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FCA Focus on Non-financial Misconduct

24 February 2020

Regulatory Focus on Non-Financial Misconduct

Last month the FCA issued a Dear CEO letter to Insurance Firms in relation to non-financial misconduct in general wholesale insurance firms. Referencing publicised incidents within the sector, the FCA laid out its clear expectations within their letter that firms should be proactive in tackling such issues.

Whilst non-financial misconduct may have previously be seen to be HR’s territory, it now seems that it is clearly seen as a key indicator towards the firm’s culture as previously indicated by Christopher Woolard of the FCA in his speech ‘Opening up and speaking out: diversity in financial services and the challenge to be met’ on 19 December 2018:

“Our message to firms is clear: non-financial misconduct, victimisation and discrimination, is misconduct, plain and simple”

With the FCA’s most recent letter, it therefore seems that the regulatory spotlight may become increasingly fixed not only on financial misconduct but on non-financial misconduct as well. Therefore, whilst this Dear CEO letter was written to insurers in the wholesale general insurance sector, the contents and approach of the regulator will be of interest to all firms.

Clearly indicated in the FCA’s letter are the message that they regard non-financial misconduct and an unhealthy culture as a key root cause of harm.  

“Non-financial misconduct and an unhealthy culture is a key root cause of harm”

As regulator, the FCA wants to see firms identifying the drivers of such behaviour and making changes to address these causes. 

Responsibility of Senior Management

The FCA’s Dear CEO Letter highlights that firms’ ability to appropriately address non-financial misconduct is under-developed and that senior managers are considered by the regulator to be poorly equipped to respond. Firms should note that how senior managers approach issues of inclusion and diversity may be relevant to the FCA’s assessment of their competence and character and any failure to take reasonable steps to address this type of misbehaviour could lead the regulator to determine that they are not considered ‘fit and proper.’

“a senior manager’s failure to take reasonable steps to address non-financial misconduct could lead us to determine that they are not fit and proper. We expect firms and the Boards of firms to take this into account when considering the suitability and performance of (potential) senior managers and other senior leaders.”

Whistleblowing

As an indicator of the rise in cases of non-financial misconduct, the FCA have noted that there are increasing numbers of whistleblower reports being received relating to non-financial misconduct. Whilst the regulator notes that reports of customer treatment still dominate these disclosures, there are increasing numbers of disclosures relating to the culture of firms and individual fitness and propriety including increasing reports of non-financial misconduct.

This was also highlighted in Christopher Woolard’s December 2018 speech.

“we have seen a noticeable upturn in reports which concern issues like discrimination and sexual harassment in financial services. Our message to firms is clear: non-financial misconduct is misconduct, plain and simple.

While numbers are still small, they point to a striking trend. In 2017 our whistleblowing team received 20 reports of non-financial misconduct. [So far, in 2018] we’ve received 64. And our suspicion is we have only scratched the surface.”

Next Steps:

The FCA advises it will continue to work closely together with the PRA to assess instances of inappropriate conduct in firms and will hold firms and senior managers to account for their cultures. 

Whilst firms within the Wholesale General Insurance sector are asked by the FCA to identify gaps and shortcomings and act promptly to address them, all firms should take note of the message from the regulator in this Dear CEO letter and take heed.

All firms should reflect upon the messages in this Dear CEO Letter and bear in mind that Non-financial misconduct looks likely to be a key focus for regulatory supervision of firms and senior managers going forwards.

“Although work has been undertaken in the market to tackle the issue of non-financial misconduct, it continues to be prevalent and will be a key focus for our supervision of firms and of senior managers.”

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.