The Financial Conduct Authority (FCA) has published the findings of its comprehensive survey on non-financial misconduct within the wholesale financial services sector. The survey covered incidents from 2021 to 2023. The targeted portfolios included London market insurers, market intermediaries, wholesale banks, and wholesale brokers.
Although many of the survey results are positive and demonstrate that firms are addressing incidents of non-financial misconduct, some gaps remain. The message from the FCA is that non-financial misconduct is a priority area and that a firm’s response to non-financial misconduct is considered as indicative of whether it has a healthy culture more broadly. Firms must be able to demonstrate appropriate policies, processes and governance to identify and appropriately investigate and address non-financial misconduct.
The FCA is expecting firms to benchmark their own reporting against this peer analysis and to reflect on:
- whether they have suitable processes and controls which enable employees to speak up about non-financial misconduct and provide robust detection of non-financial misconduct, as well as processes for investigation where potential instances are identified. For example, the FCA found that some firms lacked policies on whistleblowing and disciplinary actions;
- whether non-financial misconduct is being discussed appropriately at senior management and board level. Although boards may delegate the day-to-day handling of non-financial misconduct to HR and compliance, boards must be able to demonstrate sufficient oversight. The board is responsible for the culture of the firm, and how a firm deals with non-financial misconduct is a key to that culture; and
- when firms are comparing its data to the wider market it may compare favourably but a low number of incidents does not necessarily suggest a positive or improving environment. Conversely, a high number of incidents does not suggest a worse environment. It may be an indication of a healthy culture where employees feel empowered to speak up.
Key findings
The survey revealed an increase in reported incidents of non-financial misconduct over the three-year period, with wholesale banks reporting the highest number per 1,000 employees. Bullying and harassment (26%) and discrimination (23%) were the most frequently reported, with a significant portion categorised as ‘other’ (41%), which covered incidents ranging from intoxication to data protection breaches.
Wholesale banks reported the lowest number of sexual harassment cases but had a higher number of reported discrimination cases compared to other portfolios. By comparison, London market intermediaries reported the highest relative proportion of incidents involving violence or intimidation compared with other portfolios.
The FCA recognised that the data it gathered had limitations when considered in isolation and without the context. There is also difficulty in interpreting some of the statistics in the FCA’s survey. The significant number of instances categorised as ‘other’ (41%) makes analysis more challenging.
Identifying incidents
Incidents were primarily identified through measures such as grievances and formal processes (50%), alongside whistleblowing which was most prevalent in wholesale banks. Firms also have started to use passive detection approaches like market surveillance, meaning that a single incident can be subject to multiple detection methods.
Detection of non-financial misconduct from the use of monitoring and surveillance tools, such as the monitoring of work email or telephone communications, remains relatively low which is perhaps expected as such tools are primarily designed to identify other forms of misconduct.
Actions taken
Disciplinary action, meaning verbal or written warnings and dismissal, and ‘other’ actions were taken in 43% of cases, with the remaining cases either not upheld, upheld with no action or investigations were ongoing. Very few cases were not investigated.
The cases of non-financial misconduct that lead to dismissal of the individual, involved possession or use of drugs, sexual harassment, or violence or other intimidation. Other forms of non-financial misconduct often led to settlement or confidentiality agreements.
The FCA found that action taken following misconduct rarely resulted in remuneration adjustment across the sectors. Where remuneration was adjusted, it was most often against unvested variable pay. This may be something firms wish to reflect on as remuneration adjustment may be an appropriate disciplinary action, either on its own or in conjunction with other disciplinary measures.
Governance and management information
The survey identified that appropriate policies where not in force in some of the firms surveyed, including policies relating to whistleblowing, disciplinary action and remuneration.
The survey also found that some boards did not address non-financial misconduct, indicating potential governance shortcomings. The results found that 38% of respondents did not receive management information (MI) about non-financial misconduct, and 33% have no formal governance structure or committee to decide outcomes for non-financial misconduct cases. The FCA’s clear expectation is that non-financial misconduct should be a board level issue, and boards should be reflecting on whether they need to take steps to improve, their culture, how they identify and manage risks and how they address non-financial misconduct on an ongoing basis.
Regulatory References
The number of regulatory references containing information on non-financial misconduct rose from 16 in 2021 to 43 in 2023, and87% of respondents indicated they would update a regulatory reference following a non-financial misconduct incident. The number of hires involving individuals with non-financial misconduct incidents on their regulatory references halved between 2021 and 2023. This may demonstrate that the intention behind the regulatory reference process under the Senior Managers and Certification Regime is working.
The FCA reminded firms that whilst some incidents that did not lead to disciplinary action may fall outside of the regulatory reference requirements, firms should not withhold information that they reasonably believe would impact the assessment of an individual’s fitness and propriety.
Co-Authored by Marelize Abercrombie, Trainee Solicitor
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