Introduction
Non-financial misconduct remained an enforcement priority for the Financial Conduct Authority (FCA) throughout 2024, with various updates and addresses made to Parliament since its initial consultation paper in September 2023.1As we welcome in the new year, the financial services sector continues to await the publication of the FCA's finalised policy which will set out the regulatory parameters in which non-financial misconduct should be considered within the FCA's rules. But what can regulated entities learn from the events of 2024 in order to best prepare for when these new rules apply?
This article provides a review of the latest regulatory updates and the key considerations regulated firms can focus on for the year ahead.
Culture and Non-Financial Misconduct Survey
In October 2024, the FCA published findings from its culture and non-financial misconduct survey2 which included responses from 1,028 regulated wholesale financial services firms.
The FCA's information request sought to gather data between 2021-2023 relating to non-financial misconduct, covering:
- The number of incidents recorded (by type/category) and the method by which these incidents were detected.
- The number of incidents recorded (by type/category of incident) and the outcomes of those incidents.
- The number of further outcomes recorded.
The number of reported non-financial misconduct incidents increased significantly over the three-year period surveyed - from 1,363 in 2021 to 2,347 in 2023 - with wholesale banks responsible for the vast majority of this data across all portfolios surveyed. This statistic is perhaps unsurprising, given that the wholesale banking sector has a substantially larger employee population, and, with this, greater and more diverse functionality for reporting disclosures. With the increased focus on non-financial misconduct year on year, it is also expected that the volume of disclosures will rise in these cases.
Whilst the responses to the survey broadly interpreted non-financial misconduct to cover 'other' incidents, such as performance issues or misuse of expenses, bullying and harassment (at 26%) was the most reported type of non-financial misconduct across all subsectors surveyed. That being said, sexual harassment, which was recorded separately, was the most common behaviour reported within the wholesale intermediaries subsector, accounting for 16% of reported incidents. With the very recent implementation of the Worker Protection Act 20233 in October 2024, which imposes a legal duty on all UK employers to prevent sexual harassment, there is no doubt that regulated firms are already assessing elements of their respective frameworks in managing workplace conduct matters. However, based on the survey results, although bullying is highlighted as a prevalent form of misconduct, it is not included in the positive legal duty for UK employers.
Another important result from the survey was the number of reported 'no incidents' within respondent companies across the subsectors, depending on the size of the firm. A high proportion of smaller firms (those with 0-49 employees) reported 'no incidents' between 2021-2023. Whilst fewer medium-sized firms (those with 50-249 employees) reported the same, there was still a high number of reported 'no incidents' across particular subsectors, including 68% in relation to wholesale brokers.
Key Considerations
Regulatory Expectations
The upshot of the FCA's survey is an expectation for regulated firms to reflect on the data and (i) discuss non-financial misconduct at senior management and board level, (ii) identify and manage risks associated with non-financial misconduct, (iii) have an appropriate framework in place to address all relevant incidents, including bullying behaviour, and (iv) ensure processes and procedures are in place for employees to be able to speak up and raise concerns.
Subject Matter Experts
With the data showing a large number of non-reports across small to medium-sized firms, there is a significant risk for firms of this size where they do not have proportionate resources or the relevant expertise in place to be able to properly address issues relating to non-financial misconduct. Lean financial services firms, such as specialist hedge funds or asset managers, might not be well-equipped to respond to such incidents and may rely on external advisors to support investigations.
The first stage of support these firms should focus on is ensuring a robust triaging procedure is implemented for disclosures to be assessed. Triaging incidents based on risk and impact on the individuals involved will help firms develop a risk-based response based on the duty of care requirements and protecting reputation. Firms of this size are potentially most at risk of regulatory scrutiny and therefore must ensure that they have considered short-medium term initiatives, as well as ensuring advisors with aligned expertise in harassment and discrimination matters are onboarded before further regulatory reforms take place.
Response Planning for Types of Non-Financial Misconduct
With the implementation of the Worker Protection Act 2023 now imposing a legal duty on employers to take reasonable steps to prevent sexual harassment in the workplace, regulated entities should ensure that legal obligations are considered alongside regulatory obligations when dealing with sexual harassment cases, specifically.
Parameters on how bullying and psychological harassment cases will be regulated are still to be determined. These cases, which umbrella a realm of different types of behaviours, from undermining and exclusion to verbal threats, can often be those most at risk of escalating to contentious issues, resulting in complex investigations which need to be approached with care.
A best practice approach would be to ensure compliance policies and investigative procedures factor in this type of misconduct to ensure lengthy employment disputes and counterclaims are minimised. For most firms, including companies operating outside the sector, bullying and psychological harassment will be the most common type of non-financial misconduct to be investigated. It is vital for financial services firms to assess disclosures effectively by implementing a triage procedure, as well as response planning, so the type of conduct can be categorised and assessed based on legal, regulatory, and reputational exposure.
Footnotes
1. https://www.fca.org.uk/publication/consultation/cp23-20.pdf
2. https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings
3. https://www.legislation.gov.uk/ukpga/2023/51/contents/enacted
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.
