Unpacking the FCA Non-Financial Misconduct Survey

Last week the Financial Conduct Authority (FCA) intensified its supervisory work on Non-Financial Misconduct (NFM) by issuing a “Notice to Provide Information” to the Insurance sector (under section 165(1) of the Financial Services and Markets Act 2000 (FSMA)) related to incidents of NFM.

NFM is an area that sits at the heart of the recent FCA Diversity and Inclusion (D&I) Consultation Paper and the Treasury Select Committee’s Enquiry into “Sexism in the City”. It demonstrates the ongoing regulatory focus on conduct, diversity, and inclusion (D&I), governance and accountability - and perhaps the golden thread linking each of these areas - culture.

Why is this an important area for the FCA? In its recent D&I Consultation Paper, the FCA stated that “Non-financial misconduct erodes psychological safety and trust and can also increase the risk of groupthink and the problems that gives rise to”. Moreover, “such behaviour can lead staff to feel reluctant to raise concerns and speak up. This can result in firms missing the opportunity to remedy problems of all kinds as they arise or stop them from developing in a way that leads to regulatory breaches, negative impacts on market integrity or consumer harm”.

Here we discuss the most recent FCA NFM survey and how NFM links to the broader regulatory agenda.

What is the FCA’s Non-Financial Misconduct Survey?

The FCA’s Notice to Provide Information Letter is part of a sector-wide information gathering exercise relating to NFM, with the letter (and accompanying survey) (“the Survey”) was issued to all regulated Lloyd’s Managing Agents & London Market Insurers (and Lloyd’s and London Market Insurance Intermediaries and Managing General Agents) on the 6th February 2024.

The FCA is using the Survey to collect data on:

The volume and type of incidents of NFM;
The methods of detection (eg. via whistleblowing or other channels); and
The actions taken to address these incidents within firms.

The FCA has stated that the information collected will enable it “to develop a clearer understanding of when and where NFM occurs, provide us with a baseline assessment of each sector and inform our ongoing supervisory work programmes”.

What is required of firms who receive the Survey?

Firms are required to complete the Survey, which asks for aggregated data for the last 3 years (i.e., 2021, 2022, and 2023). This includes:

The number of NFM incidents recorded (by type/category) and the method by which these incidents were detected (eg. whistleblowing).
The number of NFM 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 (eg. non-disclosure agreements and employment tribunals).

Firms are asked to distinguish between Senior Management Function (SMF) and non-SMF, and “any other incidents of NFM identified that took place at the office, working from home, working offsite, and social situations related to work”. All incidents, including those that have not previously been reported to the FCA (eg. as they did not meet the FCA reporting thresholds) should be included.

Firms must have completed and submitted the Survey by close of business on the 5th March 2024, making it a tight turnaround time.

What about other financial services sectors?

On the 6th of January 2020 the FCA issued a Dear CEO Letter to wholesale general insurance firms centred around NFM. The letter followed on from a number of well-publicised incidents of NFM in the sector and set out clear expectations around how firms should proactively address NFM, by ensuring that a healthy culture has been established and embedded.

Given the 2020 Dear CEO Letter, it comes as no surprise that the first NFM Survey has been issued to the insurance sector; with surveys to wholesale banks and brokers (and potentially other financial services sectors) likely to follow. Whilst it is not yet clear what the output of the Survey will be, it is likely that it will be used to benchmark firms and guide further supervisory activity - as well as broader learning and sharing of best practice across the industry.

However, the NFM Survey also speaks to the broader direction of regulatory travel that firms across other financial sectors should be mindful of and should ensure are on their radars.

What is Non-Financial Misconduct?

The FCA describes NFM as behaviour or actions within a financial services firm that do not directly relate to the financial aspects of the firm's business but can still have a significant impact on its conduct, integrity, and reputation. This can include things like bullying, harassment, discrimination, or any other behaviour that creates a hostile or complicit work environment.

Why is the FCA concerned about NFM?

As referenced above, the FCA believes that NFM can be a measure of a firm's culture and is therefore relevant to the assessment of a firm's ability to conduct business in line with regulatory standards. A poor culture is more likely to facilitate or be complicit in enabling poor decision making and/or permitting activities that breach regulatory standards.

However, there has been some debate around whether NFM falls within the FCA's remit - and even legal challenge. For example, around whether certain behaviours (particularly outside of the workplace) do speak directly to an individual’s fitness and propriety to work within the financial sector or not.

Despite this (and the clear need for robust processes that enable firms to identify and act on any allegations of NFM in a fair and appropriate way), there is a growing body of research that seemingly supports that there are established links between positive (diverse and inclusive) cultures and outcomes (in terms of conduct, decision-making, and even innovation and commercial outcomes) that align with the FCA’s statutory objectives of protecting consumers, ensuring the integrity of the UK financial system, and promoting effective competition.

As such, the direction of travel is clear - it's not just about complying with rules - it's about embedding a culture that promotes (and incentivises) the right behaviours and is inclusive and psychologically safe (so that any issues that do arise are promptly identified and addressed).

But how do firms go about doing this?

1. Embedding a healthy culture

Culture is not a new topic for the FCA, and most firms will be very familiar with the FCA’s four “drivers of culture”: purpose, leadership, approach to rewarding and managing people, and governance. Purpose has received significant attention, being described as a firm’s “reason for existing, and why the world would be worse off without the value it provides” (FCA, Marc Teasdale, Director of Wholesale Supervision). The premise being those different purposes (eg. a customer-centric versus non-customer-centric purpose) drive different decision-making and outcomes.

However, establishing a clear purpose, values, and desired culture is one thing – ensuring that that culture has been embedded, is quite another. The UK Corporate Governance Code (2024) has even been updated to make that distinction, and it now requires boards (of listed firms) not only to assess and monitor culture but also how the desired culture has been embedded.

This is often an area firms struggle with as culture can seem intangible – and so a few points to consider:

Firstly, do you have all the right foundations in place? Such as a defined purpose and values that are clear and well-understood. Your firm’s purpose and values should be threaded through your people policies and incentivisation arrangements.
How do you evaluate your culture? Do you have a robust framework for this – or is your firm’s approach less well defined?
What role do the three lines of defence play when it comes to culture? For example, does culture feature on your compliance monitoring and internal audit plans? If not, how does your board gain assurance around whether the desired culture has been embedded?
How do you monitor culture and what management information is used to support this? Are your metrics carefully considered and supported by analysis and insights?

The culture conversation is not one likely to ebb away, and so if you don’t have clear or comforting answers to the above, it’s worth confronting this head on.

2. Encouraging “speaking up” and fostering psychological safety

The NFM Survey not only requests data for NFM incidents, but also the method by which the incidents were detected. Whistleblowing is of course a key mechanism for raising concerns, and firms should consider reviewing the design and effectiveness - not only of their policies - but of their end-to-end process, including:

The channels (communication methods) in place, and the clarity/prominence of these - and training and awareness;
The controls regarding confidentiality and ensuring there are no adverse consequences for whistleblowers;
The assessment and escalation processes - including mitigation of conflicts of interest and the role of the whistleblower's champion; and
Management information, reporting, and outcomes - including actions taken in relation to substantiated concerns.

Whistleblowing also won’t be the most appropriate channel for all concerns, and firms should reflect on the other mechanisms they have in place to encourage employees to share their opinions and concerns.

Perhaps most importantly, there also needs to be an awareness that – without a safe and inclusive environment, people may not feel able to speak up, even where there are channels to do so in place. And so, fostering psychological safety is key. Psychological safety in the workplace should create an environment where employees feel safe to innovate, voice their opinions, and admit mistakes. The aviation industry is often cited as an example where an open culture exits to continually improve safety by learning from flight data and incidents. Psychological safety is not just about being nice or avoiding conflict. Instead, it's about encouraging open dialogue, promoting diversity of thought, and ensuring that everyone's views are heard and respected. A psychologically safe environment can lead to better decision-making, increased innovation, and improved risk management.

As a few points to consider:

How do you know if employees feel safe and able to speak up?
What mechanisms do you have in place to encourage speaking up – beyond your whistleblowing channels?
How do you monitor the effectiveness of your speak up channels and culture? And use this information to inform continuous improvements?

3. Enhancing diversity and inclusion

NFM is a core element of the recent FCA D&I Consultation Paper (CP23/20). The proposals include better integrating NFM considerations into fitness and propriety (F&P) assessments, the Conduct Rules, and the suitability criteria for firms to operate in the financial sector (i.e., the Threshold Conditions).

However, the crux of the focus on NFM, is about tackling poor behaviours, and particularly (but not exclusively) discriminatory behaviours, to create a safe and inclusive environment where diverse talent can thrive.

And so when you're considering the CP proposals and how your firm plans to implement these, it's worth making sure that:

Your firm is focusing on fostering inclusion as well as diversity - this means thinking about inclusion as part of your strategy as well as inclusion metrics.
NFM is considered, not just in the context of F&P assessments and conduct rule reporting, but in terms of the mechanisms for identifying, managing, and learning from NFM (as referenced in the section above).

4. Ensuring effective governance

The NFM Survey also asks questions around governance and management information (MI). This is no surprise given that governance is one of the FCA's four drivers of culture. But what does good governance look like? And how does good governance promote healthy culture and conduct? Firms are required (in accordance with SYSC General requirements - 4.1.1R) to "have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility" and "effective processes to identify, manage, monitor and report the risks it is or might be exposed to." But there’s more to consider here. For example:

The composition of your board and board committees – do you have the right mixture of skills, experience, and diversity? (to provide a range of perspectives and experiences that can help to challenge groupthink and drive better decision-making).
Board culture - Is the board and committee culture itself facilitative of effective discussion and decision-making? (eg. is it inclusive and focused on continuous improvement).
Board effectiveness – do you have appropriate mechanisms in place to evaluate the performance of the board and board committees? These reviews should be regular and robust (eg. should include consideration of the above, as well as MI, decision-making and overall functioning).
MI – does your firm have the right MI at board level and across broader governance forums? Coverage, content, quality, timeliness are all important – particularly when it comes to areas such as culture, D&I, and NFM. We have often seen limited metrics and meaningful analysis in these areas which raises the question as to how boards get comfortable that a healthy culture has been embedded.

Next steps

Considering the NFM Survey and broader regulatory direction of travel, it is worth firms across the financial services sector considering:

Their approach to NFM, including F&P assessments, conduct rule reporting, and regulatory references.
Their overall frameworks for creating and embedding a healthy culture as well as monitoring culture.
Supporting policies and procedures, including whistleblowing and other “speak up” mechanisms, disciplinary processes, and remuneration and incentivisation arrangements.
Their D&I strategies and frameworks, particularly in light of the new D&I consultation papers.
Their board and governance arrangements, and particularly the effectiveness of these arrangements.

BDO’s Financial Services Advisory specialists have expertise in each of these areas, including culture and D&I advisory support and governance and board effectiveness/performance reviews.

How can BDO help?

If you would like to discuss any of the topics mentioned above, we can help. To discuss how we can help you please get in touch today with Sasha Molodtsov.

BDO UK LLP is the 5th largest Tax, Audit and Advisory firm in the UK. The BDO financial services advisory practice is a team of over 180 specialists, including ex-regulators and people who have held senior positions in regulated firms. This experience helps financial services clients to understand the impact of regulation and mitigate risk.