Findings from the Financial Conduct Authority on non-financial misbehavior could be a major reset in culture for the financial sector. Norton Rose Fulbright’s Katie Stephen and Joe Smallshaw investigate how firms should respond.
Key Findings
The most frequent concerns. There was an increase in the number of reports of non-financial misbehavior between 2021-2023. The survey covered three years, during which bullying and harassment (26%) as well as discrimination (23%), were the two most common concerns.
Outcomes : In 43% of the cases, disciplinary or “other” actions were taken. Some types of non-financial misconduct reported, like violence, intimidation, and sexual harassment led to more disciplinary action than other types such as discrimination. In addition, between 2021-2023, 47% of bullying and harassment reports and 62% of discrimination reports were rejected. The FCA suggested that industry reflect on the different rates and determine if they can be explained.
Impact on remuneration : actions taken in response to non-financial misconduct resulted rarely in a remuneration increase. The majority of the time, remuneration is adjusted against non-vested variable pay and not other types of remuneration such as clawback or fixed salary adjustments.
Management Information: According to 38% of respondents, boards and committees at the board level did not receive information on non-financial misbehavior. The FCA believes that responses to questions regarding board management information and governance structures indicate that large firms may be failing to meet the FCA’s standards for governance and oversight.
The FCA’s next steps
The FCA confirmed that:
Engage firms and understand their results, including how they used data to reflect upon their own culture. Focus on firms that are outliers in their peer group.
Encourage trade associations to use survey data to improve industry standards;
Continue communicating to firms and setting its regulatory expectations via portfolio letters.
Act when it believes that firms have not adhered to the FCA rules and principles.
What next for companies?
The following seven questions may be useful for firms to assess next steps based on the results of the survey.
Does the employee handbook, or any other guidance that you provide to employees adequately cover non-financial misbehavior?
In the survey, specific types of harassment were included, including sexual harassment, bullying, harassment, intimidation, drug possession or use, and violence. 41% of incidents were classified as “other”. Companies should decide if they want to incorporate any “other” experiences into employee training.
Does the internal decision-makers receive adequate support in establishing conduct boundaries?
The lowest percentage of complaints that were upheld and actions taken was for discrimination, which could be due to the fact it is often harder to determine whether or not an act of discrimination has occurred. Giving guidance to decision makers may help achieve appropriate outcomes.
Do you use settlement agreements and confidentiality agreement correctly?
The report is a reminder to individuals that NDAs or confidentiality agreements shouldn’t be used as a way to stop them from reporting to the FCA. The FCA is currently investigating the reasons why confidentiality agreements are most commonly used in cases of discrimination, harassment and bullying.
Do your reports of incidents meet the appropriate standard? Do you have a whistleblowing policy that is appropriate and do you have a healthy culture where people speak up about issues they are concerned about?
The survey indicates that there are many ways to detect fraud, including whistleblowing and grievances. The FCA’s recognition that high complaint levels may be indicative of a healthy culture of speaking up is a positive development for firms. Not all respondents had a policy on whistleblowing, and low complaint levels may not reflect well on the firm.
Do you need a compensation policy?
The use of retroactive clawbacks or salary adjustments may have been less common when remuneration was affected than the implementation of forward-looking changes to bonuses or pay that had not yet vest. The FCA has noted that not all companies have remuneration policy and some may not meet its requirements.
Does the board of directors or a committee at board level receive sufficient management information regarding non-financial misbehavior?
Over a quarter of respondents said that their boards or board-level committees did not receive information about non-financial misbehavior, and another third stated they had no formal governance structures or committees to determine the outcomes. The FCA believes that large firms may not be meeting their expectations in terms of governance and oversight. The board should also decide whether it will adopt the Institute of Directors’ new code of conduct, which is based on six Principles of Director Behavior.
Do You provide enough references and keep them up to date?
Only 87% of respondents updated a reference after an incident, despite 92% saying they would include nonfinancial misconduct. Check that the firms have a process in place for updating and providing references. The FCA warns firms that they must consider their responsibilities in hiring employees with negative references, and to ensure the individuals are fit and proper.
The Grid of Regulatory Initiatives, which was recently updated, confirmed that FCA’s Policy Statement on Combating Non-Financial Inconduct in Financial Sector would be published “around the end of the year”. Keep an eye on this space.
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