FCA Non-Financial Misconduct Review
Background
It has long been recognised that culture plays an underlying part in misconduct in the workplace. This week an article by Paul Caruana Galizia highlighted the impact of non-financial misconduct on the prevalence of financial conduct. A point that has not been lost on the FCA who have now placed an increased focus on non-financial misconduct especially given the attention the FCA has received from Treasury Select Committee (TSC). This has resulted in action by Sarah Pritchard (FCA Executive Director of Markets) and Nikhil Rathi (FCA CEO) raising wider market enquiries as part of the ‘Sexism in the City’ review on 17 January 2024.
The FCA Industry data Request
On 6th February 2024, the FCA issued a s165 formal notice requirement to provide information on non-financial misconduct stats to further a market wide review in the area. This was focussed on Lloyd’s Managing Agents & London Market Insurers (including P&I Clubs) and Lloyd’s and London Market Insurance Intermediaries (and Managing General Agents).
The survey asks for high-level, aggregated statistics for the following areas for the years 2021, 2022 and 2023:
The number of non-financial misconduct incidents recorded (by type/category) and the method by which these incidents were detected (e.g., whistleblowing and surveillance within firm).
The number of non-financial misconduct incidents recorded (by type/category of incident e.g., sexual harassment, bullying, and discrimination) and the outcomes of those incidents (e.g., dismissal, written warning, and complaint not upheld).
The number of further outcomes recorded (e.g., non-disclosure agreements and employment tribunals).
The request required that firms distinguish these statistics between SMF (Senior Management Function) and non-SMF, and any other incidents of non-financial misconduct identified that took place at the office, working from home, working offsite, and social situations related to work. It included all incidents, including those that the firms have not already reported to the FCA (e.g., the incident did not meet FCA reporting thresholds).
WBUK General Observations
Whilst it is positive that more focus is being placed on the sexual harassment and non-financial misconduct of regulated staff, it has raised some eyebrows whether a s165 request is the correct method of data extraction. The request itself recognises that this is unlikely to be structured data firms hold, so steps do need to be taken to ensure sufficient time is afforded with some limitations so this can be collated if it is going to be relied on.
Allegations of non-financial misconduct are always fact specific. There is a concern “hard data” such as the above may not convey the seriousness/specifics needed to manage the overall risk. It would have been helpful to see the FCA commission a thematic review from specialist experts, and not limit it to the Lloyds of London Market. WBUK has supported many WBs across industry and especially within Retail banking so non-financial misconduct is clearly not limited to just one sector. It is also suggested any thematic review engages with interested parties/experts who regularly deal with these matters in supporting victims such as WBUK to ensure there is a holistic assessment with any findings being benchmarked/cooberated.
WBUK has repeatedly campaigned against the use of arbitrary NDAs for WBs- often victims of non-financial misconduct. Therefore the actual terms and conditions used by regulated firms need to be reviewed rather than a high-level data analysis to give a better indication if there is unlawful practice. There are limited resources for the victims when harassment etc occurs other than to go to the ET. Victims are often litigants in person with far less resources and power than large corporate entities. Whilst we are encouraged that this data has been requested, it may be necessary for the FCA to widen their scope to consider the data the MOJ/ET’s collect in the ET1 forms where it specifically requires Claimants to confirm if protected disclosures can/should be raised with relevant regulators like the FCA. It would be interesting to cross analyse the data from industry to that of what is being presented into the Tribunal system given it is a question within the s165 request.
It is noted that Sarah Pritchard indicated that there is a desire to do more supervisory/enforcement work for firms who fail to meet the standard in this area. Whilst this is encouraged, it remains unclear how this objective will be achieved. Firstly, much of the FCA’s in depth supervisory work increasingly appears to be outsourced to their S166 Skilled Persons Panel. It is unclear from the 12 lots of specialist panels, which one would be designated and qualified to deal with non-financial misconduct. There are lots to deal with “Governance, Strategy and Culture” and “Conduct of Business”, but the FCA will need to take considerable measures to ensure “the experts” are trained and have the expertise to carry out these reviews. Secondly, it may even require a specialist lot to look at non-financial misconduct. Part of these considerations is that non-financial misconduct may be dealing with allegations of crime such as sexual harassment. Therefore, what legal standard is the FCA seeking to aim for to meet the threshold of non-financial misconduct? If it is to a criminal standard, extra care must be taken as the FCA should not be an alternative to the Police to enforce acts of crime. However, these are all measures that can be resolved but do require careful consideration and planning.
It is noted that the s165 request specifically requires clarity as to whether the incidents relate to senior management staff that hold an SMF position (Senior Managers Regime). If the analysis concludes that the biggest risk is with those who hold an SMF position, it is unclear what the strategy will be. Namely, as this remains an area the Chancellor of Exchequer is seeking to minimise for competition reasons. It is not supported by most people within industry to remove accountability from those with SMF functions is a positive move forward. If competition advantage is the focus, then consider the entry requirements to become regulated and/or tax incentivisation. Removal of the SMF functions/decrease in accountability is likely to make non-financial misconduct risk management worse, not less.
Conclusions and Recommendations
Whistleblowing remains the single most effective way for the regulator to properly understand the scale of non-compliance across financial services. The FCA needs to do more to promote and support whistleblowers both inside the FCA and those in regulated businesses conducting regulated and non-regulated functions.
The introduction of the Whistleblowing Bill currently going through Parliament will include the introduction of an Office of the Whistleblower. The OWB will be granted statutory powers that include setting, monitoring and evaluating the effectiveness of whistleblowing policy, create a more effective speak up framework within the FCA and ensure that whistleblowers are protected from retaliation.
Need for a review of the effectiveness of incentive schemes in the US and more widely and whether they provide adequate deterrent of wrongdoing.
Improve the quality and clarity of data being provided by the FCA, e.g. FCA could including binary figures in future regulatory returns once it is clear what the data expectation is so it can be tracked.
A thematic review be completed in this space across sectors to try to quantify specifics across the industry in consultation with independent expert groups.
Author: Simran Bharaj, Interim MLRO, Financial Crime Change and Transformation Specialist, Corporate Troubleshooter, Chair Financial Services Focus Group WhistleblowersUK. https://www.linkedin.com/in/s-b-a600a7a8/
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