This blog post was first published in Law360.

Make no mistake, nonfinancial misconduct remains at the top of the Financial Conduct Authority's agenda.

While the financial industry awaits a policy statement from the FCA on nonfinancial misconduct finalizing changes to its rules as consulted on last Autumn,¹ in October the regulator published the results of its February survey on nonfinancial misconduct,² and made clear that the

results should act as a catalyst for regulated firms' boards and trade associations to prioritize and act on issues of nonfinancial misconduct that lead to poor working cultures and can ultimately harm consumers or market integrity.³

In essence, the FCA expects:

• Senior management and boards of directors to discuss and provide oversight over nonfinancial misconduct;
• Firms to have systems and controls in place to identify and address workplace issues; and
• Firms to take steps now to ensure that they have effective policies and practices in place.

The Results

Earlier this year, the FCA issued a compelled information requirement to more than 1,000 regulated wholesale financial services firms regarding nonfinancial misconduct.

The FCA sought data and information from 2021 to 2023 regarding:

• The number of nonfinancial misconduct incidents recorded by type or category, and the method by which these incidents were detected;
• The number of nonfinancial misconduct incidents recorded by type or category of incident and the outcomes of those incidents; and
• The number of further outcomes recorded, for example in nondisclosure agreements or employment tribunals.

Based on the responses provided by over 1,000 regulated financial firms, we summarize the results here.

The number of nonfinancial misconduct incidents reported increased significantly over the last few years, from 1,363 in 2021 to 2,347 in 2023, although this may have been affected by the global pandemic. The number of incidents reported increased across all subsectors surveyed — London market insurers, London market intermediaries, wholesale banks and wholesale brokers — and more than doubled in all subsectors except for wholesale banks.

The FCA interprets nonfinancial misconduct broadly, including cases of intoxication or misuse of alcohol, inappropriate or offensive language, harassment and discrimination. According to the FCA, the broad definition of nonfinancial misconduct means that firms should retain flexible policies and procedures designed around principles that can be applied proportionately in different circumstances.

Grievances and other formal escalation processes were the most common methods of identifying nonfinancial misconduct. Whistleblowing remains an important method for staff to raise concerns, but not all respondents had a current whistleblowing policy in force at the time of responding.

The FCA recognizes that the best suited detection methods may vary depending on the size, scale and business model of each firm, but stated that all firms should consider a variety of methods of detection and information received from all sources.

Sixty-two percent of reported discrimination incidents and 47% of reported bullying and harassment incidents were not upheld, i.e., after investigation the complaints of discrimination or bullying were not substantiated. Disciplinary or other action was taken in 73% of violence or intimidation incidents and 64% of sexual harassment incidents. Incidents that were most likely to lead to dismissal involved sexual harassment, possession or use of illegal drugs, or violence or intimidation.

The number of confidentiality and settlement agreements signed by complainants fell, and the FCA has reminded all firms that under its rules, settlement agreements must include a term clarifying that nothing prevents an employee from making a protected disclosure.⁴

Thirty-eight percent of respondents stated that a board or board level committee did not receive management information about nonfinancial misconduct, and 33% stated they have no formal governance structure or committee that decides the outcomes and disciplinary actions for those involved in nonfinancial misconduct.

The FCA says that the industry should reflect on these statistics and the varying outcomes of reported incidents, and consider whether they are explainable or enhancements are necessary.

Action Required

The FCA makes it clear that it expects all regulated firms — irrespective of whether they were surveyed — to reflect on the results and take steps to ensure that they have systems and controls in place to identify and address nonfinancial misconduct effectively.

Notably, the FCA explicitly states that it expects firms to discuss nonfinancial misconduct at senior management and board levels and to consider whether enhancements are needed to improve culture, the identification and management of risk, and how nonfinancial misconduct is addressed. There are a number of steps firms could take now to mitigate their risk of increased regulatory scrutiny or enforcement actions, including the following.

1. Conducting a Workplace Compliance Review

Firms should consider undertaking a review of their policies and practices related to nonfinancial misconduct. Such reviews, which have become common in the U.S. following the #MeToo movement, can vary in scope and should be tailored to the company, its industry and its workforce.

Best practices would generally include a review of workplace policies and training, reporting channels, investigation and escalation processes, disciplinary and corrective action practices, and management and board reporting — especially in light of the FCA's explicit expectation that senior management and boards oversee nonfinancial misconduct issues.

2. Reviewing Policies and Procedures

A more streamlined version of a workplace compliance review could focus on policies. A policy review, whether conducted as a stand-alone review or as part of a broader workplace compliance review, should assess whether the firm's code of conduct or employee handbook defines nonfinancial misconduct in clear terms, sets expectations regarding workplace behavior, and provides examples of inappropriate behaviors.

Looking to the evolution of workplace compliance-program expectations in the U.S., firms should also consider whether their policies address off-site conduct, virtual interactions, events involving alcohol, and the use of nondisclosure agreements.

3. Benchmarking Risk

A firm's business activities, firm-related social events, such as client ski trips or dinners, and workforce demographics are all likely to affect a firm's risk of nonfinancial misconduct and the types of issues that are most likely to arise.

Conducting a review of a firm's workplace complaint data and benchmarking that data against that of comparable firms can provide meaningful insight into a firm's risk profile. Understanding one's risk profile can help firms identify and address potential issues before they become widespread.

4. Assessing Governance Practices

The survey results make clear that the FCA expects firms to consider not only whether management information on nonfinancial misconduct is provided to senior management and the board, but also the quality and granularity of the data provided.

Firms should review the information shared with leadership and consider reporting, for example:

• The number of reported incidents of nonfinancial misconduct;
• The percentage of cases that are substantiated or result in disciplinary action;
• Detailed information regarding any cases that may pose heightened risk to the firm;
• Case trends; and
• Completion rates for training on nonfinancial misconduct.

5. Conducting a Workplace Culture Review

One of the best ways to gain insight into potential workplace concerns is to talk to employees. Hosting listening sessions, focus groups, or 1:1 employee experience interviews can provide important insight into a firm's workplace culture and opportunities to enhance the culture.

The regulator's expectation is that firms adhere to documented policies and conduct a full and fair procedure in response to all incidents. All responses to incidents should be made in accordance with the FCA's Principles for Businesses, in particular:

• Principle 2: A firm must conduct its business with due skill, care and diligence; and
• Principle 3: A firm must take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems.

In addition to regulatory obligations, firms should consider nonfinancial misconduct from an employment perspective. A new duty on employers under the Equality Act 2010 to take reasonable steps to prevent sexual harassment of their employees has been introduced, which should assist firms in reframing their methods of identifying, assessing and addressing nonfinancial misconduct if necessary.

Those in compliance and human resources should both assess existing policies, procedures and training to address these issues to ensure that all angles are covered.

Conclusion

The results of this survey will be used to inform the FCA's supervisory work. Failing to consider the survey, and make any enhancements necessary, may lead to regulatory scrutiny and, potentially, enforcement action.

Nonfinancial misconduct is an inherently challenging topic, but the age-old adage "prevention is better than cure" should be borne in mind: Taking steps now to ensure that firms have in place effective policies and procedures that promote a healthy workplace culture is likely to save time and resources, potentially preventing reputational damage and regulatory scrutiny later on.

¹ FCA CP23/20 Diversity and inclusion in the financial sector – working together to drive change, https://www.fca.org.uk/publication/consultation/cp23-20.pdf.

² Notice to provide information dated 6 February 2024.

³ Culture and nonfinancial misconduct survey – findings dated 25 October 2024, https://www.fca.org.uk/data/culture-non-financial-misconduct-survey-findings.

⁴ SYSC 18.5.1R, https://www.handbook.fca.org.uk/handbook/SYSC/18/?view=chapter.