"The wholesale insurance market in particular has a long way to go in having an inclusive culture ... areas for improvement include ... preventing and handling non-financial misconduct,"1stated the Financial Conduct Authority (FCA) last autumn. This message was reinforced by action this week as the FCA issued a compelled information requirement to all regulated Lloyd's Managing Agents, London Market Insurers, and Lloyd's and London Market Insurance Intermediaries regarding incidents of non-financial misconduct, stating that the regulator "may use the outcomes of this work to inform any broader learning and best practice"2 for the industry.
Non-financial misconduct has been in focus at the FCA for several years across all firms it regulates, in particular in banking and fund management. According to the FCA, non-financial misconduct includes, but is not limited to, "bullying, sexual harassment and discrimination whether in or outside the workplace."3It seems that the insurance sector is a current focus, perhaps in part due to the "concerning increase in incidents involving non-financial misconduct that have been reported in the wholesale market"4and the regulator's view that "firms have generally not been prioritising these issues."5
The FCA's information requirement (issued using its statutory powers to compel the provision of information) asks for statistics for each year from 2021 to 2023 regarding:
1. the number of non-financial misconduct incidents recorded by type/category and the method by which these incidents were detected;
2. the number of non-financial misconduct incidents recorded by type/category of incident and the outcomes of those incidents; and
3. the number of further outcomes recorded, for example in nondisclosure agreements or employment tribunals.
The data requested includes incidents both in and outside the workplace, albeit the FCA has explicitly stated that it excludes private events organised by staff members with no connection to work; this limitation of scope is welcome but still lacks clarity.
While the FCA has recognised that "not all allegations will be substantiated"6 and a "higher volume of allegations ... is not necessarily indicative of a worse environment,"7 it is easy to see how firms' responses could prompt further information requirements and assertive supervision and, in worst-case scenarios, potentially lead to enforcement action.
Accordingly, alongside collating responses to the information requirement, firms should:
1. reconsider previous FCA speeches, statements and correspondence on non-financial misconduct; and
2. reassess whether their systems and controls, in particular training and speak-up programs, are indeed designed to prevent, detect and address instances of non-financial misconduct.
Although the current information requirement focuses on the insurance sector, all FCA-regulated firms should consider it, as well as their non-financial misconduct systems and controls, to determine whether any enhancements should be made to live up to the regulator's expectations that firms foster cultures intolerant of non-financial misconduct in the same way as every other form of misconduct. Christopher Woolard delivered the message in 2018 that "non-financial misconduct is misconduct, plain and simple,"8 and that the regulator is unlikely to look kindly on firms that have failed to heed that message over five years later.
The FCA and Prudential Regulation Authority's Consultation on diversity and inclusion in the financial services sector included proposals expanding the scope of the conduct rules and fitness and propriety assessments to address non-financial misconduct.9While we await the outcome of that consultation, it seems the FCA has decided to demonstrate a proactive stance regarding non-financial misconduct now. Similarly, a proactive but proportionate response is required of all UK financial services firms and their group boards.
For local London insurance market advice on these matters and/or advice for US parent or group boards on the relevant governance issues surrounding UK operations facing non-financial misconduct issues, WilmerHale's UK/US team can assist.
Footnotes
1 FCA Dear CEO letter on Insurance Market Priorities 2023-2025 dated 20 September 2023
2 FCA Notice to Provide Information dated 6 February 2024
3 Ibid
4 FCA Dear CEO letter on Insurance Market Priorities 2023-2025 dated 20 September 2023
5 Ibid
6 FCA Notice to Provide Information dated 6 February 2024
7 Ibid
8 Opening up and speaking out: diversity in financial services and the challenge to be met, Christopher Woolard, 19 December 2018
9 FCA CP23/20 Diversity and inclusion in the financial sector – working together to drive change, PRA CP 18/23 – Diversity and inclusion in PRA-regulated firms
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