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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

Initiation Game Over: Lloyd's tackles non-financial misconduct

As published in a notice of censure on 16 March 2022 (the "Notice"), Lloyd's of London ("Lloyd's") has publicly censured and fined member organisation, Atrium Underwriters Limited ("Atrium"), in relation to non-financial misconduct by Atrium employees and the way in which Atrium responded to allegations of such misconduct.

Specifically, Atrium accepted three charges of detrimental conduct in breach of Lloyd's rules:

  1. Atrium failed to notify Lloyd’s of the facts and matters relating to an employee’s (the "Employee's") misconduct, and Lloyd’s ought reasonably to have been informed. This constituted a failure by Atrium to be open, honest and transparent with Lloyd’s and, in doing so, Atrium was in breach of paragraph 4 (reporting obligations) of the Enforcement Byelaw and Principle 8 (failing to deal with Lloyd's in an open, honest and transparent manner) of the Enforcement Principles which, in turn, constituted detrimental conduct contrary to paragraph 3(b) of the Enforcement Byelaw.

  2. The Employee's general conduct, including a systematic campaign of bullying against a junior employee, was well known within Atrium, including by senior managers. Atrium failed to: (a) protect the junior employee, (b) properly investigate the Employee's actions (even after another employee made a complaint), and (c) take appropriate disciplinary action against the Employee (even after its own investigation made findings of serious misconduct against him and recommended disciplinary action). Atrium also failed to acknowledge or challenge the Employee's behaviour, and instructed the employee who complained not to speak about the outcome of the investigation or the allegations. These actions were motivated, in part, by the desire of senior managers to protect Atrium from bad publicity. Atrium's behaviour breached Principle 6 (damage to Lloyd's brand/bringing the market into disrepute) and/or Principle 10 (harassment, bullying and discrimination) of the Enforcement Principles and was detrimental conduct pursuant to paragraph 3(b) of the Enforcement Byelaw.

  3. Atrium had sanctioned and tolerated for a number of years up until 2018 an annual “Boys’ Night Out” during which some male members of staff, (including two senior executives in leadership roles) engaged in unprofessional and inappropriate conduct, including initiation games, heavy drinking and making inappropriate and sexualised comments about female colleagues, which were both discriminatory and harassing to female members of staff. Some of this conduct was led, participated in and condoned by the two senior managers in attendance. This amounted to detrimental conduct contrary to Principles 6 and 10 of the Enforcement Principles and paragraph 3(b) of the Enforcement Byelaw.

Atrium agreed to pay a fine of £1,050,000 (which included a 30% discount for early settlement) as well as Lloyd's costs of £562,713. The fine is significant, not only because it is the largest fine ever imposed by Lloyd's, but also because it is the first enforcement action by Lloyd's concerning non-financial misconduct.

For a number of years, Lloyd's has sought to address cultural issues within the industry including allegations of sexual harassment, discrimination against female employees and an excessive drinking culture. However, until now, its efforts have focused on non-enforcement measures including conducting annual culture surveys, introducing a culture dashboard and a gender target for the market, banning the consumption of alcohol during the working day, and running a poster campaign in City pubs and cafes urging staff to speak up against unacceptable behaviour. Lloyd's decision to exercise its enforcement powers to address an instance of non-financial misconduct, and impose a significant fine, indicates a shift towards taking a more robust approach to tackling non-financial misconduct.

Lloyd's approach is consistent with the keen focus by the Financial Conduct Authority ("FCA") and other financial regulators on tackling non-financial misconduct and improving culture, including specifically within the insurance sector (see, for example, the FCA's January 2020 "Dear CEO" letter to wholesale insurance firms on non-financial misconduct). Whilst, to date, the FCA has not used its enforcement powers to address instances of non-financial misconduct within the insurance industry, it has in recent years prohibited four individuals from working in financial services on the basis of non-financial misconduct (in each case the individual had been convicted of a sexual offence).

Lloyd's decision regarding Atrium potentially paves the way for further enforcement action against others who do not act in accordance with its expectations. As expressed by John Neal, Lloyd's CEO, in a press release accompanying the Notice: "Lloyd's expects all participants in the market to meet the highest standards of professionalism, and we are continuing to use our powers to intervene when needed".

The increasing risk of regulatory enforcement in relation to non-financial misconduct may concern firms and, in particular, senior managers who themselves might face regulatory scrutiny, especially given that the exact scope of behaviour which may give raise to regulatory concern is not clear. For example, whilst the actions that were the subject of the Atrium fine were known by the firm and either not addressed or actively permitted, the decision leaves open the possibility that action could be taken against firms in relation to non-financial misconduct, even if that behaviour was not known by the firm at the time.

To mitigate the risks of potential enforcement action, firms and their senior managers must take active steps to embed a healthy culture and tackle drivers of cultural problems. As part of this, there should be robust governance in place to ensure that clear expectations regarding behaviour are set out and that, in the event any issues are identified, there are clear processes to identify, investigate and address the matter, including taking disciplinary action against individuals and notifying the relevant regulators of any issues. As the Atrium fine has highlighted, failure to tackle cultural failings and non-financial issues may result in serious consequences for firms, including significant fines.

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