On May 12, 2014, Lloyd’s published Market Bulletin Y4795: Enforcement Proceedings – Framework for Enforcement Sanctions and Costs. The Bulletin sets out the approach that will be taken by Lloyd’s Market Supervision and Review Committee (MSARC) in establishing the appropriate level of sanctions when prosecuting enforcement cases in the Lloyd’s market. The framework indicates that Lloyd’s has adopted a similar approach to determining the level of penalties as that taken by both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). The MSARC states that “it is likely that the application of this framework will lead in many cases to higher levels of fines or other sanctions than has previously been the case”. The announcement heralds greater use of sanctions against both individuals and firms as a deterrent against market misconduct.
The new framework establishes that MSARC will be able to determine a fine as a percentage of a managing agent’s “relevant revenue”, meaning the amount of premium income that the managing agent generates from a particular product line, class of business or the relevant underwriting year of account during which the misconduct occurred. The framework mentions that there may be cases where using premium income will not be an appropriate measure to the sanction to be applied as it will not be an appropriate indicator of the harm that the particular misconduct has caused.
For individuals, the level of fine will be calculated as a percentage of the individual’s relevant income. In the context of individuals relevant income will include the gross amount of all benefits received by the individual from their employment (including salary, bonus, pension contributions and any share options) or their role in connection with the misconduct. In the past Lloyd’s has been prepared to accept public undertakings from individuals in lieu of suspension from the market. Significantly, under the new framework Lloyd’s will not generally agree to accept an undertaking as part of a settlement and will only do so in exceptional cases.
The framework also states that MSARC will seek a public censure in all cases of misconduct “to ensure that the market is made aware of conduct that Lloyd’s believes to be unacceptable” and to act as a deterrent against others’ misconduct. Where a defendant has accrued a profit or caused a loss to a third party the MSARC will consider whether an order for restitution should be made. The financial position of the defendant will not ordinarily be a reason not to make an order for restitution that would otherwise be made.
Lloyd’s have published the new framework in order to provide greater transparency regarding the use of sanctions in enforcement cases. Where enforcement proceedings are brought against those subject to Lloyd’s supervision both Lloyd’s and the defendant may agree settlement terms in order to resolve the case without the need for a contested hearing. The sanctions to be offered to the defendant in such settlement discussions are determined by MSARC.
In addition to the sanctions sought Lloyd’s will also seek an order for costs. According to the framework costs may be sought against any person who was the subject of an inquiry. Costs may also be sought in respect of the Council’s costs incurred in the investigation, preparation and presentation of an enforcement case. The framework states that MSARC is of the view that it will be inappropriate for the Society to bear the costs of investigating and bringing proceedings against a defendant. Lloyd’s will therefore always seek to recover the full amount properly and reasonably attributed to the defendant.
The FCA and PRA have recently announced a review of their enforcement decision making and whether it is providing credible deterrence in order to strengthen accountability in the financial services industry. One of the issues raised is whether it is appropriate to give an early settlement discount, whether discounts should be available in all cases, whether clearer incentives should be offered after the 30 per cent reduction of penalty period expires and whether the right incentives to settlement are offered.
For further information: Lloyd’s publishes Market Bulletin Y4795