Non-financial misconduct: insights from FCA findings

November 26, 2024

The Financial Conduct Authority's (FCA) recent survey findings on non-financial misconduct (NFM) reports in the wholesale financial services sector provide insights on the handling of NFM as an issue central to diversity and inclusion, applicable to all financial services firms. The detailed FCA final rules on NFM are still awaited (in response to CP23/20: Diversity and inclusion in the financial sector - working together to drive change) and should provide greater clarity on the definition of NFM and FCA expectations. We set out below our recommended actions for FCA firms in other sectors.

What does the FCA mean by non-financial misconduct?

Introduced fairly recently into regulatory discussions, NFM is used to refer to employees' conduct for issues such as bullying, harassment, sexual harassment and discrimination. The survey responses demonstrate the current breadth of issues that are possible to label as NFM (being under the influence of alcohol and drugs whilst working, abusing power, violence and intimidation, breach of company policies). On review, some of these incidents could be classified as performance issues and/or financial misconduct and therefore the FCA's final rules may attempt to address the risk of confusion about which allegations should be labelled as NFM for reporting purposes.

The survey: a snapshot of industry practice

The FCA issued detailed questions about reports of NFM and firms' responses during the period 2021 to 2023. 984 of the 1028 firms (wholesale banks, wholesale brokers, London market insurance and London market intermediaries) responded.

Details of the questions posed by the FCA were made public at the same time as the findings and these can be used as a useful reference point for any firms outside the scope of the survey to self-assess whether they would currently be in a position to respond. Indeed, the FCA expects firms to have effective and streamlined systems in place for recording allegations of NFM and that data can be drawn from across business units. Relevant data includes whistleblowing reports, disciplinary records, settlement agreements and any allegations raised in the context of exit discussions, consideration of remuneration adjustment, regulatory reference information etc.

Out of scope firms have an opportunity to test whether they are well placed to collate NFM data and review and consider how their data compares with the wholesale sector findings. This falls part of any assessment on culture, with a view to ensuring staff feel safe to speak up, are heard when they do so and can challenge decisions.

Action 1: Collate data requested in the FCA survey questions and compare with the wholesale sector survey findings.

Firms saw an increase in NFM reports 2021-2023

The key message from the survey findings is that the number of NFM reports increased significantly: a 72.2% rise between 2021 and 2023. Bullying, harassment and discrimination make up 49% of the total incidents, with 43% of cases leading to disciplinary or other action being taken. Dismissal from employment was commonly the outcome in cases involving illegal drugs, sexual harassment and violence or intimidation.

Whilst the raw data is interesting, without factual backdrop it is too easy to jump to conclusions. A key focus for the FCA is on creating a culture where people feel safe to speak up. The majority of incidents came to firms' attention following a grievance being raised. High figures may indicate employees are raising matters in an appropriate way, but without further context it is impossible to judge.

Action 2: Review employee awareness of grievance and whistleblowing procedures. Consider what lessons can be taken from internal employee engagement or culture surveys about feeling safe to speak up.

Governance gaps: where firms fell short

The FCA expects firms to reflect on their data when compared with the broader picture now shared in their findings. The FCA expects discussion and action at board and senior management level, to review risk management of NFM and implement an action plan to resolve any gaps. Any governance gaps should be addressed promptly (some surveyed firms reported not having disciplinary, whistleblowing and/or remuneration policies in force).

The FCA reported that 38% of firms had no formal governance arrangements in place for providing management information about NFM to board level. There is an opportunity for firms to take stock on how information on all disciplinary outcomes and Conduct Rules breaches are recorded and escalated to the board to consider in relation to its responsibility for culture. It may be prudent for firms to report to the board on all disciplinary outcomes, covering NFM and other misconduct.

Action 3: Review and enhance governance reporting on NFM to board and senior management levels.

Confidentiality agreements

The post #MeToo focus on the use of non-disclosure agreements, particularly in the context of sexual harassment cases, has impacted regulatory practices. The survey data shows the use of settlement agreements, and to a lesser extent confidentiality agreements, is still common in connection with NFM allegations. The Treasury Committee report "Sexism in the City" contained damning indications that too often a complainant who raises allegations of sexual harassment is ultimately exited. It is perhaps then a positive development that the survey findings show a reduction in the number of complainants entering settlement agreements over the period in question.

Action 4: Ensure use of confidentiality agreements (in settlement agreements and separately) aligns with all relevant regulatory guidance.

Remuneration adjustments

Firms have the power to reduce or recover remuneration in response to misconduct. The survey findings highlight that this is rarely utilised in practice, with clawback being very rare. As part of the governance review in response to the survey findings, firms should ensure that due consideration is given to adjusting pay and bonuses where there is a finding of NFM.

Action 5: Review and enhance remuneration adjustment policies and practices.

Fitness and propriety

One area of particular contention from the consultation paper CP23/20 was the proposal that incidents of NFM in an employee's personal life are relevant to the fitness and propriety of those holding a certified or Senior Manager function. The FCA findings show that firms are re-assessing fitness and propriety in response to findings of NFM, even though the number of cases where this has happened is fairly low (93 re-assessments, of which 22 related to sexual harassment).

Action 6: Test the awareness of the need to review fitness and propriety in response to disciplinary action and findings of Conduct Rules breaches. Review how often an out of cycle re-assessment has been performed.

Practical steps for HR and in-house Legal

Firms should ensure that, where disciplinary action is taken for NFM (or any form of misconduct), consideration is always given to any follow-on governance that is relevant. This includes a potential review of fitness and propriety, consideration of whether the Conduct Rules have been breached and whether remuneration should be adjusted.

Regulatory references

Flowing through from those decisions is the need to record what should be said on a future regulatory reference when a former employee applies for a certified or Senior Manager role. The FCA findings demonstrate firms are taking steps to record incidents of NFM in this way (16 regulatory references mentioned NFM in 2001, increasing to 43 in 2023). It is insightful to see that some certified/Senior Manager individuals are successfully securing a new role despite an incident of NFM being on their regulated reference, albeit these numbers are very low (10 people in 2021, dropping to only five in 2023).

Action 7: Audit the preparation of timely commentary for future regulatory references and how those with responsibility for the recruitment process manage incoming references that include NFM information.

Conclusion

The FCA's findings on NFM provide a crucial opportunity for firms in the financial sector to reflect on their governance practices, reporting systems and cultural frameworks. While the survey highlights significant increases in NFM reports, it also underscores the opportunities to enhance the company culture by supporting those who raise examples of bad practice.

Follow-on surveys are likely. Firms have an opportunity to review practices to ensure robust governance structures are in place, prioritise clear policies on whistleblowing, disciplinary and Conduct Rules and remuneration adjustment, whilst fostering a culture where employees feel safe and supported in raising concerns. As we await the FCA's final rules on NFM, firms should proactively assess their practices, address gaps and remain adaptable to evolving definitions and expectations.

Ultimately, addressing NFM is not only about regulatory compliance but also about building an inclusive, respectful and accountable workplace culture that aligns with the broader goals of diversity and inclusion.