Since CP23/20: Diversity and inclusion in the financial sector was released in September 2023, the financial services sector has been awaiting a policy statement from the Financial Conduct Authority (“FCA”) which would finalise changes to its rules. On 25 October 2024, the FCA published the results of its survey, carried out in February 2024, on how firms record and manage non-financial misconduct allegations. The survey examined recorded incidents of Non-Financial Misconduct (“NFM”) at over 1,000 wholesale financial services firms over the period 2021 to 2023. In this article, we highlight some key findings from the survey and translate what this could mean for firms in terms of next steps.
Highlighted Findings:
- The number of NFM allegations reported increased by more than 70%;
- Bullying and harassment (26%), and discrimination (23%) were the most recorded concerns;
- 41% of concerns were labelled as ‘other’. Firms noted this included:
➢Intoxication or misuse of alcohol within the workplace or work-related environment;
➢Inappropriate or offensive language or communication style within the firm or towards third parties (both verbally and in electronic communications);
➢Data protection and information technology security breaches;
➢Employees engaging in retaliatory behaviour in relation to allegations made against them;
➢Misuse of expenses or gifts and hospitality;
➢Performance issues and related conduct breaches; and
➢Breaches of firm policies and procedures.
- Firms took direct action on the complaint in 43% of cases. However, consequences rarely involved financial penalties. When remuneration was adjusted it usually related to unvested, variable pay;
- Action was also more often taken over violence and intimidation issues, as opposed to areas such as discrimination;
- Use of confidentiality and settlement agreements (i.e. NDAs) in the banking sector fell;
- Grievances or ‘other formal escalation processes’ (such as whistleblowing channels) were the main ways that Firms have identified NFM. The FCA recognised that this was likely to continue, although there’s no suggestion that they will encourage Firms to try and detect NFM using monitoring and surveillance tools; and
- 38% of Firms stated that a board or a board level committee did not receive management information (“MI”) about NFM. 33% of total respondents stated that they have no formal governance structure or committee that decides the outcomes and disciplinary actions for those involved in NFM cases.
What should Firms do next?
The survey shows the FCA’s continued focus on NFM in financial services firms. All firms should reflect on the results and take steps to ensure that they have systems and controls in place to identify and address NFM effectively or risk scrutiny/enforcement action by the FCA. There are several steps firms could take now to mitigate the risk of falling short of the FCA’s expectations, as outlined below.
Compliance and Workplace Culture Reviews
Firms should consider undertaking a firm-wide compliance review of their policies and practices related to NFM. Further, to gain insight into potential workplace concerns firms should consider talking to employees by conducting workplace culture reviews. This can be done by holding focus groups, or employee interviews to provide important insight into a firm’s workplace culture and opportunities to enhance or make changes to the culture.
The Regulator’s expectation is that firms adhere to documented policies and have in place adequate procedures in for resolving incidents. For example, consider reviewing workplace policies and training, reporting channels, investigation, escalation processes, disciplinary, remedial action practices, and management and board reporting. This is important considering the FCA’s expectation that senior management have oversight over NFM issues. Conducting compliance and workplace culture reviews will help firms ascertain their overall risk of NFM and make improvements as required.
Reviewing Policies
It is already recommended that firms should be reviewing their policies and procedures at least annually to ensure that they reflect any regulatory changes and to ensure that internal procedures are correctly outlined and not out of date. A policy review, whether conducted as an annual review or as part of a firm-wide workplace compliance review, should assess whether the firm’s employee handbook or manual defines NFM in clear terms, sets expectations regarding workplace behaviour, and provides examples of inappropriate behaviours and steps to be taken. This is especially prudent for employee training purposes.
Governance Practices
The results of the survey demonstrate that the FCA expects firms to consider the quality and granularity of management information provided to Senior Management. Firms should review the information shared with senior management and consider reporting, for example:
- The number of reported incidents of NFM;
- The percentage of cases that result in disciplinary action or reports made to the FCA;
- Detailed information regarding any cases that may pose heightened risk to the firm;
- Trends identified; and
- Completion rates for training on NFM.
Conclusion
The results of this survey will be used to inform the FCA’s supervisory work and further reiterate the regulators focus on the area. Failing to consider the survey, ahead of the publication of the final policy statement (expected in Q1 2025) and making any enhancements necessary could lead to regulatory scrutiny and, potentially, enforcement action. In summary, senior management and boards of directors should discuss and provide oversight over NFM, ensure systems and controls are in place to identify and address workplace issues and take steps now to ensure they have effective policies and procedures in place.
How Complyport can help:
We understand the complexities and challenges involved in addressing non-financial misconduct. Our team of subject matter experts provides tailored guidance and support to help all firms navigate the evolving regulatory landscape, implement best practices and cultivate a culture of ethics and inclusion.
- Advisory services: Expert advise for implementation of changes to prepare your firm for the new NFM rules.
- Compliance reviews and Workplace culture reviews: We can conduct an audit-style review or Health Check with findings and recommendations outlined in a report.
- Bespoke Training for Board Members: Effective DE&I initiatives start at the top. We offer bespoke training sessions for Board members, ensuring they understand their role in promoting diversity and fostering an open and inclusive culture.
- Strategic Planning: We work with you to develop a robust DE&I strategy that aligns with your business goals and the regulatory requirements
- Policy Drafting and Disclosures: Clear, comprehensive policies are essential for driving change. We assist in drafting DE&I policies that reflect best practices and regulatory expectations, as well as preparing transparent disclosures that demonstrate your commitment to stakeholders.
