Findings from the FCA’s investigation into non-financial abuse

Office of Financial Control conclusions on non-financial abuses could be a major culture reset in the financial sector. Cathy Stephen, Joe Smallshaw and Rebecca Dullier of Norton Rose Fulbright explore how firms need to respond.

Key findings

The most common problems: The number of allegations of non-financial abuse increased from 2021 to 2023. In the three years covered by the survey, bullying and harassment (26%) and discrimination (23%) were the most reported problems.
The results: disciplinary or “other” action was taken in 43% of cases, and some types of non-financial misconduct, such as violence, intimidation and sexual harassment, were more likely to lead to disciplinary action than other types, such as discrimination. In addition, 62% of reported cases of discrimination and 47% of reported cases of intimidation and harassment between 2021 and 2023 were not substantiated. The FCA suggested that the industry should consider these differences in rates and whether they can be explained.
Impact of reward: Actions taken following non-financial abuses rarely resulted in compensation adjustments. When compensation was adjusted, it was mostly to variable compensation that was not fixed, rather than other forms of compensation adjustment such as fixed salary adjustments or clawbacks.

Management information: 38% of survey respondents also said that boards and board-level committees did not receive management information about non-financial misconduct, and the FCA believes that responses to questions about management information (MI) and governance structures suggest that large companies’ governance and oversight for non-financial breaches may not meet the FCA’s expectations.

Next steps for the FCA

The FCA confirmed that it now:

Interact with companies understand their results and how they used the data to analyze their own culture, focusing on firms that differ from their peer groups;
Support trade associations lead industry efforts to improve standards using survey data;
Keep talking with firms and outline their regulatory expectations in portfolio letters;
act if he believes that firms are not complying with the FCA’s rules and principles.

Next steps for firms

Companies can consider the following seven questions to evaluate next steps in light of the survey:

Does your employee handbook or equivalent guide adequately cover types of non-financial misconduct?
Specific types included in the survey include sexual harassment, bullying and harassment, discrimination, possession or use of illegal drugs, violence or intimidation. However, 41% of incidents fell into the non-specific category of “other”. Companies should consider whether any “other” experience should be included in the management of their employees.

Is adequate support provided to internal decision makers regarding behavioral boundaries?
Discrimination had the lowest proportion of upheld complaints with action taken, which may reflect the fact that discrimination is sometimes more difficult to assess than other types of misconduct. Providing guidance to decision makers can help achieve appropriate outcomes.

Are you using settlement agreements and confidentiality agreements correctly?
The report serves as a reminder that NDAs and confidentiality agreements should not be used to prevent individuals from reporting to the FCA. Non-disclosure agreements were most commonly used for discrimination, intimidation and harassment, and the FCA is taking some follow-up action to understand why this is happening.

Do you have an adequate incident reporting rate, an appropriate whistleblower policy and a healthy whistleblowing culture?
The survey points to a variety of detection methods, including complaints and whistleblower reports. The FCA recognizes that this can be indicative of a healthy whistle-blowing culture, and is a potential advantage for companies with high levels of complaints. However, not all respondents followed the whistleblower policy, and the low level of complaints may not reflect positively on the firm.

Should you have a reward policy?
Understandably, where remuneration was affected, the use of retrospective paybacks or salary adjustments was less common than prospective changes to bonuses or other benefits that had not yet been granted. However, the FCA has advised that not all firms have a remuneration policy and for some firms this may not meet its requirements.

Does your board or board-level committee receive appropriate information about non-financial irregularities?
More than a third of respondents said boards or board-level committees did not receive MI about non-financial misconduct, and a third had no formal governance structure or committee to determine outcomes. The FCA suspects that governance and supervision at large companies may not meet expectations. The board is also due to consider adopting a new code of conduct for directors, structured around six key principles of director behaviour, which was published by the Institute of Directors this week.

Do you provide adequate recommendations, update them and take into account the negative feedback received?
While 92% of respondents said they would include non-financial abuse in a regulatory reference, only 87% said they would update the reference following an incident. Companies should check that they have an adequate process for providing and updating references. The FCA says it expects firms to review their regulatory obligations to hire employees with negative reviews and ensure that individuals remain fit and compliant.

Recently updated Table of regulatory initiatives confirmed that the FCA’s policy statement on tackling non-financial misconduct in the financial sector would be published “around the end of the year”. Watch this space.

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