The FCA’s 2024 Survey on Culture and Non-Financial Misconduct

Welcome to my latest LinkedIn newsletter! In each issue, I will share Employment Law insights on important topics with my connections and followers.

It is more than six years since the FCA first discussed non-financial misconduct as a regulatory priority.? As those in the Financial Services will know, 'misconduct' has been on the FCA's priority agenda since 2008 and arguably before.

The concept began with 'financial misconduct' in the hope of addressing many of the issues which led to the 2008 crisis and, over the years since, has developed as the world witnessed the #metoo and #black lives matter movements, among other and of course the introduction of gender pay gap reporting and voluntary ethnicity pay gap reporting, which serve to highlight discrepancies within the sector and stressing the need to focus on the 'whys' to redress this.

While writing this article, it occurred to me that many of today's bankers were teenagers in 2008.

As such, they were very unlikely to be reading the Financial Times or FCA newsletters and were?probably unaware of the 2008 crisis unfolding around them.?They will know that the FCA and PRA are pushing Firms to address non-financial misconduct now, but may be less aware of where this started and why.

On Friday, 25 October, the Financial Conduct Authority (FCA)?published the results of its survey to understand how investment banks, brokers, and wholesale insurers handle non-financial misconduct, such as bullying, sexual harassment, and discrimination. Six years after the FCA started the discussion and made it clear to Firms this was a priority for the regulator.

The survey?included over 1,000 firms and found that reports of such misconduct increased between 2021 and 2023.

The FCA confirmed it carried out its survey in line with its focus on improving firm culture, ensuring senior managers’ fitness, requiring firms to assess their certified staff and restating its priority of promoting healthy cultures to improve market outcomes and reduce harm.

It has reminded organisations that both individual fitness and corporate culture significantly impact the risks posed to these objectives.

The FCA found that firms identified concerns through various mechanisms, with internal systems, formal processes, and whistleblowing being the most common.

The findings were shared to help firms benchmark their reporting and ensure their processes for non-financial misconduct are appropriate.

Key findings include:

• Bullying and sexual harassment (26%)?and?discrimination (23%)?were the most commonly recorded concerns.
• A significant portion of concerns (41%) fell into an “other” category, highlighting the complexity of categorising personal misconduct issues.
• Firms used various methods to identify concerns, with formal processes and whistleblowing being the most common.

In 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) consulted on proposals to introduce a new regulatory framework on Diversity and Inclusion (D&I) in the financial sector, ‘Diversity and inclusion in the financial sector – working together to drive change’.

As part of this, the FCA and PRA sought to clarify and strengthen its expectations around non-financial misconduct where it is?relevant for regulatory purposes. It set out proposals to better integrate non-financial misconduct considerations into staff fitness and propriety assessments, Conduct Rules and the suitability criteria for firms to operate in the financial sector (Threshold Conditions).

The aim being to give firms the confidence to take decisive and appropriate action against employees for instances of non-financial misconduct.

The responses to the consultation highlighted the significant challenges firms face in navigating complex regulatory environments, especially regarding fitness, propriety, and conduct rules. Smaller firms, in particular, often struggle due to limited legal and compliance resources and a lack of precedent to guide them.

The impact of getting this wrong can be far-reaching, not only in terms of facing the wrath of the FCA or PRA but also in terms of leading to career-ending outcomes for regulated employees.

Many firms will already have initiatives in place to address non-financial misconduct in their workplaces; however, as a reminder, several actions should be taken:

1. Regulatory Measures: The FCA and the PRA have proposed measures to promote diversity and inclusion.?These include amendments to specify where their rules apply to non-financial misconduct. It is expected that as a minimum, all regulated individuals are aware of these measures.
2. Fitness and Propriety Assessments: Non-financial misconduct should now be integrated into staff fitness and propriety assessments, conduct rules, and the criteria for firms to operate in the sector.
3. Whistleblowing and Reporting: Firms should actively stress test and adapt, as needed, their whistleblowing and reporting mechanisms to ensure that all employees feel able to safely report misconduct without fear of repercussions.
4. Industry Benchmarking: The FCA is regularly sharing survey findings to help firms benchmark their reporting and investigation processes against peers, promoting transparency and accountability. These findings should be circulated, and reviews of fitness and propriety assessments and?conduct rules should be conducted to ensure they address the findings.
5. Training and Awareness: Most firms are implementing training programs to raise awareness about non-financial misconduct and to foster a culture of respect and inclusion. However, these training programs need to be regularly reviewed to ensure they remain relevant, incorporate FCA and PRA findings, and are refreshed and training carried out regularly.

What next?

The FCA has reiterated its expectation that firms should have effective systems in place to identify and mitigate risks of all kinds and take non-financial misconduct seriously. It is restating that a culture tolerating such behaviour undermines trust and decision-making. It confirmed that it can and will act against firms with inadequate controls.

Therefore, given the existing focus on this area and recent enforcement action by the FCA, the number of investigations relating to non-financial misconduct opened by the Regulators may increase.

To manage this risk, firms should:

Set clear expectations for employees’ non-financial conduct.

Provide necessary training.

Ensure issues are effectively investigated, addressed, and reported when they arise.

Feel free to Get In Touch if you are an FCA/PRA regulated Senior Executive experiencing issues at work following either disclosure of non-financial misconduct in your workplace or facing allegations of non-financial misconduct., [email protected]

For more information on my employment law practice see my Penningtons profile here. https://bit.ly/RubyDinsmore

You can also find more information on the advice we at Penningtons provide for senior executives here: https://bit.ly/Senior-Executive-Employment

Ruby Dinsmore Employment Lawyer (UK)

Thanks for reading, and please subscribe. I'd love to know your thoughts in the comments below. If you enjoy my content, then follow me.

?