Earlier this year, the Financial Conduct Authority (FCA) conducted an opportune survey on culture and non-financial misconduct (“NFM”), which investigated how firms identify and handle NFM incidents.
The recent survey results have reignited a discussion on what is considered proper conduct (including conduct outside of work) and whether further rules from the regulators are imminent. While this may increase compliance and administrative burden, it is coming about against a timely backdrop where efforts to improve culture (intertwined with diversity, equity and inclusion) have been shunned.[1]
The FCA adds that the findings, published recently at the end of October, should act as a “catalyst for boards and trade associations to prioritise NFM that lead to poor working cultures” that can ultimately harm consumers and or market integrity.[2]
Revamping culture is a mammoth task and it is not just restricted to NFM. This article will explore key findings of the survey, what firms can do in the meantime and looks ahead to the landscape that firms may want to cultivate.
Survey Snapshot
This was the first ever comprehensive non-financial misconduct (NFM) data gathering exercise across sectors, where 1,028 wholesale financial services firms* participated, with a focus on recorded incidents** of NFM for the period between 2021 and 2023.
*Wholesale Banking, Wholesale Brokers, Wholesale Insurers & Wholesale Insurance Intermediaries portfolios
**Incidents describe an alleged or confirmed occurrence of NFM that was reported to or identified by the firm (including those that were not reported already to the FCA)
The survey[3] found that:
- The number of reported NFM incidents increased over the 3 years.
- Incidents are often detected through reactive routes like grievances or similar processes (50%).
- In response to the incidents:
- Only in 43% of the cases disciplinary or ‘other’ actions were taken by firms,
- In the remainder, cases were not investigated, not able to conclude, not upheld, upheld with no other action, or investigations were ongoing.
- Violence and intimidation more often resulted in disciplinary actions, compared to other types (like discrimination).
- In all sectors, action taken following NFM rarely resulted in remuneration adjustment. When it did, it was mostly against unvested variable pay.
Types of NFM incidents (as measured in the survey):
- Sexual harassment (the Equality Act 2010, Sexual Offences Act 2003)
- Bullying and harassment
- Discrimination
- Possession or use of illegal drugs
- Violence or intimidation
- Other non-financial misconduct
Key Takeaways
The point regarding the increasing number of reported and identified incidents may suggest a bleak outlook, although at the same time it implies that employees feel more comfortable or are in a better position to report their grievances and raise concerns.
This is echoed by the FCA in the survey findings:
“A corporate culture that tolerates sexual harassment or other NFM 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.”[4]
Severe cases (violence or sexual harassment) are more likely to result in action, while less clear-cut behaviours often received less attention. Most cases do not result in any disciplinary action, such as written warnings and other measures. This indicates the current light-touch approach, and that many firms may lack the appropriate processes to respond to reported misconduct.[5] The variation in handling the incidents also leads to inconsistent outcomes across the sector, which highlights the call for clear rules and better governance.[6]
The FCA results lead to further questions, for example, it would be of interest to note the nuances of NFM as well – would sexual assault be considered as 2 counts of NFM as it is a form of violence too? The findings understandably do not go into this in detail. It is up to a firm’s policies and procedures to decide this in accordance with the Conduct Rules and Fitness and Propriety standards, keeping in mind the proportionality of its procedures to its size and operational scale.
Cultivating culture and looking forward
The Financial Services Culture Board (FSCB); a legacy membership body that worked with financial services firms to help them understand and manage their workplace cultures halted its operations in 2023.[7] There is a distinct gap in guidance, and clearer measures would allow a more consistent approach and a safer and healthier financial services sector, which would result in better protections of investor and consumer interests.
It has been said time and again by proponents that NFM is quite simply misconduct. The trouble does lie in the broad spectrum of incidents, and the many murky nuances. In an example scenario of a serious misconduct by Person A that could have resulted in a criminal case, a more prescriptive approach would effectively disallow this person to perform a regulated activity as well. This keeps Person A’s firm safer both psychologically and physically, it would also signify better risk management and prevent other regulated firms from onboarding a harmful person that could jeopardise the team’s interests.
Board members currently also do not receive adequate information on NFM, which could signify that the firm or senior managers do not see it as of equal importance as remuneration.[8] The survey also adds that relevant policies (whistleblowing, disciplinary, diversity and inclusion) had various levels of adoption.
From a HR perspective, it’s vital to be clear on the diversity and inclusion processes but crucially to inspect the NFM situations in your own organisation. Following this, an audit and risk assessments of what can be done for improvements moving forward can be done, and for it to be communicated to the board as soon as possible.[9] A few relevant questions could involve: Is the grievance process accessible? Are staff aware of said process?
There is also a greater expectation for larger firms, especially those with more than 250 employees. Although culture is important regardless of the size of the firm, and while smaller firms may have a close-knit culture that could amplify incidents, the expectation for larger firms is bigger in proportion to its size.
Conclusion
The FCA’s feedback to their consultation on ‘Diversity and inclusion in the financial sector – working together to drive change,’ is much anticipated and the regulator will publish their finalised policy in due course, including on how NFM should be considered within their rules.[10]
Poor conduct at all levels within a firm can have negative impacts on a firm’s governance, employee wellbeing, and ultimately, its financial performance.[11] NFM can act as a gauge of a firm’s overall culture and can contribute to the lack of trust within firms, potentially leading to significant regulatory, reputational, and financial risks.[12]
Boards can start comparing the position at their firm relative to others and firms should be using the survey data as a benchmark to compare if their existing systems are adequate for detection and remediation.[13]
Changing culture itself can be precarious as it takes a long time for a healthy (or healthier) result to come into fruition. Another layer of complexity is the preciseness in the guidance that the regulators are tasked with providing. The crux lies in how we move forward – both for the regulators and financial firms.
[1] https://hbr.org/2024/11/what-trumps-second-term-could-mean-for-dei, https://www.managementtoday.co.uk/uk-line-us-style-dei-pushback/opinion/article/1882962
[2] https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings
[3] Ibid.
[4] https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings
[5] https://www.pinsentmasons.com/out-law/news/fca-publishes-survey-on-culture-and-nonfinancial-misconduct-in-uks-finance-sector
[6] https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings
[7]https://financialservicescultureboard.org.uk/#:~:text=The%20FSCB%20has%20now%20closed,and%20manage%20their%20workplace%20cultures
[8] https://www.ft.com/content/91155ce5-3796-4799-8010-f8bcc1c97f7a
[9] https://www.pinsentmasons.com/out-law/news/cultural-change-at-the-fore-for-uks-financial-services-sector
[10] https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings
[11] https://www.mgaa.co.uk/non-financial-misconduct-the-fca-survey-results-and-next-steps-for-firms/
[12] Ibid.
[13] https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings
