The Financial Conduct Authority (FCA) has long been concerned with non-financial misconduct (NFM) within the financial services sector. This concern stems from the understanding that NFM, which includes behaviours such as discrimination, bullying, sexual harassment, and other forms of misconduct, can significantly impact the integrity and reputation of the financial industry. The FCA's recent survey, conducted over a three-year period from 2021 to 2023, involved over 1,000 investment banks, brokers, and wholesale insurance firms, employing approximately 326,000 individuals. This survey aimed to establish a baseline for understanding the prevalence and nature of NFM within these sectors.
The survey's findings highlight a troubling increase in reported incidents of NFM, with a more than 70% rise in allegations. Bullying and harassment accounted for 26% of these reports, while discrimination made up 23%. Other concerns included inappropriate language, misuse of alcohol, and breaches of data protection and firm policies. Despite the increase in reports, the survey revealed that direct action was taken in only 43% of cases, often without financial penalties. This suggests a need for more robust mechanisms to address and mitigate NFM within firms.
Implications for firms
Cultural and structural changes
The FCA's survey underscores the necessity for firms to reassess their internal cultures and structures. The FCA emphasizes that a corporate culture tolerating NFM is unlikely to foster an environment where employees feel empowered to speak up or trust that their concerns will be fairly assessed. This can lead to poor decision-making and risk management, ultimately harming consumers and market integrity.
Firms are encouraged to reflect on their survey data and compare their performance with peers. This reflection should extend to senior management and board levels, where discussions about NFM should be prioritised. Firms need to evaluate their risk management strategies and consider ongoing improvements to their cultural frameworks. Sharing best practices across the industry, particularly through trade association forums, is also recommended to foster a collective effort in addressing NFM.
Systems and controls
The survey results indicate that many firms lack formal governance structures to handle NFM cases effectively. Approximately 38% of firms reported that their boards did not receive management information about NFM, and 33% lacked a formal committee to decide on outcomes and disciplinary actions. This highlights the need for firms to establish robust systems and controls that enable employees to report NFM safely and confidentially. Implementing formal whistleblowing processes where they are not already in place is crucial.
Firms should also review their policies and procedures to ensure they are fit for purpose and capable of mitigating risks associated with NFM. This includes revising confidentiality and settlement agreements to allow for necessary disclosures to regulators and law enforcement agencies. The FCA's expectation is that firms will take these steps seriously and integrate them into their operational frameworks.
Role of HR teams
Enhancing detection and investigation
HR teams play a pivotal role in addressing NFM within firms. The FCA expects HR departments to assist in reviewing and updating processes, procedures, and controls related to NFM. This involves ensuring that detection methods are robust and that investigations are conducted effectively and independently. The Treasury Select Committee's "Sexism in the City" report also questioned whether HR teams are adequately equipped to manage NFM allegations, highlighting the need for HR to be proactive in this area.
HR teams should facilitate discussions about NFM at senior management and board levels, ensuring that these discussions are well-documented and can be referenced in future regulatory surveys or requests for evidence. Additionally, HR should lead efforts to raise awareness and provide training on NFM, emphasising the importance of a zero-tolerance culture towards such misconduct.
Practical steps for firms
Immediate actions
Data reflection and comparison: Firms should analyse their survey data and compare it with industry peers to identify areas for improvement.
Board-level discussions: Ensure that NFM is a regular topic of discussion at senior management and board meetings, with documented evidence of these discussions.
Policy and procedure review: Conduct a thorough review of existing policies and procedures related to NFM, ensuring they are robust and effective.
Whistleblowing processes: Establish or enhance formal whistleblowing processes to enable safe and confidential reporting of NFM.
Training and awareness: Implement training programs to raise awareness about NFM and promote a zero-tolerance culture.
Long-term strategies
Cultural assessment: Regularly assess the firm's culture to ensure it aligns with the FCA's expectations and promotes a healthy working environment.
Resource allocation: Allocate sufficient resources to HR and compliance teams to support cultural change and regulatory compliance.
Industry collaboration: Engage with trade associations and industry forums to share best practices and collaborate on addressing NFM.
Regulatory preparedness: Prepare for future regulatory changes by staying informed about upcoming FCA guidelines and incorporating them into the firm's operational framework.
Additional considerations
The FCA's focus on NFM is part of a broader effort to enhance diversity and inclusion within the financial sector. The consultation on diversity and inclusion, launched in September 2023, aims to integrate NFM considerations into the Conduct Rules, fitness and propriety assessments, and suitability criteria for firms. This reflects a shift towards a more comprehensive regulatory framework that addresses both financial and non-financial misconduct.
Firms should be aware of the potential impact of NFM on their regulatory references and fitness and propriety assessments. The FCA's proposed changes to the Conduct Rules and the Fit and Proper test highlight the importance of addressing NFM not only within the workplace but also in employees' personal lives. This underscores the need for firms to adopt a holistic approach to managing NFM and ensuring compliance with regulatory expectations.
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