By Feeras Juenda, Compliance Consulting Analyst
On 25 October 2024, the UK Financial Conduct Authority (FCA) published the findings of its culture and non-financial misconduct survey.
In order to ascertain how firms were detecting and managing non-financial misconduct (NFM) failures, such as bullying and harassment, in February 2024 the FCA sent a ‘notice to provide information’ letter to 1,028 regulated wholesale financial services firms to gather data on reported incidents, exercising its power under Section 165 of the Financial Services and Markets Act 2000 (FSMA). This came following the publication of Consultation Paper CP23/20 in September 2023 on diversity and inclusion, wherein the FCA stated that the proposed rules and guidance concerning NFM would apply to all firms with a Part 4A permission under the FSMA, including MiFID investment firms and AIFMs.
The following statement in the FCA’s press release by its Executive Director of Markets and International, Sarah Pritchard, highlights the FCA’s objective of maintaining high standards of conduct across the UK financial services industry and the rationale behind the regulator’s continued focus on this area:
“Healthy workplace cultures are essential across all the markets we regulate – where non-financial misconduct is allowed to persist it can undermine trust and confidence, and create a culture where wrongdoing goes unchallenged, causing harm.”
The FCA’s findings
From the survey responses, the FCA found that there had been a significant increase in the number of reported NFM incidents in recent years (an increase of 40% between 2021 and 2023). The most commonly reported (41%) type of NFM across all sectors was “other” NFM, which comprised of issues such as intoxication, inappropriate or offensive language, as well as data protection and information technology security breaches. This was followed by bullying and harassment, as well as discrimination, which constituted 26% and 23% of all reported incidents respectively.
However, firms took disciplinary or “other” actions in merely 43% of cases. The survey responses also revealed that disciplinary or “other” actions were more likely to be taken in certain types of reported NFM incidents, such as violence and intimidation or sexual harassment. In addition, certain types of NFM were more likely to result in dismissal, such as possession or use of illegal drugs, sexual harassment, and violence or intimidation. It is worth noting that, under Section 1 of the Worker Protection (Amendment of Equality Act 2010) Act 2023, which came into effect on 26 October 2024, employers are now legally obligated to “take reasonable steps to prevent sexual harassment of employees”.
Next steps
In terms of next steps, the FCA will:
- 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 its regulatory expectations through our portfolio letters, and
- Act where it finds firms fail to adhere to the rules
Although the FCA has not yet published formal guidance on this area, the Financial Services Regulatory Initiatives Forum released an interim version of the Regulatory Initiatives Grid last month, which states that the FCA intends to publish a Policy Statement addressing NFM regulatory requirements by the end of this year.
What do firms need to do?
Given that this will be an area of increased regulatory scrutiny going forward, and given the potential consequences of NFM failures, firms should reflect on the FCA’s findings at senior management and board level and consider whether they should improve their culture or amend the systems, procedures, policies, and mechanisms that they have in place to identify and address all types of risk, including NFM.
In addition, the FCA expects firms to:
- Enable employees to speak up about NFM
- Establish ways for employees to raise concerns, including formal processes for whistleblowing where these are not already in place
- Take allegations of NFM seriously
- Ensure there are appropriate governance arrangements to allow Senior Managers to have adequate oversight of compliance in this area, including the availability of management information (MI) as appropriate
- Have effective systems in place to identify, investigate and remedy promptly and fairly when allegations of NFM are substantiated (the significance of this expectation was recently illustrated by the FCA’s high-profile investigation into allegations of sexual misconduct made against a hedge fund manager, whom the regulator subsequently found had impeded an internal disciplinary hearing), and
- Fully comply with their regulatory responsibilities and reporting requirements, regardless of size or sector
How IQ-EQ can help
To discuss what the FCA’s new expectations or the proposed rules and guidance regarding non-financial misconduct may mean for your firm or find out more about the support available from IQ-EQ’s expert regulatory compliance consulting team, please contact us today.
About the author
Feeras is a Compliance Consulting Analyst for IQ-EQ, based in London. Feeras completed a Regulatory Compliance internship at IQ-EQ, and holds a degree in law from City, University of London.
