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FCA thematic review of non-financial misconduct: The sign of things to come?

26 February 2024
The UK Financial Conduct Authority ("FCA") recently issued an Information Request to Lloyd’s Managing Agents & London Market Insurers under Section 165(1) of the Financial Services and Markets Act ("FSMA"). The Information Request focuses on non-financial misconduct across all regulated Lloyd’s Managing Agents & London Market Insurers (including P&I Clubs), Lloyd’s and London Market Insurance Intermediaries (and Managing General Agents). 


The FCA has steadily increased its focus on the supervision of firms in regards to non-financial misconduct in recent years. In January 2020, the FCA issued a "Dear CEO" letter addressed to wholesale general insurance firms. In this letter, the FCA stated that they expected wholesale general insurance firms to identify gaps in their culture and promptly address them.

More recently, in September 2023 the FCA set out its Insurance Market Priorities for 2023-25. The FCA made clear that the setting and testing of higher standards is one of its top priorities, which includes addressing an increase in non-financial misconduct reported in the wholesale market. It noted that despite emphasising its importance, firms are generally not prioritising conduct and cultural issues and that, as a result, the FCA is ready and willing to utilise enforcement action where they see instances of non-financial misconduct.

In the same month, the FCA also consulted on Diversity and Inclusion ("D&I") in the financial sector, entitled Diversity and Inclusion in the financial sector – working together to drive change.  The consultation was aimed at proposals to introduce a new regulatory framework on D&I. In particular, a key aim is to better integrate non-financial misconduct considerations into staff fitness and propriety ("F&P") assessments, alongside some of the more traditional and more accepted metrics and standards for F&P and ongoing assessments. 

Requested information

The Information Request issued under section 165(1) requires all regulated Lloyd’s Managing Agents & London Market Insurers (including P&I Clubs) and Lloyd’s and London Market Insurance Intermediaries (and Managing General Agents) to complete the Qualtrics survey by close of business on 5th March 2024.

The information required includes:

  • The number of non-financial misconduct incidents recorded (by type/category) and the method by which these incidents were detected (e.g., whistleblowing and surveillance within firm);
  • The number of non-financial misconduct 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), and;
  • The number of further outcomes recorded (e.g., non-disclosure agreements and employment tribunals).

A key point raised by the FCA is that data should be separated by SMF and non-SMF individuals, and should include all non-financial misconduct identified that took place at the office, working from home, working offsite, and social situations related to work, but does not require detailed information related to the specifics of allegations or investigations. The FCA has requested the above information to better understand when and where non-financial misconduct occurs, and to better inform any broader learning and best practice that will be shared across the industry in the near future.

In our view, and from the work undertaken by DWF related to non-financial misconduct in this sector, the underlying purpose for requesting this information may be to establish whether firm's formal reporting mechanisms, policies and procedures for highlighting poor conduct are adequate and/ or if firms are becoming aware of these issues through mechanisms such as whistleblowing or anecdotal surveillance.

It is important to establish whether firm's systems and controls go far enough to encourage a 'speak-up culture' for calling out when employees and senior management are subject to poor conduct from colleagues, and indeed, what firms do about reports through designated channels, or when they become aware of such concern through less formal mechanisms.

The FCA is seeking to confirm the above in this sector and all others that it supervises, that poor behaviours or being subjugated for holding a different view, is not allowed to foster and that firms truly encourage an inclusive, supportive culture for its employees. It is likely therefore, that the FCA will use the outcome of this survey as a benchmark for future reference when determining whether firms are doing enough to capture instances of non-financial misconduct and address them.

FCA expectations

The monitoring of non-financial misconduct is a key part of the FCA's goals over the next few years. In its paper, CP23/30 on D&I, the FCA noted that diversity and inclusion is a key aspect of financial services in the UK, and its ability to attract a pool of exceptional talent that reflects the societies it serves.

To this end, in the FCA's view, reducing non-financial misconduct is paramount to creating an inclusive environment that encourages constructive challenge can improve decision-making and reduce groupthink, potentially both enhancing innovation and reducing poor conduct, to achieve better outcomes for all. A utopian view perhaps, but not one that we feel many can take issue with.

In the wholesale general insurance sector, the FCA has stated that senior managers should bear the responsibility of embedding healthy cultures and modifying the key drivers for their culture. In amongst all of the focus on the Consumer Duty, which may have little impact for most firms in this sector, the FCA's flagship culture paper should be revisited (Transforming culture in financial services - Driving purposeful cultures)

When viewing how a firm handles non-financial misconduct as an indicator of the firms culture, the FCA expects firms to create an environment in which it is safe to voice concerns - and in which firms should address any instances of discrimination, harassment, victimisation and bullying.

The FCA hopes that these efforts will lead to a market in the UK where the best talent is retained, the best choices are made and the best risk decisions are taken.

Senior Managers & Certification Regime ("SM&CR") expectations

In line with the cultural expectations of firms, the FCA also expects that future F&P assessments, take into account non-financial misconduct to a greater extent, when determining whether employees and candidates are fit and proper to carry out their roles. Whilst the current F&P guidelines state that considerations should include competency, honesty and integrity and financial soundness, including criminal records checks and previous disciplinary action, it is likely that the FCA will want firms to take non-financial misconduct complaints more seriously. This may include any previous complaints made against a potential candidate not related to their job performance, or whether an instance of harassment/bullying or poor outside of work conduct has taken place since the last F&P assessment.

The FCA will also likely wish firms to take into account whether such non-financial misconduct is a breach of the Conduct Rules. Historically, the application of the Conduct Rules has been largely centred on conduct relating to an individual's job role. However given the FCA's focus on diversity and inclusion and aims to reduce non-financial misconduct, firms should also consider whether non-financial misconduct warrants a notification to the FCA under Principle 11. These notifications also apply if a firm decides that disciplinary action should be taken, the result of which should also be notified to the FCA under section 64C of FSMA.

The FCA has gone to great pains to define non-financial misconduct in this letter, going further to clarify that such instances are not merely limited to workplace behaviour. The key driver behind this distinction is likely to be the FCA's focus on D&I, and improving culture in firms. By concentrating on changing behaviours outside of the workplace, this will have a direct impact on behaviours within the workplace, thereby fostering a more accepting and conducive work environment. 

The extent and scope of information asked for by the FCA is unprecedented in this sector, and will likely have a material impact on firms. It's likely that the information asked for will require firms to question whether they have sufficient processes in place to target and combat disruptive behaviour in and out of the workplace. It is beneficial for firms to enquire, when providing the requested information, whether they have definitions of bullying and harassment in the workplace, whether they are trying to proactively advocate against discriminatory behaviour, and the reliability of the data they're giving to the FCA.

Given the nature of the requested information, the FCA will likely analyse the information gathered to determine the robustness of internal reporting procedures for non-financial misconduct through the methods of reporting, whether firms have embedded a culture of D&I through the number of complaints recorded and where, and how senior managers view any misconduct that arises through analysing the outcome of any complaints. The result of this analysis will likely give the FCA a benchmark for assessing behaviours outside of work i.e. by assessing whether a firm has strong internal reporting mechanisms and/ or an appropriate disciplinary procedure with a "speak-up" culture, the FCA is more likely to view such firms as promoting inclusive and supportive behaviours both in and outside of work.

Systems and controls, may be viewed by some, as a basic hygiene factor only. It is likely that many firms do not have an agreed set of behavioural standards by which conduct both in and outside of work is judged, nor do they have sufficient data gathering procedures for monitoring and addressing non-financial misconduct instances. 

The significant shift to both a rules and behaviours based approach from the FCA could mean that many firms face potential enforcement action should they fail to address these issues promptly and effectively, following the section 165(1) deadline. 

With a team of experts in advising insurance firms on the SM&CR, the Conduct Rules and cultural matters, we have a wealth of experiencing on non-financial misconduct matters from the perspective of regulation, employment, culture and sustainability. DWF is well placed to ensure your business is not only meeting regulatory standards, but fostering the right kind of culture where your employees feel safe, and senior management have sufficient oversight of any cultural issues that may arise. Ultimately, all of our clients want to know that they are dealing with a firm that takes such matters seriously.  

Our work includes reviewing international insurance businesses' SM&CR framework, assisting firms with improving their governance arrangements as part our Regulatory Consulting and Sustainable Business services we have advised upon Board Effectiveness and behaviours-based cultural outcomes, helping firms to implement a 'speak up' culture in line with both best practice and regulatory expectations.  Please contact us to see how we can help your business.

We would like to thank Tom Castel for his contribution to this article.

Further Reading