The Financial Conduct Authority’s findings on non-financial misconduct could represent a significant reset for culture in the financial sector. Norton Rose Fulbright’s Katie Stephen, Joe Smallshaw and Rebecca Dulieu investigate how firms need to respond.
Key findings
Most frequent concerns: the number of allegations of non-financial misconduct reported increased between 2021 and 2023. In the three years covered by the survey, bullying and harassment (26%) and discrimination (23%) were the most recorded concerns.
Outcomes: disciplinary or “other” actions were taken in 43% of cases and some types of reported non-financial misconduct, such as violence, intimidation and sexual harassment, more often resulted in disciplinary actions compared to other types, such as discrimination. In addition, 62% of reported discrimination incidents and 47% of reported bullying and harassment incidents between 2021 and 2023 were not upheld. The FCA has suggested that the industry should reflect on these differing rates and whether they are explainable.
Remuneration impact: action taken following non-financial misconduct rarely resulted in remuneration adjustment. When remuneration was adjusted it was mostly against unvested variable pay rather than other forms of remuneration adjustments such as fixed salary adjustment or clawback.
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Management information: 38% of respondents to the survey also stated that boards and board-level committees did not receive management information about non-financial misconduct, and the FCA considers that the responses to questions about board management information (MI) and governance structures suggest that large firms’ governance and oversight of non-financial misconduct could be falling short of the FCA’s expectations.
Next steps for the FCA
The FCA has confirmed that it will now:
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 from their peer groups;
Support trade associations to lead industry efforts to improve standards using the survey data;
Continue to communicate with firms and set out its regulatory expectations through portfolio letters;
Act where it considers that firms have failed to adhere to the FCA’s rules and principles.
Next steps for firms
Firms may wish to consider the following seven questions for the purpose of assessing next steps in light of the survey:
Does your employee handbook or equivalent guidance adequately cover types of non-financial misconduct?
The specific types included in the survey were sexual harassment, bullying and harassment, discrimination, possession or use of illegal drugs, violence or intimidation. However, 41% of incidents fell into the non-specific “other” category. Firms should consider whether to feed any “other” experience into their employee guidance.
Is adequate support provided to internal decision-makers on conduct boundaries?
Discrimination had the lowest proportion of upheld complaints with action taken which may reflect the fact that discrimination is sometimes harder to judge than other types of misconduct. Providing guidance to decision-makers may assist in achieving appropriate outcomes.
Are you using settlement agreements and confidentiality agreements correctly?
The report serves as a reminder that NDAs and confidentiality agreements should not be used to prevent individuals from whistleblowing to the FCA. Confidentiality agreements were most used for discrimination, bullying and harassment and the FCA is carrying out some follow-up to understand the reasons for this.
Do you have an appropriate level of reported incidents, an appropriate whistleblowing policy and a healthy speak-up culture?
The survey indicates a variety of detection methods including grievances and whistleblowing. It is helpful and a potential silver lining for firms with high levels of complaints that the FCA recognises that this may indicate a healthy speak-up culture. However, not all respondents had a whistleblowing policy and low levels of complaints may not reflect positively on the firm.
Should you have a remuneration policy?
It may be understandable that where remuneration was impacted, the use of retrospective clawback or salary adjustment was less common than making forward looking variations to bonuses or other pay which had not yet vested. However, the FCA has flagged that not all firms had remuneration policies and for some firms, this may itself not be in keeping with its requirements.
Does your board or a board-level committee receive adequate management information about non-financial misconduct?
Over a third of respondents stated that boards or a board-level committee did not receive MI about non-financial misconduct and a third had no formal governance structure or committee to determine outcomes. The FCA suspects that governance and oversight at large firms could be falling short of expectations. The board should also consider whether to adopt the new code of conduct for directors structured around six key Principles of Director Conduct which was published by the Institute of Directors this week.
Do you provide adequate references, keep them updated and take account of adverse references received?
Although 92% of respondents said they would include non-financial misconduct in a regulatory reference, only 87% said they would update a reference following an incident. Firms should check they have an adequate process for providing and updating references. The FCA flags that it expects firms to consider their regulatory obligations with regards to hiring of employees with adverse references and ensure individuals remain fit and proper.
The recently updated Regulatory Initiatives Grid confirmed that the FCA’s policy statement on Tackling Non-Financial Misconduct in the Financial Sector will be published “around year-end”. Watch this space.
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