The FCA published the findings of its survey of how firms detect and handle incidents of non-financial misconduct, on 25 October 2024. The survey of over 1,000 firms was sent to wholesale banks, wholesale brokers, and London market insurers and intermediaries in February 2024. While the findings are specific to the firms in the sectors surveyed, they will also be of interest to other FCA-regulated firms. It is worth recalling that the FCA intends to publish final rules and guidance by the end of this year on embedding non-financial misconduct within regulatory requirements for all FSMA firms with a Part 4A permission, as set out in CP23/20, as part of proposals for a new diversity and inclusion framework (policy on the remaining elements of the proposals is due next year).
The FCA found that the number of reported non-financial misconduct incidents increased over the three years surveyed (2021-2023). The FCA makes clear that interpreting the survey results requires careful contextualisation, as - for example - a high number of incidents may be an indication of a healthy speak up culture, rather than a poor culture.
The regulator expects firms to reflect on the data and how they compare to peers, and to consider at a board and senior management level whether they need to improve their culture, how they identify and manage risks, and how they address non-financial misconduct.
The survey forms part of the FCA’s ongoing focus on non-financial misconduct and culture. The FCA has previously identified particular concerns in its wholesale sector portfolios, and in 2023 wrote to wholesale banks, wholesale brokers and wholesale insurers and intermediaries to reiterate its expectations on risk management, preventing and handling non-financial misconduct, and inclusive cultures.
The FCA required all firms in the relevant portfolios to respond to its survey on the number and type of non-financial misconduct incidents, methods of detection and resolution, and policies and procedures relating to culture. The FCA sets out its findings, and reiterates its expectations across the following areas.
Reported incidents
Findings
The number of reported non-financial misconduct incidents increased significantly over the three years surveyed, from 1,363 total incidents reported in 2021 to 2,347 in 2023.
Notwithstanding potential for different interpretations of incident categories, the distribution of non-financial misconduct types varied by sector, with bullying and harassment (26%) and discrimination (23%) as the most reported types across all sectors, together with ‘other non financial misconduct’ (41%).
Key takeaways
The FCA notes that non-financial misconduct was broadly interpreted by firms. It also notes that some of the incident types could be categorised as financial misconduct or employee performance issues. It states that the range of possible misconduct suggests firms need to retain flexible, principles-based policies and procedures.
Firms will need to reflect on this as they prepare for the upcoming policy statement on non-financial misconduct, which is likely to require each firm to have a clear and consistent definition of non-financial misconduct that can be applied within existing processes and policies, such as whistleblowing policies, and disciplinary and grievance processes.
Detecting non-financial misconduct
Findings
Firms mainly identified incidents through reactive routes such as grievances or similar formal processes. Firms also identified incidents through whistleblowing and firm-led detection methods such as market surveillance.
Key takeaways
The FCA recognises that detection methods will vary by business type and size. However, it makes clear that all firms should consider a variety of complementary methods for identifying non-financial misconduct. The regulator stresses the importance of encouraging a robust speak-up culture, alongside safe avenues for reporting, such as whistleblowing.
Incident outcomes
Findings
Excluding complaints not upheld, the FCA found that disciplinary or other action was taken in 84% of violence or intimidation cases, and 80% of sexual harassment cases. For other incident types, the proportion was notably lower.
The FCA asks firms, coordinated by trade associations, as appropriate, to reflect on the differing uphold and outcome rates across incident types, and consider whether these are explainable.
It also found that confidentiality and settlement agreements signed by complainants are still used, but that the number did fall over the three years surveyed. Confidentiality agreements were used most frequently in instances of discrimination; the FCA is engaging with industry to understand the rationale for this.
In all sectors, action taken following non-financial misconduct rarely resulted in remuneration adjustment.
Key takeaways
The FCA acknowledges there may be reasons why firms use confidentiality clauses and agreements, but also underlines that it expects them to feature an explicit exclusion allowing for disclosure to certain parties – including regulators and law enforcement agencies. It also notes settlement agreements must state that nothing prevents an employee from making a protected disclosure. Firms may therefore wish to review their current use of and governance around settlement and confidentiality agreements.
Governance
Findings
The FCA found that 38% of respondents did not share MI about non-financial misconduct with the board or a board-level committee. Additionally, 33% did not have a formal governance structure for decision-making on cases of non-financial misconduct.
Key takeaways
The FCA explains that while it expects firms to take a proportionate approach to governance and MI, all firms, regardless of size or business model, must comply with the FCA’s Principles. It warns that the responses suggest that large firms’ governance and oversight of non-financial misconduct could be falling short of its expectations. Firms may therefore wish to review their governance, board reporting and oversight arrangements.
Regulatory references
Findings
The vast majority of respondents (92%) said they would include incidents of non-financial misconduct in a regulatory reference. In practice, the number of regulatory references that contained information relating to non-financial misconduct that firms reported in the survey was 16 in 2021, 21 in 2022 and 43 in 2023.
The number of hires with non-financial misconduct on their references halved from ten in 2021 to five in 2023 across all portfolios. Respondents also reported an increase in amending employees' Fit and Proper assessments over the three years.
Key takeaways
The FCA reminds firms of their obligations under SYSC regarding regulatory references and fit and proper assessments. Firms may therefore wish to review how processes ensure misconduct is appropriately and consistently captured in regulatory references.
The FCA also reminds firms that it could conclude that an SMF is not fit and proper where they fail to take steps to address non-financial misconduct.
Governance and oversight: Discuss non-financial misconduct at board level, and ensure appropriate policies, procedures and governance structures are in place to deal with incidents.
Collaborate: Better connect internal processes, including those across compliance, risk, legal and HR. Engage with trade bodies to address non-financial misconduct at an industry level.
Assess policies and procedures: Regularly review and update policies and processes around fit and proper assessments, regulatory references, whistleblowing and grievances.
Non-financial misconduct is high on the regulatory agenda. The FCA makes clear that it expects firms to reflect on how their own data compares with peers, and to assess whether existing processes for reporting and investigating non-financial misconduct require enhancement. This is relevant to all firms, and not just those in scope of the survey.
Firms should assess how their data compares to the findings, but in doing so should carefully consider the context and nuance required to undertake a meaningful comparison exercise. Firms which identify outlier results, at either extreme (ie. significantly more or significantly fewer reported incidents relative to peers), should carry out further analysis to identify the reasons.
A joined-up approach across the business is required with respect to other legislative changes. This includes the new proactive duty on sexual harassment which came into force on 26 October 2024, and the provisions related to sexual harrassment in the draft Employment Rights Bill published earlier this month.
Finally, the FCA recognises the role of trade bodies in coordinating industry action in this area. Firms should engage with their trade bodies to ensure they input into any industry initiatives to tackle non-financial misconduct.
“This report gives important indications of where the regulator is particularly focused in its ongoing work on culture and non-financial misconduct. It also serves as a call to action for firms to get the right people around the table to prepare for incoming final policy on non-financial misconduct.”
Katy Bennett
Director, PwC
The FCA will use the survey responses to inform ongoing supervisory work across the four portfolios.
It is due to issue final rules and guidance by the end of this year on the non-financial misconduct aspects of its diversity and inclusion proposals, consulted on in September 2023. Final policy on the remaining proposals is due next year.
Culture and non-financial misconduct in wholesale insurance has catapulted to the FCA’s list of key priorities over the last few months. The FCA expresses concern over poor governance in wholesale insurance. The regulators also recently set out proposals on diversity and inclusion for all firms.
The FCA and PRA published detailed proposals for a new regulatory framework for Diversity & Inclusion for financial services firms.
Sajedah Karim
DEI Reporting and Regulation Director, London, PwC United Kingdom
