FCA launches non-financial misconduct survey for Lloyd's and London market firms

The FCA has launched a survey into non-financial misconduct in the financial services sector. On 6 February, the regulator wrote to Lloyd’s and London Market Intermediaries and Managing General Agents requesting a raft of information relating to incidents of non-financial misconduct which have taken place. It follows recent consultations by the FCA and PRA on diversity and inclusion in financial services which proposed the introduction of strict new rules and guidance designed to force a culture change across the sector and give the regulator greater visibility of how firms are tackling the issue or are failing to tackle it. The deadline for responding to the survey is today, 5 March 2024. Firms which fail to meet the as a deadline, for whatever reason, have been urged to contact the FCA as a matter of urgency.

As the letter makes clear, the survey is not designed to gather information on specific allegations and firms are not being asked for any personal information or the names of any individuals. Rather, it comprises a series of high-level questions on the governance and management of diversity and inclusion including matters such as policies and procedures, remuneration, regulatory references, disciplinary matters, and whistleblowing. For these purposes, the FCA spells out that non-financial misconduct has a wide meaning, including bullying, sexual harassment, and discrimination and is not confined to incidents which took place at the office. So, it also includes working from home, working offsite including training and conferences, client entertainment and sponsored events, and social events which are work-related. The FCA says the data will help to understand when and where non-financial misconduct occurs and help shape best practice going forward. 

When providing the information, the FCA says it wants firms to break-down how the incidents relate to senior and non-senior management roles. On the numbers, they make it clear that a high volume of incidents is not necessarily indicative of a worse environment and could instead point to an effective and transparent speaking up culture. Conversely, where a firm is reporting nil-returns, or a low volume of incidents, this is not necessarily an indication of a good culture where all is well.

As you would expect, we’ve been advising on this and running training sessions for clients. Chris Evans has been involved in that work and earlier he joined me by phone from the London office to discuss it. First, question, what’s led to this survey?” 

Chris Evans: “So, previously, until the D&I consultation paper which closed in December last year, there was a lack of authority, if I can put it that way, as to the role of non-financial misconduct both in terms of fitness and propriety, and also in terms of whether there's been a conduct rule breach. Now, we did have some loose guidance from the FCA in terms of ‘Dear CEO’ letters, for example, and also various speeches which have been done, but there is nothing categorical in terms of a potential non-financial misconduct could amount to a conduct rule breach and what this correspondence from the FCA does is it reinforces that the FCA is now looking at non-financial misconduct and it is an area of significant risk for businesses going forwards. What I think employers should take from this is, effectively, they need to ensure that their systems and controls around first of all, ensuring non-financial misconduct is properly dealt with is in place, but also that they are doing the appropriate regulatory notifications because part of the information requirements which are being requested include the number of non-financial misconduct incidents reported, the outcomes, and the number of further outcomes recorded and I think, realistically, if there have been no notifications to the FCA, and the response to the FCA to this request for information looks significant, questions could be asked as to why there is a disparity between the lack of notifications made to the FCA under the relevant rules and why there are such high numbers, for example, of non-financial misconduct within the given organisation.”

Joe Glavina: “On the reporting side, the FCA says a high volume of incidents doesn’t necessarily indicate a worse environment because it could mean people are speaking up and the reporting procedures are working well.  Equally, nil-returns, or a low volume of incidents, is not necessarily a good thing. It’s a key point.”

Chris Evans: “I completely agree, and something that we often tell clients is there is this thing called a Form H which is, effectively, every year you have to record and send to the FCA instances of conduct rule breaches. Now, if a firm submits a nil return because there are no conduct rule breaches, it does give me cause for concern that actually the systems and controls that the firm has in place are not correct because actually they're not properly monitoring and  they're not properly following up  poor behaviours. Equally, if they're very high, as you rightly point out, that doesn't necessarily mean that there are problems, it just means that they are being properly recorded, but I think what the FCA will be keen to understand is the correlation between what they are notified about and also what the statistics show from the reporting as a result of this notification.”

Joe Glavina: “The FCA says it wants firms to distinguish in the data they provide between Senior Management Function and Non-Senior Management Function and that ties in with what they’ve said previously about non-financial misconduct being part of the ‘fit and proper’ person test going forward.”

Chris Evans: “Also, the key issue is they say they're not looking into specific incidents but a firm may only have a small number of senior managers for example and, as a result, it may be very obvious who is implicated in that non-financial misconduct and you may get a scenario where the notification requirements for senior managers are much more stringent than notification requirements to the FCA for non-senior managers and you could get into a scenario where the FCA look at the data and there are responses against senior management for non-financial misconduct, yet there have been no notifications made as would be expected under the handbook to the FCA when that conduct occurred and I think firms should be ensuring that, when they are doing their return, that they are comfortable that first of all they have responded and notified appropriately at the relevant time, and if there is any cause for concern that they've got a good rationale as to why certain notifications were not made at the given time.”

Joe Glavina: “The scope of the FCA’s survey includes regulatory references and all the signs are that the new rules, when we see them, will say that non-financial misconduct will be treated as misconduct for regulatory purposes. But as we’ve highlighted previously in this programme, Chris, that could be tricky for firms because it could be career-ending for the individual involved. How should firms deal with that?”

Chris Evans: “So, many employers have taken the view that non-financial misconduct should be included within a regulatory reference. So, even if there isn't a conduct rule breach, for example, typically it would be included in what you would call Question G, and that's on the regulatory reference, which is: is there any other information which is relevant to a prospective employer’s assessment of fitness and propriety? The difficulty we've had in the past, and as I mentioned before, was that there is very little guidance as to whether it is necessary to include such information on a regulatory reference, but the majority of employers have taken the view that it is appropriate in most cases to include reference to such conduct. The benefit of, certainly the consultation paper from December, and also supported by this information gathering exercise, is that clearly non-financial misconduct is becoming more relevant and it should, therefore, be included on regulatory references going forward even if employers chose not to in the past. Now, the difficulty that many employers will have, and many employees will have, in fact, is if there are instances of non-financial misconduct which are disclosed on a regulatory reference, a future employer could deem them to be not fit and proper to carry out that regulated role and, as a result, it could be career ending for that individual. So, I think there is also an education piece needed here for staff so that they understand that their activities both within work, and also outside of work, could impact their careers and, also, in terms of their continued employability by their current employer.”

Joe Glavina: “Finally, Chris, any particular message for viewers? What should firms be doing now if anything?”

Chris Evans: “I think what employers should be thinking about now is that the D&I consultation paper obviously closed in December, we're expecting the rules to be updated, information as to what those updates look like and a response to the consultation paper this year, with any changes implemented in 2025. For many employers, I think they ought to be in a position now where they're thinking ahead as to what information needs to be given to staff. Now, there is an argument that, actually, nothing has changed because all the FCA are doing is confirming that non-financial misconduct can be relevant to a conduct rule breach and/or assessment of fitness and propriety, but I think it will become an increased focus for the regulator once those rules are in and if employers can now look ahead, update training, ensure staff are fully aware of the potential consequences of their actions outside of work, then once the rules come in they will be in a much better place should they find themselves dealing with non-financial misconduct.”
The FCA’s letter to firms is dated 6 February and sets out the rationale behind the survey and exactly what information they want from firms. The deadline for submitting it is today, 5 March, so if your firm has received a letter and you have not responded to it the advice is contact the FCA immediately and explain why. We have included a link to the letter in the transcript of this programme for you. 

LINKS
- Link to FCA’s letter requesting information relating to non-financial misconduct