The FCA has published some key findings on non-financial misconduct, including action points for firms. Although the survey was aimed at wholesale firms, the key findings report (Report) sets out some actions that firms should take in order to address non-financial misconduct. It is therefore of interest to all financial services firms.
The Report is not the FCA's feedback to its diversity and inclusion proposals (see our briefing), which as consulted upon incorporate non-financial misconduct into the Conduct Rules, fit and proper assessments, suitability guidance on the Threshold Conditions and guidance on regulatory references. The final rules are expected in Q4 2024 (the FCA has indicated separately that this is likely to be around the year end). The Report nonetheless provides a useful insight into the likely approach that the FCA may take to non-financial misconduct when those DEI proposals settle.
We discuss the FCA's key findings from the survey and the actions that the FCA expects firms to take below.
Key findings
The FCA surveyed 1,028 firms in the following portfolio sectors: wholesale banks, wholesale brokers, London market insurers and London market intermediaries. The survey covered the years 2021, 2022 and 2023, with respondents asked to report all non-financial misconduct related incidents during that time and the most recent or final disciplinary action or outcome for each incident.
Key points of the survey include:
- The number of reported non-financial misconduct incidents increased significantly over the three years surveyed (both in terms of absolute numbers and incidents per 1,000 employees) with bullying and harassment (26%) and discrimination (23%) being the most reported types of non-financial misconduct. However, the FCA acknowledged that a large number of reports could indicate a healthy speak-up culture (and vice versa).
- Disciplinary or other action was taken in 43% of cases but this rarely included remuneration adjustment (and, if it did, this was usually an adjustment to unvested variable pay as opposed to clawback (vested pay adjustment) or an adjustment to fixed salary).
- Grievances or similar formal escalation processes were the most common detection method.
- Confidentiality agreements with staff should include an explicit exclusion allowing for disclosure to certain parties including the FCA, other regulators, and law enforcement agencies. The total number of confidentiality and settlement agreements signed by complainants fell between 2021 and 2023.
- Some of the firms surveyed did not have the relevant policies in force (e.g., whistleblowing or remuneration).
- In relation to governance, 38% of total respondents stated that a board (or equivalent board level committee) did not receive management information about non-financial misconduct. A third of total respondents indicated that they did not have a formal governance structure or committee that decided the outcomes and disciplinary actions for those involved in non-financial misconduct cases.
- Almost all firms surveyed (92%) indicated that they would include incidents of non-financial misconduct in a regulatory reference. In practice, the number of regulatory references that contained information relating to non-financial misconduct steadily rose over the survey period.
Actions for firms to take
The Report sets out some steps that the FCA considers that firms should take to address non-financial misconduct. These include firms:
- Considering the Report's data and how their performance compares with their peers. Although this is most likely to be relevant to firms within the four portfolio sectors covered by the survey, other firms may wish to consider this as well.
- Discussing non-financial misconduct at senior management and board level and considering whether to take steps to improve culture, the identification and management of risks, and how to address non-financial misconduct on an ongoing basis.
- Enabling employees to speak up about non-financial misconduct and establishing ways for employees to raise concerns, including formal processes for whistleblowing where these are not already in place.
- Taking allegations of non-financial misconduct seriously.
- Having effective systems in place to identify, investigate and remedy promptly and fairly when allegations are substantiated.
- Being fully compliant with their regulatory responsibilities and reporting requirements, regardless of size or sector.
The FCA also sees a role for trade associations in co-ordinating industry action.
Firms should therefore consider whether they are already carrying out these actions or whether they think that it would be prudent to make changes to their processes. Once the FCA does publish its final rules on non-financial misconduct, further changes are likely to be required to reflect those new requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
