FCA publishes the findings from its non-financial misconduct survey 

The FCA has published the results of its survey, conducted in February 2024, in which they asked over 1,000 firms to report how they record and manage allegations of non-financial misconduct. The survey was sent to regulated wholesale financial services firms and asked for data on incidents that occurred across three years from 2021 – 2023. The regulator now expects firms to reflect on the data, compare themselves to their peers and consider at board level how they identify and manage risks and how they address non-financial misconduct.  

Key findings 

Reported incidents of non-financial misconduct have increased 

The number of reported incidents increased significantly across each of the different portfolios over the three years surveyed from 1,363 to 2,347. Wholesale banks had the highest number of reported incidents. The FCA points out that it considers that high levels of reporting are not in themselves a sign of poor management of risks and may in fact indicate a healthy ‘speak up’ culture.  

Across all four portfolios that were surveyed, bullying and harassment (26%) and discrimination (23%) were the most common types of non-financial misconduct reported, but the least likely to be upheld following investigation. Cases of sexual harassment resulted in disciplinary action being taken 64% of the time (although dismissal rates were 21%) and cases of violence and intimidation resulted in disciplinary action in 73% of the time. The FCA is encouraging firms to look at these differing rates and consider if they can be explained or justified.  

The new proactive duty to take reasonable steps to prevent sexual harassment came into force on 26 October 2024. The bar for compliance is high and is likely to have an immediate impact on firms’ approach to non-financial misconduct. The requirement involves conducting a risk assessment, putting a policy in place, staff training and making sure proper complaints procedures are available.  The FCA has indicated that it will be working with the Equality and Human Rights Commission further on this. The Employment Rights Bill proposes amendments that would raise the bar even further and require employers to take all reasonable steps (not just reasonable steps). The Bill will also make it clear that complaints about sexual harassment can amount to protected disclosures under the whistleblowing regime.  

Detection  

Most firms surveyed relied on reactive methods to detect incidents of non-financial misconduct. Grievances or ‘other formal escalation processes’ were the most common methods and were used to detect approximately 60% of incidents. The FCA noted that proactive detection methods such as surveillance were relatively uncommon. The regulator suggested that all firms should consider a variety of complementary methods for identifying non-financial misconduct to ensure that incidents that are not formally reported do not go undetected. A robust ‘speak up’ culture and offering various safe avenues for reporting are recommended. 

The regulator also noted that 38% of firms reported that their board or board level committee did not receive management information on incidents of non-financial misconduct.  While the FCA expects firms to take a proportionate approach it is concerned that larger firms could be falling short in respect of its governance and oversight expectations.  

Outcomes 

16% of complainants in discrimination cases left under settlement agreements and 10% had confidentiality obligations included. By contrast, just 2% of alleged perpetrators left under settlement agreements. One particular concern raised by the FCA was the use of confidentiality agreements and confidentiality clauses within settlement agreements following incidents of non-financial misconduct. It reminds firms that settlement agreements and non-disclosure agreements cannot be used to prevent disclosures made in the public interest to regulators, and that such disclosures should be explicitly excluded in confidentiality agreements entered into by firms. 

Processes 

The survey found that, whilst most firms had procedures and policies in place, wholesale brokers and London market intermediaries were the least likely to have up to date remuneration and diversity and inclusion policies. Surprisingly, several firms did not have a current whistleblowing policy. Although the FCA focuses on the requirements under its own handbook for policies to be in force and up-to-date, firms were also reminded of the importance of having clear grievance procedures and harassment policies.  

Regulatory references 

A significant majority of firms (92%) indicated they would include instances of non-financial misconduct in a regulatory reference and 87% said they would update the reference if an incident of non-financial misconduct was discovered. The number of people hired into roles despite having non-financial misconduct noted in their reference has decreased, indicating firms are taking such incidents more seriously.  

Firms are encouraged to review their processes to ensure that misconduct is appropriately and consistently documented in regulatory references. 

What should firms do now?  

By the end of this year, the FCA is due to release final rules and guidance on the non-financial misconduct elements of its diversity and inclusion consultation. The final policy on the remaining proposals is expected next year. In the meantime, firms should:   

• Review and benchmark the survey findings against their own incidents of non-financial misconduct. 

• Ensure proper governance structures are in place and that boards receive information about incidents of non-financial misconduct. Boards should use this data to consider whether they need to strengthen their cultures, risk management and internal processes. 

• Ensure employees feel able to speak up and that appropriate whistleblowing and ethics hotlines are in place and that training is provided. 

• Ensure robust disciplinary processes are in place and that incidents of non-financial misconduct are being appropriately reported as breach of Conduct Rule incidents and on regulatory references.  

If you would like to speak to one of our specialist financial services employment team about the survey or the new duty to prevent sexual harassment, please contact Olivia Toulson.