As a former surveillance operative, I knew which way my bread was buttered with financial misconduct. Identifying tell-tale signs of market manipulation was a challenge, but one that the industry understood – we knew what it looked like, what the potential impacts were, and what we needed to do about it.
Non-financial misconduct (NFM) is presenting firms with a trickier – but no less pressing – challenge. As ‘the other side of the coin’ to financial misconduct, it presents itself differently, but is still inherently connected, and we very rarely see one without the other. Echoing the sentiments of Jamie Bell, FCA Head of Secondary Market Oversight, As Anna Gooch, Manager, Market Conduct Team, Aberdeen Asset Management, said at a recent Global Relay event:
“It is rare to see a market abuse case that didn’t have other types of misconduct … about 95% of financial misconduct cases will include NFM elements.”
The Financial Conduct Authority (FCA), true to its name, has been prioritizing conduct and cultural issues of late, and raising big questions: How deep does finance’s NFM issue go, and how should firms do something about it?
To the letter
On January 24, 2025, the FCA circulated a ‘Dear CEO’ letter to chief executives of wholesale brokers. The regulator laid out its new strategy for supervising brokers and its expectations of them in areas including financial crime, prudential risk management, and non-financial misconduct.
The FCA outlined that, over the coming years, it will be “focused particularly on ensuring that regulatory compliance and good standards of conduct are adhered to by all firms,” as well as reiterating that “good conduct stems from good culture, and this starts with a strong tone from the top.” The letter clearly lays out its expectations:
“We expect firms to have suitable controls in place to detect misconduct and to take appropriate action against those found to be committing misconduct. If we identify material weaknesses in the frameworks governing broker conduct, we will take actions which may include restrictions placed on individual firms or enforcement action against firms or individuals.”
Interestingly, the FCA expects firms to “have effective and comprehensive risk and control oversight frameworks to detect and prevent harm from occurring and penalise undesirable behaviour,” which the regulator explicitly states should include trade and communication surveillance.
The FCA’s NFM survey results identified 2,347 instances of NFM reported across 1,000 in 2023 alone – a damning nine incidences a day on average – which, as FCA chief operating officer Emily Shepperd rightly pointed out, “are just the incidents that were reported.” In a speech comparing the contagious nature of both good and bad culture to “a winter bug,” Shepperd identified that:
“Good or bad, culture is contagious … it is culture that drives conduct. Culture that shapes decisions and actions at every level. And those decisions, whether they’re made on the trading floor or in the boardroom, directly impact outcomes for consumers, markets and our economy.”
Shepperd also outlined that “rules and guidance will not be enough on their own” – the regulator expects firms to act on NFM, no matter how uncomfortable that might prove.
With the FCA’s recent rollback of its controversial “name and shame” proposals after considerable industry criticism, questions remain around what shape any future rule-setting or specific regulation around NFM could now take. While Nikhil Rathi said the regulator will “continue to prioritize” NFM, we will have to wait until at least “June this year” to see the specifics.
Hear no, see no, speak no
We have heard a lot from the FCA on the importance of “tone from the top” in setting good examples of conduct and behavior. The issue here is, even if working to set the right tone themselves, leadership can only know there are culture or conduct issues if they hear about it.
It’s easy to imagine a situation where a bank or firm has a board of non-executive directors (NEDs) that C-suite leaders report to as a layer of accountability, with the NEDs representing the interests of shareholders and the wider market.
Reports of NFM and other misconduct must travel through layers of internal reporting before they reach the top brass. If a compliance or surveillance team member spots something, it may well be escalated to a function manager, then the chief compliance officer (CCO), then the CEO, before it eventually rattles through to the non-execs.
But this leaves those reports open to multiple layers of potential edits, meaning the NEDs may only see a selective picture. A CEO-level leader will no doubt be earning a considerable chunk of change, and so there is a natural conflict of interest when it comes to reporting things which may jeopardise their position or income. Similarly, CCO or managerial level compliance staff may not want to stick their own necks out and ‘rock the boat’ by escalating potential conduct or cultural issues.
The result? Reports are squashed without those at the top ever hearing about them. Those inclined towards non-compliant behaviors are emboldened as they know issues may not be escalated, and others are disempowered, as they know that reporting of misconduct won’t go anywhere.
What can firms do about non-financial misconduct?
With the FCA setting out clear expectations, firms need to ensure they’re taking NFM similarly seriously. There are a range of approaches that they can take, but key to these will be training, surveillance, and renumeration.
Training
To a certain degree, a workplace culture is something that we absorb over time. However, when it comes to NFM, firms need to ensure their expectations and procedures are set out clearly, available for consistent review by staff, and updated regularly as and when required.
Firms need to make it clear to employees that NFM will not be tolerated, and that incidences will (not just might) be discovered, either through surveillance or reporting, and acted on. Staff need to know how to report instances, and be confident that they will be taken seriously, and that reports will be escalated appropriately every time. Firms should also be explicit in what they consider NFM to include, using impactful, anonymized real-world examples so that teams know what behaviors are accepted and which will be met with zero-tolerance.
While FCA chief executive Nikhil Rathi said that “what can be categorized as non-financial misconduct is quite broad” and that the regulator won’t “realistically give completely precise rules for everything,” firms need to do the legwork on giving their employees a crystal clear understanding of what NFM looks like, so that individuals know what is expected of them, and what they should expect from their employer.
Surveillance
Whatever disciplinary or reporting frameworks firms put in place, nothing can happen unless they can identify NFM risk as it occurs.
By including communications surveillance in the ‘Dear CEO’ letter as a weapon in the anti-NFM arsenal, the FCA has hammered home the importance of using surveillance solutions to combat all kinds of misconduct, not just market abuse.
Voice surveillance must be at the forefront here, as traders and brokers primarily use voice channels due to their speed, plus ‘old habits’ across the industry dying hard. With voice surveillance solutions now increasingly leveraging artificial intelligence and accurate voice transcription to quickly sift through calls and flag potential incidents, as well as reduce false positives, streamline surveillance workflows, and create accurately transcribed data records of calls, their applications for identifying signs of NFM are obvious.
While those of us who have worked on the trading floor will be familiar with the often ‘colorful’ language and terminology often used, the recent fine against Danske Bank shows how that language can be an indication of potential misconduct, and can constitute abusive behavior. And, as discussed above, a sign of one form of misconduct is often sure sign that of another.
Renumeration
“Hit them where it hurts” may be a strong adage to use, but, as the FCA outlined, renumeration can be a powerful tool to both discipline and reward culture and behavior:
“Appropriate and SM&CR-compliant remuneration arrangements at wholesale brokers are important and can affect the overall culture of a firm. When implemented well, they provide strong incentives for good conduct by front office staff as well as an effective deterrence against misconduct.”
The FCA will be scrutinizing “whether remuneration is used as an effective disciplinary tool by firms to address broker misconduct, including non-financial misconduct (NFM)” going forward. The ‘Dear CEO’ letter highlights cultures where NFM is ignored or downplayed because those committing it are ‘star performers,’ meaning those employees are not only getting away with bullying and harassment, but continuing to be financially rewarded in spite of their negative impact on firm culture.
Clawbacks from those found to have been engaging in NFM behaviors are a vital deterrent. They not only show individuals what behaviors are acceptable the hard way, they also give clear indication of the firm’s willingness to act on NFM to the rest of the business, encouraging employees to think about their own behavior.
But firms can also take a ‘carrot’ as well as a ‘stick’ approach with renumeration, not just using clawbacks as a disciplinary tool to show what behaviors aren’t accepted, but also to reward employees that are exemplifying good conduct and culture. While none of us should “do the right thing” because we might expect financial gain from it, firms should not overlook the potential rewarding those who set a good example has for boosting good culture.
Winning the ‘culture war’
In the immortal words of the inimitable Carroll Barry-Walsh, “if you employ human beings, I can guarantee you that somewhere … one of them is doing something stupid.” People make mistakes and have errors of judgement, or momentary lapses based on high emotion – but misconduct doesn’t happen by mistake.
Non-financial misconduct involves repeated patterns of behavior, both from those that commit it, and those that systemically overlook or downplay it. Those historic attitudes have allowed NFM to take firm root in the finance space and created cultures of complicity where it goes unchecked and unchallenged.
The FCA’s work – and the work that firms and individuals need to ensure they cooperate on – is only just beginning. Tone might come from the top, but action needs to come both from the top down and the bottom up. Utilizing the tools at our disposal, including training, renumeration, and surveillance technologies, we can work to make NFM a thing of the past.
