstances surrounding NFM-related incidents. The survey revealed a 40% increase in the number of reported NFM incidents over the 2021-23 period. Additionally, the FCA warned firms that any NDAs entered into with employees in connection with an NFM incident should include a specific carve-out for disclosures made to regulators and law enforcement agencies. 

Conclusion

Lloyd’s market participants should ensure they are aware of the proposals (both from Lloyd’s and the FCA) and consider whether they want to participate in the consultation process, either directly or through an industry body.

In addition, participants should look at how these proposals align with their own internal approach to NFM (in particular) and may wish to consider conducting an initial impact analysis of the proposals on their current conduct framework. This analysis will help identify any necessary preemptive amendments to internal conduct rules to align with the forthcoming regulatory requirements, ensuring they remain compliant and prepared for the changes ahead.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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