Non-financial misconduct (‘NFM’) has been a key focus of the FCA for many years now. In September 2023, the FCA launched an expansive consultation on diversity and inclusion in the financial sector, which proposed significant changes to the way the FCA regulates the issue of NFM. That consultation closed in December 2023.
At the end of September 2024, a senior member of the FCA announced at the regulator’s AGM that the final rules for the consulted-upon changes would be announced before the end of 2024.
On 25 October 2024, the FCA announced the results of their NFM survey.
The findings are possibly unsurprising, but make for sober reading in a sector that is struggling to change its image.
What is NFM?
There is no legal or formal definition of NFM.
However, it is clear that the FCA generally regards it as encompassing behaviour such as discrimination, bullying, sexual harassment, or criminal behaviour.
NFM can include acts that do not occur in the workplace but are still capable of affecting the individual’s ability to perform their regulated role.
Ultimately, such misconduct may potentially breach the FCA Conduct Rules and/or lead to a finding by the employer that the individual is not fit and proper for the purposes of the FIT test required by the FCA Handbook. It may also result in an adverse finding by the FCA as to the individual’s fitness and propriety.
Why does the FCA care about NFM?
The FCA takes the view that NFM is “misconduct, plain and simple” (to quote one of its former directors). And the FCA is tasked with regulating conduct – the clue is in the acronym. The FCA considers that NFM is inconsistent with its statutory objectives, in that it damages public confidence in the financial services industry. The FCA therefore considers that acting to reduce NFM furthers its statutory objectives (for example, the operational ‘integrity’ objective, the operational ‘consumer protection’ objective in certain circumstances, and the strategic objective of ensuring that the relevant markets function well). The FCA also says, in exercising its functions as a public body, that it has a duty under the Equality Act 2010 to ‘have due regard’ to the need to, amongst other things, eliminate discrimination, harassment, victimisation, and any other conduct prohibited by or under the Equality Act. The FCA therefore seeks to reduce instances of discrimination and harassment within financial services firms, promote equality of opportunity within the sector for people from all backgrounds, and to encourage firms to create more inclusive working environments.
However, under the existing regulatory framework the FCA has struggled to enforce these aims. Nor has it provided detailed regulatory guidance about the practical application of NFM within firms. There is a concern that firms have taken inconsistent approaches to dealing with these issues.
The FCA has always viewed NFM through a ‘culture’ lens, and in its view, culture is one of the most important things for firms to focus on.
The FCA put it very succinctly in relation to their NFM survey:
“A corporate culture that tolerates sexual harassment or other non-financial misconduct is unlikely to be one in which people feel able to speak up and challenge decisions, or one in which they will have faith that concerns will be independently and fairly assessed. Such a culture also raises questions about a firm’s decision making and risk management.”
What was the FCA NFM survey about?
Over 1,000 investment banks, brokers and wholesale insurance firms, covering a three-year period (2021-2023), provided responses to the FCA’s survey. Between them, the firms employed some 326,000 employees.
Firms were compelled to provide the data to the FCA, under s.165 of the Financial Services and Markets Act 2000.
This was the first comprehensive NFM data gathering exercise across these sectors, with the FCA aiming to acquire a baseline assessment of behaviours. The reference to a ‘baseline’ suggests to us that further surveys may be forthcoming.
The FCA hopes that the results should act as a catalyst for regulated firms’ boards and trade associations to prioritise and act on issues of NFM. The FCA’s view is that NFM leads to poor working cultures and can ultimately harm consumers or market integrity.
What did the survey find?
Echoing many of the findings of the Treasury Select Committee in its Sexism in the City enquiry report in March this year, the survey reveals that NFM remains an issue in firms, with the number of reported incidents increasing over the last three years.
Some of the highlights from the survey include:
- The number of NFM allegations reported increased by more than 70%.
- Bullying and harassment (26%), and discrimination (23%) were the most recorded concerns.
- 41% of concerns were labelled as ‘other’. Firms said this included:
- Intoxication or misuse of alcohol within the workplace or work-related environment.
- Inappropriate or offensive language or communication style within the firm or towards third parties (both verbally and in electronic communications).
- Data protection and information technology security breaches.
- Employees engaging in retaliatory behaviour in relation to allegations made against them.
- Misuse of expenses or gifts and hospitality.
- Performance issues and related conduct breaches.
- Breaches of firm policies and procedures.
- Firms took direct action on the complaint in 43 per cent of cases. However, consequences rarely involved financial penalties. When remuneration was adjusted it usually related to unvested, variable pay.
- Action was also more often taken over violence and intimidation issues, as opposed to areas such as discrimination.
- Use of confidentiality and settlement agreements (i.e. NDAs) in the banking sector fell.
- Grievances or ‘other formal escalation processes’ (such as whistleblowing channels) were the main ways that firms have identified NFM. The FCA recognised that this was likely to continue, although there’s no suggestion that they will encourage firms to try and detect NFM using monitoring and surveillance tools. This is perhaps not altogether unsurprising, given the sensitivity (for example from employment law, and privacy law perspectives) around such methods.
- 38% of firms stated that a board or a board level committee did not receive management information (‘MI’) about NFM. 33% of total respondents stated that they have no formal governance structure or committee that decides the outcomes and disciplinary actions for those involved in NFM cases.
The data around breaches of policy and misuse of expenses suggests that there is much more work to be done generally within firms regarding culture, integrity and honesty.
What are the FCA, following the results of the survey, saying firms should do?
The FCA says they expect firms do 4 things:
- To reflect on the data and consider how their own performance compares with their peers.
- To discuss NFM at senior management and board level and consider whether they need to take steps to improve:
- Their culture.
- How they identify and manage risks.
- How they address NFM on an ongoing basis.
- Encourage sharing of good practice across firms, for example through trade association forums.
- Review their systems and controls to:
- Enable employees to speak up about NFM.
- Establish ways for employees to raise concerns, including formal processes for whistleblowing where these are not already in place.
If firms have high levels of NFM, what will the FCA think?
It is likely that the FCA may more closely scrutinise firms with high levels of NFM.
However, as the FCA’s survey makes clear, a high number of reported incidents (which, includes both allegations as well as confirmed occurrences) does not necessarily suggest a worse environment. First, not all incidents will be substantiated upon investigation, and some may be factually incorrect or vexatious. Second, high levels of reports may in fact be an indication of a healthy speak up culture. Finally, it may simply reflect size and scale of a firm (large firms will inevitably have more incidents).
The FCA also observes that no, or a low number of, incidents does not necessarily suggest a positive or improving environment. This in fact may reflect that a firm’s speak up mechanisms, or other avenues for detecting NFM are not functioning effectively.
What are the FCA likely to do following the results of the survey?
In the main, the FCA say they will do four things as a result of this survey:
- Engage with firms to understand their results and how they have used the data to reflect on their own culture, focusing on the firms that are outliers in their peer groups.
- Support trade associations to lead industry efforts to improve standards using the survey data.
- Continue to communicate with firms, and send portfolio letters to set regulatory expectations.
- Act where they find firms are failing to adhere to the FCA’s rules.
More broadly, what does this mean for HR teams?
The FCA has made clear that it expects firms to reflect carefully and meaningfully on the survey data, not least because it will be using the data to inform its supervisory and policy work. As a minimum therefore HR teams could assist firms to:
- Review their own processes, procedures and controls regarding NFM – are they fit for purpose, and do they help in mitigating risk?
- Consider whether detection methods are sufficiently robust.
- Consider whether investigation, and other related processes, are similarly effective. This mirrors comments made by the PRA in the consultation paper in 2023, when it referred to the need for allegations to be appropriately and independently investigated. Similarly, the Treasury Select Committee’s Sexism in the City enquiry report in March this year queried whether firms’ HR teams were in fact well placed to investigate and manage allegations of NFM.
- Discuss NFM at senior management and board level. Firms should consider how best to evidence these discussions, in case of further regulator surveys or requests for evidence of action.
- Ensure that steps are taken internally in accordance with the new proactive duty to prevent sexual harassment in the workplace, including risk assessments, policy revisions and awareness raising and training for all staff top of the agenda.
- More generally, now that firms are on notice of the regulators’ appetite for data regarding NFM, all firms should review their record keeping processes and systems, updating them where necessary, in order to ensure that they would be able to respond to a further survey or request for data from the regulators.
There is a role here for HR teams and HRDs – both in terms of reviewing and updating existing policies and training, but also in terms of reflecting honestly on whether sufficient resource and support is given by firms to those who are at the forefront of driving culture change, compliance with conduct and values policies, and to the internal enforcement of standards.
We know that many HR leaders are currently feeling the weight of both current and forthcoming employment law change, not to mention regulatory change, whilst also managing day-to-day HR matters and processes. Whilst workplace culture and behaviours remain in the spotlight, it is realistic to expect that there will be more reporting of allegations, with a resulting need to investigate, and provide support to all those involved in any investigative process. This will require further resource from HR and other teams. It is also likely that those in senior business line roles, including SMFs, will need more support in understanding how best to manage and support their teams.
The FCA has pointed to the role of trade associations in coordinating continued industry action. Whilst such associations can and do play a part in helping to drive cultural change across the sector, there are many who consider that the regulators themselves have a greater role still to play – both in producing clearer guidance for firms around managing allegations of NFM, as well as using their own regulatory powers to sanction and censure those whose conduct has clearly and egregiously fallen short of the standards expected.
The FCA continues to consider its response to the 2023 D&I consultation paper. As noted above, the regulator has indicated that it expects to publish its finalised policy by the end of this year, including changes to the FCA handbook. Given the FCA’s proposed changes to the Conduct Rules regarding NFM, this will have a significant impact on HR teams. As the changes will be unlikely to address best practice for firms regarding NFM, seeking professional advice will continue to be important for HR teams, in house employment/regulatory lawyers, and General Counsel.
Conclusion
We will continue to review developments in relation to this challenging area of law and regulation. We will provide further updates, and in particular when the FCA publishes its final regulatory rule and guidance changes regarding NFM later this year.
In the meantime, if you wish to discuss how your firm can best respond to the survey findings, please do get in touch with a member of the employment or financial services team, or speak to your usual Fox Williams contact.
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