Lloyd’s of London consultation seeks to significantly extend its regulatory powers

Lloyd’s of London has published a consultation in which it proposes wide-ranging changes to its regulatory powers. The proposals represent potentially the most significant increase to the regulator’s powers for many years.

Several proposals are remarkable in their breadth and (should they be enacted unchanged) would result in the Lloyd’s regulator enjoying wider powers than those generally enjoyed by equivalent regulators, in various respects.

There are a number of striking changes. First, the proposals introduce a brand new category of misconduct – being so-called “improper” conduct (see paragraph 3a, “red line” Enforcement Byelaw). This is a new term and category, which has not yet been the subject of any analysis, whereas the existing, (historic and significant) definition of “discreditable” conduct has been the subject of a long line of important judgments over decades, from senior independent judges (for example, Lord Wilberforce). That guidance provided individuals with protection because they (and their legal representatives) knew where they stood and what the (established) term meant. It is likely that the introduction of a new term will mean that the regulator will now prosecute test cases of what it regards as “improper” conduct, providing a disconnect with years of judicial guidance (at least for the next few years, until similar guidance is provided).

Second, the proposals include a new (almost unprecedented) power to include as prosecutable “misconduct” circumstances where an individual is suspected of “discussing a witness’ … involvement in…” alleged misconduct, unless that discussion is for the “direct purpose of … responding to an investigation or proceedings under this byelaw” (see paragraph 3(e)). As drafted, anyone in the Lloyd’s market who is alleged to have been discussing a case which they have heard about (for example, through reading about it in the press, or through prior discussion with colleagues) is vulnerable to disciplinary action. This is a remarkable power.

Third, the proposals extend the reach of the regulator to include alleged misconduct which occurs in a “social or other non-professional setting” as long as it is “in the presence of other market participants” (see paragraph 3C). This would potentially cover a post-work gathering in a pub which a) was not organised in any formal capacity by any individual with management responsibilities, and which b) was not convened to discuss any particular work-related subject in the first place, i.e. any after work drinks, no matter how informal. This is potentially a very broad definition which goes further than the regulatory powers enjoyed by equivalent regulators.

Fourth, the proposals appear to grant the regulator express power to prosecute matters of employment law as misconduct (including matters of “employment equality” and harassment under s.26 of the Equality Act 2010), with such prosecutions (curiously) being legitimate whether or not the behaviour is capable of effecting the Society’s reputation “or otherwise”. However, these concepts have precise meanings under employment legislation and are ultimately subject to being established and found proven in employment tribunals, whose judges are experienced in applying the statutory tests. The regulator may have little expertise in matters of employment law and it is not clear how it will position itself to make any sensible interventions in these areas in the future (entities operating within the Lloyd’s market place should be urgently trying to clarify this – it may be the regulator will only proceed with enforcement proceedings once allegations have already been proven in an employment tribunal).

Fifth, the proposals enhance the regulator’s powers by stating, in relation to key enforcement concepts, that it will now regulate conduct which is detrimental to “employees of underwriting agents” or “employees of other entities doing business in the Lloyd’s market” ( see paragraph 3(b)). When the Enforcement Byelaw’s current wording is properly understood, this is another expansion of the regulator’s existing powers, which at the moment only permit it to investigate conduct that is detrimental to those “doing business at” the Lloyd’s market (most employees are not “doing business”).

Sixth, the proposals give Lloyd’s a new right to appeal where a defendant has been acquitted of misconduct charges by the Enforcement Tribunal (see paragraph 26(a)). Currently, the right to appeal a tribunal misconduct outcome is only possessed by the defendant (not the prosecutor), once prosecuted and found guilty. This seemed reasonable as it meant that the regulator, having brought a case before an independent first instance tribunal and lost, notwithstanding all of the many advantages (financial and otherwise) it enjoys, did not have a right to a second bite of the cherry so as to extend the period of uncertainty for the defendant (which can last many years). Yet under the new proposals, the regulator is now granted its own right of appeal against a misconduct acquittal, having not previously held this power.

Finally, elsewhere in the proposals (in the new “Requirements” at 2.3.20A) there is the suggestion that the first instance Enforcement Tribunal may give “special consideration” to vulnerable witnesses. This in itself is uncontroversial, but the drafting is again unusually broad, with vulnerable witnesses said to include those concerned about the “sensitive, personal nature of their evidence”, and with the “special consideration” including the option to ignore the safeguards which most legal processes provide in relation to witness evidence. For example, the “special consideration” is stated to include (i) allowing into evidence before the tribunal transcripts of notes of interviews provided to Lloyd’s own lawyers (notwithstanding that thereafter the witness does not wish to attend at the tribunal to give evidence under oath), and (ii) allowing witness statements into evidence in circumstances where the author of them will not attend at the hearing and will therefore not be the subject of any cross-examination, so that their evidence cannot be properly challenged by the defendant’s lawyers. This provision is likely to be unproblematic in practice because Enforcement Tribunal chairs will be familiar with how best to take the evidence of a vulnerable witness, and are also independent. They are therefore unlikely to pay much attention to this extra power, and will instead remain focused upon the need to ensure a fair hearing.

The consultation runs until 16 December 2024.

Michael Uberoi is a barrister specialising in financial services regulation at Outer Temple Chambers. He acted for the defendant Richard Tomlin (before both the Enforcement Tribunal, and before the Lloyd’s Appeal Tribunal) in the recent long running misconduct proceedings brought by Lloyd’s against him.