Lloyd’s and London Market: a long way to go in developing inclusive cultures?

The FCA's September 2023 wholesale insurance portfolio letter specifically discusses poor governance and culture in the Lloyd's and London Market (LLM), identifying this as the driver of recent major conduct failings. The portfolio letter was recently followed up by a mandatory survey to the LLM, through which the regulator is seeking to establish a baseline understanding of when and where non-financial misconduct occurs.  

With the regulator shining a spotlight on the LLM, and the PRA’s and FCA’s diversity and inclusion (D&I) proposals set to require all financial services firms to do more to build inclusive cultures with improved diversity, it's clear that LLM firms need to act now on non-financial misconduct. 

The regulator’s work with the LLM is targeted at LLM insurers, intermediaries and managing general agents. While acknowledging many firms have acted to make some progress in this area, the FCA considers that the LLM still has a long way to go in having an inclusive culture, one where there are suitable channels for staff to speak up and feel safe while doing so. The FCA clearly has a desire to hold firms to account in this area. In this article we discuss the need for LLM firms to take urgent action to improve their non-financial misconduct systems and controls. We also touch upon the broader D&I proposals contained in the regulators’ consultation papers (CPs) and explore the steps that firms will need to take to comply.

Non-financial misconduct on the rise

The FCA states it has seen a concerning increase in non-financial misconduct being reported in the LLM. In its portfolio letter it called out some LLM firms for claiming this issue will take a generation to fix as an excuse for not taking action now. This is not the first time the FCA has called out the LLM on this issue. In early 2020 the FCA wrote to firms operating in this market setting out its expectation for firms to be proactive in tackling non-financial misconduct. At the time, the regulator reminded firms about the importance of senior manager leadership and accountability, and having a clear purpose that does not conflict with people management policies, governance, systems and controls.

In the recent D&I CPs the regulators propose to embed explicit rules into existing regulatory requirements to prevent non-financial misconduct, such as bullying, harassment and discriminatory practices. The first step for most firms looking at the CPs will be to perform a gap analysis of current practices with the proposed requirements. In areas such as diversity reporting there may be an obvious way to ‘plug the gap’ through enhanced data collection. However, given the concerns expressed by the FCA in its portfolio letter, this may be less obvious for matters related to non-financial misconduct in the LLM. These firms may instead want to work from a clean slate to build robust non-financial misconduct policies, rather than try to simply close the gap between existing policies and the regulators’ current (and forthcoming) expectations.

Enhanced Fitness and Propriety assessments

Firms will need to better integrate non-financial misconduct considerations into their staff fitness and propriety (F&P) assessments at onboarding and during the course of employment. The regulators will expect to see firms weed out the bad actors from the good through enhanced F&P assessments. While this may initially lead to a slight increase in staff not passing F&P assessments, firms should look to tackle the issue from its roots going forward. Firms should ensure they have rigorous pre-employment (and in-employment) checks in place. This is likely to reduce the chances of staff later not passing F&P assessments. 

In theory, where bad actors are required to leave the business, this should lead to improved staff survey results and disclosures under the mandatory inclusion questions proposed for larger firms in the CPs. This is because staff should feel safer to speak up, and feel that their concerns are being taken seriously where they can see previous concerns have been appropriately addressed. In practice however, even where staff feel safer to speak up, firms may still face some challenges in achieving higher staff disclosure rates. And so firms will need to consider how best to engage more staff to produce more meaningful results.

Broader D&I proposals for firms to consider

Beyond non-financial misconduct, there are several D&I proposals that all financial services firms, including LLM firms, will need to grapple with. These proposals cut across D&I strategies, setting targets, diversity data disclosure and risk and governance. Firm boards will have a significant role to play in overseeing the effective implementation of the regulatory proposals. Boards will be responsible for overseeing evidence-based D&I strategies, which includes overseeing the D&I targets set, and being able to clearly explain why such targets were chosen. More generally, firm boards will be expected to recognise any issues that may hinder good D&I outcomes, and intervene where appropriate. 

In this context, a key first step for firms will be to consider the adequacy of their D&I strategy. Firms have been given the flexibility to choose to have two D&I strategies, one targeted at the board and the other firm-wide. Alternatively, firms can decide to adopt a single D&I strategy, which suitably applies to both the board and the firm. Firms should also be considering their data needs to draw up evidence-based targets, as well as for future disclosure and reporting requirements. These disclosure and data requirements may be a significant gap for some firms. Those firms with more than 250 UK employees will be required to disclose demographic diversity information on, among others, ethnicity, sexuality, disability and faith. Collecting this data is a lengthy process typically taking at least six months and often much longer to reach good quality disclosure rates, which are needed for data-driven targets and a robust D&I strategy. For firms which do not currently collect this data, or whose data is of poor quality, addressing this will be an immediate priority. Another area that will need some attention is incentives and remuneration - the proposals make clear that incentives can be used as tools to drive progress on D&I. We provide more detail in our briefing on the preparatory steps firms should be considering.  

Through their proposals, the regulators are striving for healthy cultures that are inclusive and psychologically safe, which support and allow diversity of thought to flourish. The FCA’s wholesale insurance portfolio letter makes clear that the LLM is behind the rest of the insurance market in building healthy and inclusive cultures, and confirms that the FCA will take decisive action where it sees instances of non-financial misconduct. Given the FCA’s renewed call specifically to the LLM, and the commencement of its supervisory work in this area, if you are a firm operating in the LLM, your time to act is now.