Non-financial misconduct: a question of culture?

The FCA opened the current decade with a Dear CEO letter entitled “non-financial misconduct in wholesale general insurance firms”.  Four years later, the FCA sent a notice to provide information to insurance intermediaries on the same subject. 

Once again, the regulator used the theme of poor culture in financial services firms leading directly to harm to consumers, firms, and the market.  They have now added the impact on employees to this list.  Whilst the Dear CEO letter and the notice to provide information were addressed to a specific sector, the whole financial services industry could learn from the themes expressed. 

We have heard lots from the FCA (and its predecessor the FSA) about culture over the years going back as far as 2005, and the first discussions about treating customers fairly, but the focus has moved to good outcomes for consumers.  The extension of the Senior Managers & Certification Regime (SMCR) to all FCA regulated firms put the onus on firms and individuals to be responsible and accountable for behaviours within the firm.  This is further reinforced by the Consumer Duty and the requirement for firms to act to deliver good outcomes for retail customers.

Furthermore, the FCA's  response to the Treasury Select Committee's letter dated 14th June 2023 makes it very clear that it does not consider that non-financial misconduct is outside the scope of its regulatory remit.  Primarily focussing on culture and the importance of regulated firms' fostering an environment in which individuals feel able to speak up and raise concerns, the FCA does not shy away from comments it made back in 2018 to the Women and Equalities Select Committee, saying that:

"A corporate culture that tolerates sexual harassment or other non-financial misconduct is unlikely to be one in which people feel able to speak up and challenge decisions, or one in which they will have faith that concerns will be independently and fairly assessed.  Such a culture also raises questions about a firm's decision making and risk management."

It has been reported that the FCA has seven open enforcement investigations into non-financial misconduct.  Under the current enforcement regime, unless or until there is public censure of any of the firms or individuals involved, we will not know the details of these investigations nor their outcomes. 

What is non-financial misconduct and what can firms do to minimise it both in the workplace and with clients or customers?

Discrimination, harassment, victimisation, and bullying are all forms of non-financial misconduct including sexual harassment, homophobia, racism, and sexism and apply to the way a firm treats its staff and its customers or clients.

Discrimination

The Equality Act 2010 defines nine protected characteristics;

• age

• disability

• gender reassignment

• marriage and civil partnership

• pregnancy and maternity

• race

• religion and/or belief

• sex

• sexual orientation

 It is the role of the Board and Senior Management to ensure that staff are not disadvantaged in any way due to any of these characteristics and that customers are treated fairly and equitably. 

Discrimination can be direct: one person is treated less favourably than another due to a protected characteristic – for example consideration for promotion, or indirect by way of policies or procedures: holding team meetings before normal office hours may mean parents who need to take their children to school will find them difficult to attend.

Harassment

According to Citizens Advice, harassment is unwanted behaviour which you find offensive, or which makes you feel intimidated or humiliated.  There are several forms of harassment, one of them being sexual harassment, or unwanted attention from a colleague.  Other forms of harassment include threatening behaviour or physical harassment, the use of emails to make threatening or untrue statements, or psychological harassment which involves making belittling remarks to an individual particularly in front of colleagues.

Bullying

Bullying is a particular form of harassment and can be in private or in public.  Some bullying may lead to a charge of constructive dismissal against the perpetrator.

The SMCR puts the focus on the Board and Senior Management to engender a culture of diversity and inclusion.  The FCA expects firms to take a holistic approach to the way the firm is governed, the way employees are treated, and what happens to them if they engage in non-financial misconduct.  

Firms should begin to address non-financial misconduct risks in the same way they address other business risks within the organisation. 

Leadership

As with everything that happens in an organisation, leadership, and the tone from the top sets the agenda throughout the firm.  How does the Board communicate its definition and expectations of the culture and conduct across the business.?  Having done this, what steps has the Board taken to measure the quality of culture and conduct against these clearly defined expectations?

The treatment of whistle-blowers and the way in which their concerns are dealt with is another indication of how seriously non-financial misconduct is taken.  Does senior management look for trends and how they address the issues raised is a good test of their leadership.

Purpose

In March 2020, the FCA published a discussion paper DP20/1: Transforming culture in financial services – driving purposeful cultures.  In introducing the discussion paper, Jonathan Davidson, FCA Executive Director of Supervision said: “The purpose of a firm sits at the heart of its business model, strategy, and culture.  Unhealthy cultures and purpose have been at the root cause of too many mis-selling and other conduct scandals in financial services.  I want to see strong leadership creating purposeful cultures where it is safe to speak up and diversity is encouraged and listened to.” 

Clarity of purpose is essential for any organisation and how this is articulated, managed, and monitored is key but it needs to be carefully thought through and must resonate with staff, customers, and other stakeholders within the business.

In the intervening four years, the industry has been getting to grips with the Consumer Duty which has driven culture firmly to the top of firms’ agendas.

Rewarding and managing people

The days of reward based purely on achieving sales targets are long gone.  Most firms have reward systems that consider behavioural based key performance indicators in addition to financial performance.  Upheld complaints should be a key performance indicator and we accept this to mean complaints from clients and customers.  Do firms consider internal complaints from colleagues?

Next Steps

Senior managers should review current processes and procedures in the light of the FCA’s Dear CEO letter whichever sector they are in and identify any gaps between the regulator’s expectations and their current arrangements.  Having identified the gaps, take action to address them.

Such action should include enabling non-financial conduct leadership, in other words, senior managers should take responsibility for the firm’s culture, one way is to ask how the leadership team measures the quality of its culture and conduct of employees and, importantly, what against.  A review of HR and compliance policies will reveal if they set the right tone and are designed to ensure that cases of non-financial misconduct are handled correctly

The extension of SMCR required firms to draft statements of responsibility for all senior managers.  These should include the management of risks associated with poor handling of non-financial misconduct.  A review of remuneration will reveal if reward systems are designed to discourage poor behaviours, it will also highlight any gender-based pay gaps that may exist.

Communication is the key.  How are policy statements articulated, do staff understand what the firm expects of them?  Dependent upon the size of your firm, you may want to engage with an external resource to assist with difficult situations.  Coupled with communication is training.  This is essential to ensure that staff know exactly how the firm has defined the expected behaviours and culture in respect of non-financial misconduct coupled with diversity and inclusion.

Expect the FCA to carry out further supervisory work in this area and anticipate that they will ask your senior managers searching questions during visits and by way of further online questionnaires.

How can we help?

It is important that you have robust policies and procedures to demonstrate you have considered and addressed risks within your firm.  If you would like Compliance Matters UK Limited to review your compliance systems and controls schedule a free, no-obligation consultancy call with us today. 

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