FCA publishes results of survey on non-financial abuses | Latham & Watkins LLP

This data provides important information that will help companies in their ongoing work in this field.

On October 25, 2024, the FCA published the results a non-financial abuse survey conducted earlier this year with more than 1,000 firms in the wholesale sector (investment banks, brokers and wholesale insurance companies). It was the first time the FCA had taken a detailed look at how firms register and handle allegations of non-financial wrongdoing. The results therefore provide the FCA and companies with new insights into how firms respond to such incidents.

The FCA expects firms to take stock of the findings, consider how they can continue to strive to improve their culture and ensure that incidents of non-financial misconduct are dealt with appropriately.

What did the survey show?

In general, firms were asked to report to the FCA all incidents of non-financial misconduct that took place in 2021, 2022 and 2023, together with the most recent or final disciplinary action or outcome of each incident.

Number and type of incidents

Between 2021 and 2023, the FCA saw a significant increase in the number of allegations of non-financial misconduct reported by firms, both in terms of the total number and the number of incidents per 1,000 employees. Wholesale banks reported the highest number of incidents, even when accounting for the largest number of employees. Generally, larger firms reported more cases. The most common methods of detection were complaints or other similar formal processes for escalation. Informational messages were most often used in wholesale banks, which may probably indicate stronger information mechanisms in these firms.

The most common concern was bullying and harassment, which accounted for about a quarter of the concerns expressed, followed by discrimination, which accounted for just under one fifth. However, the data differed by firm type, with wholesale banks reporting proportionally fewer incidents of sexual harassment but more incidents of discrimination than wholesale brokers. The FCA notes that 41% of concerns were categorized as ‘other’, which shows how difficult it can be to flag many cases of non-financial abuse. This category was self-defined by the companies and included behaviors such as alcohol abuse, inappropriate or offensive language, expense abuse and data breaches.

The results

A total of 43% of cases (including cases that were not settled) involved disciplinary or similar measures. Wholesale insurance intermediaries took disciplinary action in 63% of cases, while 21% of incidents were not satisfied. However, wholesale banks failed to withstand 45% of incidents. In all surveyed companies, disciplinary measures were applied in more than 70% of cases where complaints were satisfied. However, 62% of reported cases of discrimination and 47% of reported cases of intimidation and aggressive actions were not confirmed. In general, a very low number of incidents (1-2%) were not investigated.

The survey found that certain types of behavior, such as violence, intimidation and sexual harassment, are more likely to lead to disciplinary action. When action was taken following non-financial abuse, the most common outcomes were a written warning or other action such as training or coaching. Disciplinary actions rarely led to compensation adjustments. When this happened, the adjustment was mostly against unearned variable pay. Incidents involving illegal drugs, sexual harassment, violence or intimidation are most likely to result in dismissal.

In the banking sector, the total number of confidentiality agreements and settlements decreased significantly during the period covered by the survey. This change may reflect increased attention to the compliance of such instruments in recent years. Among the other surveyed firms, no clear trend regarding such agreements was revealed. Confidentiality agreements and settlement agreements were most often concluded in cases of discrimination. In general, settlement agreements were used much more frequently than confidentiality agreements.

In terms of the impact on regulatory references, the FCA noted that 92% of firms said they would include incidents of non-financial misconduct in regulatory references and 87% said they would update references following an incident of non-financial misconduct.

Companies have reported a growing trend to reassess employee suitability after non-financial misconduct. During the period under review, the ratings of 93 people were changed, mostly due to cases of sexual harassment or “other” non-financial abuse.

Drawing up conclusions

The FCA recognizes that the data should be interpreted with caution, as a high number of complaints can equally indicate either a healthy culture in which people feel empowered to speak up and problems are dealt with more openly, or a poor culture in which a high number of problems prevails. The FCA is also keen to stress that not all reported incidents will be substantiated and some may be factually incorrect or abusive. There may also be certain factors that distort the data, such as the fact that restrictions related to the COVID-19 pandemic were in place during a certain part of the study period. Therefore, while the data is useful in confirming general trends, the FCA cautions against drawing firm conclusions. Many of the reported incidents necessarily arose out of highly nuanced situations, so reducing them to statistics will always have its drawbacks.

Management and processes

Along with providing interesting data, the findings importantly highlight certain deficiencies in the firms’ policies and procedures. For example, not all firms had up-to-date disclosure and/or remuneration policies in line with FCA rules.

The survey also found that a significant proportion of large companies did not have a formal governance structure or committee to decide on outcomes and disciplinary actions for individuals involved in non-financial misconduct cases and/or did not have board-level information on non-financial misconduct. It was more common among insurers and intermediaries in the London market. The FCA is concerned that evidence suggests that large companies’ governance and oversight of non-financial misconduct may be falling short of expectations.

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The survey is in line with the FCA’s wider focus on culture and non-financial misconduct. The FCA is due to finalize new guidance on non-financial abuse shortly (see this Latham Client notification for detailed information about offers). Companies are looking forward to this guidance as it should provide more support in deciding where to draw the line in complex cases, which are always challenging for firms.

The survey also follows on from the findings of the Sexism in the City report, which sets out a number of key issues related to non-financial misconduct in the financial services industry (see this Latham blog post). There have been reports that the Treasury Committee intends to contact the FCA about its findings.

What should companies do now?

The FCA hopes these findings will help firms continue to improve in this area. It highlights the importance of firms not only looking at their specific reporting and non-financial misconduct processes, but also continuing their broader work on culture. The FCA clarifies that it expects companies to discuss this at both senior management and board level.

As such, firms should benchmark themselves against the results and consider any areas for improvement. While this can be a difficult area to navigate, some aspects of the findings are actionable. In particular, firms should consider and ensure compliance with regulatory obligations related to fault reporting, remuneration, regulatory references and fit and proper assessment. They should also review governance mechanisms to deal with non-financial irregularities.

The FCA envisages that trade associations will play a key role in coordinating industry-wide analysis and action on survey results. The company does not currently plan to issue best practice recommendations for firms, but the findings will inform its ongoing oversight work.