Lloyd’s Conduct Consultation Embodies Sector Struggle to Combat Non-financial Misconduct and Clarify Approach

Lloyd’s of London has announced it is consulting on changing its by-laws to combat misconduct in the commercial insurance market in a continuing battle to dispel its long-standing reputation for sexual harassment and inappropriate behaviour by market participants.  

Lloyds’ consultation embodies the ongoing struggle within the financial services sector to ensure regulatory and enforcement powers adequately capture non-financial misconduct and address problematic cultures which are often insidious, manifesting in misconduct occurring outside of the professional sphere, which may have no discernible link to an individual's professionalism. 

The consultation aligns with the FCA’s own drive to combat poor culture and conduct within the sector, galvanised by the 2023 ‘Sexism in the City’ report which revealed widespread sexual harassment, bullying and misuse of NDAs to silence victims. The FCA subsequently launched a September 2023 consultation which, like Lloyds’, sought to examine how non-financial misconduct could be more clearly incorporated into its regulatory framework in a bid to tackle problematic behaviour and drive forward healthier cultures.  

This article explores Lloyd’s proposals, how they align with the wider drive in the sector to battle poor conduct, and the challenges posed when addressing poor conduct across personal and private, and public and professional, spheres.  

Lloyd’s Consultation 

Lloyd’s of London has a longstanding reputation for inappropriate behaviour and harassment, driven, in part, by a historically male-dominated demographic and culture of excessive drinking. This was highlighted in a 2019 Bloomberg expose which outlined a “deep-seated culture of harassment” within Lloyd’s, described by one insider as “basically a meat-market”.  

The expose also highlighted the link between excessive alcohol consumption and sexual harassment, an issue Lloyd’s sought to address by introducing a ‘zero-tolerance’ drinking ban on employees during working hours in 2017:  

“Women with international experience in insurance and other areas of finance say the pervasive harassment at Lloyd’s and in the wider London market is unique. And they all say it begins with alcohol. […] The London insurance market is the last place in global finance where drinking isn’t only tolerated, it’s expected.” – Bloomberg 2019 

To combat prevailing cultural issues and non-financial misconduct, Lloyd’s, made up of more than 50 insurers and hundreds of brokers, has published a consultation which seeks to develop a “modernised approach to dealing with poor conduct and behaviours in the market”.  

The consultation concedes that current processes for dealing with misconduct are “unclear” and cut across firms’ own intervention processes, asserting that “greater certainty” regarding potential outcomes is required.  

The proposal includes a non-exhaustive list of types of conduct which would be capable of amounting to misconduct for enforcement purposes, including:  

“Acting in any way that amounts to:  

• harassment (whether sexual or otherwise) or bullying of another person or persons; 

• discrimination against a person or persons on the grounds of one or more protected characteristics;  

• an improper abuse of power or authority over individuals in a more junior position;

• and conducting Lloyd’s business when under the influence of alcohol where it leads to unprofessional behaviour or behaviour that risks bringing the Lloyd’s name into disrepute; and/or - under the influence, or in possession, of illegal drugs.” 

According to the proposals, conduct towards whistle-blowers or witnesses, including subjecting them to detriment, revealing their identity, or discussing their involvement in alleged misconduct, could also amount to misconduct.  

Notably, the proposal clarifies that it is not necessary for Lloyd’s to demonstrate that it has suffered harm at an institutional level for misconduct to have occurred, stating: “[s]ome conduct (for example, illegal drug-taking, harassment or bullying) is inherently unacceptable by its very nature and ought to be actionable as such”.  

Conduct outside of a professional environment could also constitute misconduct; “in particular, but without limitation, so long as there is a material connection to the Lloyd’s market, such as the presence of other market participants”. Lloyd’s state their intention to “align its approach [with] the FCA in this regard”.  

The Challenges  

Lloyd’s detailed guidance would clarify conduct the institution would deem punishable, and the stipulation that it is not necessary to determine Lloyd’s has suffered institutional harm for misconduct to have occurred widens the scope of behaviour captured by its jurisdiction.  

However, judgements on whether allegations of non-financial misconduct would be deemed ‘discreditable’ and ‘improper’ against the standards of conduct “reasonably to be expected” in the market would involve a level of subjectivity. This means that, arguably, determining the threshold for misconduct could remain nebulous, vary case-by-case, and require a link to be established between an individual’s conduct outside of the office and professional expectations.  

The challenges associated with determining non-financial misconduct and issuing enforcement action based on professional standards has been evidenced historically by the FCA. The regulator has previously faced questions on whether enforcement is justifiable, or within the regulator’s scope, if misconduct has occurred outside of the workplace, or has no discernible link to an individual's profession.  

Under SMCR, the FCA expects firms assessing an individual’s fitness and propriety to consider “convictions, dismissals and suspensions from employment for drug or alcohol abuses or other abusive acts, only in relation to a person’s continuing ability to perform the FCA designated senior management function or an FCA certification function for which the person is, or is to be, employed” [FIT 2.2.2A. G].  

As fitness and propriety are assessed against honesty, integrity, reputation, competence, capability, and financial soundness, any allegation or conviction of non-financial misconduct could impact upon an individual’s fit and proper assessment and may be considered by the FCA as evidence that they have not acted with honesty or integrity and are unfit to continue in their role.  

This has been demonstrated in several high-profile enforcement cases, where the FCA’s has deemed an individual’s convictions for non-financial offences an indication that are not fit or proper to work in the sector. In November 2022, the FCA issued a final decision notice prohibiting an individual from performing regulated activities after they were convicted of causing grievous bodily harm, citing that such conduct evidenced a “clear and serious lack of integrity and reputation such that he is not fit and proper to perform regulated activities.” 

However, the notion of ‘integrity’ is inevitably subjective- as is the extent to which the FCA, and other regulators or financial institutions, have the capacity, or right, to judge integrity and its relevance to professional fitness and propriety.  

In March 2021 the FCA issued a prohibition order to Jon Frensham on the basis that his conviction for attempting to meet a child after sexual grooming evidenced a lack of integrity- although this offence did not involve dishonestly and was committed outside of the workplace.  

Frensham referred the FCA's decision to the Upper Tribunal, claiming that the fitness and propriety test had been wrongly applied. The Upper Tribunal criticised the FCA's reasoning that Frensham’s misconduct outside of the workplace rendered him not fit and proper to perform his professional role, asserting that, alone, the conviction was insufficient to determine this. The Upper Tribunal did, however, agree with the FCA’s decision based on Fensham’s conduct after he was arrested and charged, including his failure to be open and transparent with the FCA and breach of bail conditions. 

There is no doubt that there is a mandate to take action to tackle non-financial misconduct within the financial services sector, or that it is an issue outside of the office as well as within. During the 2023 ‘Sexism in the City’ inquiry, the Committee heard that women were increasingly being targeted by perpetrators of sexual harassment outside of the office, at conferences, drinks events or on work trips, for instance.  

However, whilst the FCA have repeatedly emphasised that ‘misconduct is misconduct’, as the Frensham case demonstrates, it remains difficult to discipline professionals based on their conduct in personal spheres and to evidence a necessary link to their professional capability or ‘integrity’.   

The outcome of the FCA’s September 2023 consultation will shed more light on the regulator’s plans to widen and clarify how non-financial misconduct fits into its regulatory framework. Yet, challenges remain, and whilst Lloyd’s plan to overhaul it’s conduct rules to bolster its ability to define and tackle misconduct is a commendable and progressive step towards rehabilitating the sector’s culture, the new proposals are likely to face the same difficulties if enforced in practice.