Non-financial misconduct: how organisations should prepare for regulatory reform and mitigate risk

October 2024 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

October 2024 Issue

Non-financial misconduct (NFM) continues to be a significant matter of discussion across the financial services (FS) sector, with the Financial Conduct Authority (FCA) reporting it had received 253 new whistleblowing reports between April and June 2024. Of these, 92 related to ‘fitness propriety’ concerning the conduct of senior individuals within firms and 78 contained allegations pertaining to the subject firms’ culture.

As referred to by the FCA and the Prudential Regulation Authority when addressing parliament back in early 2024, workplace behaviours such as harassment and abuse are indicators of a poor workplace culture, lacking diversity and inclusion.

Legal and regulatory developments

There is currently no reference to NFM in the fitness and propriety assessment relating to individuals performing a senior management function or a certification function, or the conduct rules which apply more widely to employees. This has not stopped the FCA pursuing cases of NFM despite criticism it received in its case against John Frensham.

This matter was heard before the Upper Tribunal in 2021 and set a precedent for fitness and propriety assessments – i.e., there must be a sufficient connection between the misconduct and a person’s role when working in FS.

The FCA’s September 2023 consultation paper proposed to explicitly include NFM within the regulatory regime. It noted that bullying within the workplace is relevant to fitness and propriety, as well as similar behaviour in a person’s private life. It proposed that clear conduct rules should cover serious instances of bullying and harassment toward colleagues. It also recommended bringing discriminatory practices (e.g., sexually, or racially motivated offences) and any adverse findings against associated individuals within the suitability criteria for firms.

In February 2024, the FCA initiated an information-gathering exercise (targeting the insurance sector at first) relating to NFM, including the use of non-disclosure agreements (NDAs). In the recent evidence hearing to the Treasury Committee on 8 May 2024, the FCA confirmed it would be focusing on NFM “at pace”, but not progressing with the broader data and diversity information-gathering exercise it had initially proposed in its consultation papers due to the large volume of responses received.

We can, therefore, expect the revised rules and guidance on NFM to be issued by the FCA in the near future. Nonetheless, with the anticipated implementation (in October and November 2024) of the Worker Protection Act 2023 imposing a legal duty on employers to prevent sexual harassment drawing ever nearer, regulated entities should ensure both legal and regulatory obligations are considered when dealing with sexual harassment cases, specifically.

There are short-term initiatives firms can consider before legal and regulatory reforms take place to be able to assess the current position in managing NFM, in order to better respond to and monitor incidents.

How should firms prepare?

Policy and procedures. One key objective for firms is to establish if formal reporting channels, policies and procedures are fit for purpose. Being able to rely on an internal policy and procedures document that clearly defines the types of behaviours covered under NFM is important. When responding to an incident this will make it easier for firms to scope an investigation and assess the alleged behaviour against policy (and later the regulations).

Assess the current position. Firms should start gathering information on how they currently manage NFM cases. This exercise is a useful starting point for firms to assess what mitigation measures are currently in place. Some of the key points firms must keep in mind when collating information are establishing the scope of the relevant data set and navigating issues around the existence of NDAs.

NDAs are confidential legally binding contracts that prohibit the parties from sharing specified information with others. The criticism surrounding NDAs is that they are often used to ‘cover up’ allegations of sexual harassment and abuse in financial services. Though the February 2024 information request from the FCA only sought statistics on the types of outcomes recorded (including the use of NDAs), it may in due course seek the underlying details of some NDAs (if appropriate) through additional information requests.

Anti-harassment culture. For firms to govern specific areas of risk effectively, the risk needs to be championed at the executive level. Harassment is a form of behaviour between one or a group of individuals toward another or others. This behaviour or interaction, including how it is perceived by individuals, is based on many subjective factors including an individual’s pathology, social context and life experiences, which make it difficult for a business to assess and govern as a tangible risk.

The subjective nature of human interactions and behaviours also means that the risk of harassment and exclusion is prevalent across all levels and operations of the business. Appointing a senior individual to be responsible for governing harassment and exclusion risk ensures that these types of risks are being considered from the top-down. This also demonstrates the firm’s intolerance of harassment behaviours, which will help drive cultural change across the organisation.

Reporting mechanisms. Firms should ensure reporting mechanisms exist and work effectively. Are current whistleblowing channels appropriate for dealing with sensitive allegations? Often, individuals who have been subject to abusive behaviours find it difficult to report their experiences. Options should be made available to employees to ensure individuals reporting sensitive topics, such as harassment, have access to a forum or an individual they consider to be comfortable reporting the allegations to.

Responding to allegations of NFM. A documented triaging process to assess all allegations of NFM is also crucial. NFM covers a broad variety of behaviours ranging from subtle microaggressions and poor practice to serious misconduct and criminal offences.

It will be important for firms to ensure a proportionate and timely response to reports which will also help inform how the investigation is resourced (i.e., whether independent and specialist advisers are required). There is a risk that serious instances of NFM become public. This could include scrutiny of any investigation that follows. Firms need to consider active and reactive communication strategies as part of their response.

Understanding the risk and impact of each allegation will help firms respond proportionately and assess whether regulatory disclosure is necessary. An inadequate investigation can receive the same level of public and regulatory scrutiny as a failure to investigate. Firms should make sure their teams are trained and have access to independent experts to undertake higher profile or highly sensitive investigations.

Remediation and culture. Investigations into NFM often focus on the individuals directly involved in the incident. Rarely do firms look at the issue from a wider perspective to understand whether the behaviour is confined to one individual or group of individuals. In preparing for regulatory change, firms will need to consider long-term initiatives and how company culture can be assessed. Simply being reactive to individual incidents will limit effective remediation.

Zulfi Meerza is a senior associate at Rahman Ravelli and Charli Curran is a senior director at Ankura. Mr Meerza can be contacted on +44 (0)20 3597 9784 or by email: zulfi.meerza@rahmanravelli.co.uk. Ms Curran can be contacted on +44 (0)20 7469 1111 or by email: charli.curran@ankura.com.

Zulfi Meerza

Rahman Ravelli

Charli Curran

Ankura