The start of the year is when regulators tend to set out the direction of travel they are likely to follow for the rest of the year. Whether this takes the form of specific examination priorities, or forward-looking aims as part of regulatory recap, firms are given clear ‘heads up’ messaging, which gives them an idea of where they might need to focus their efforts to ensure they’re regulator-ready.
This year, the Financial Conduct Authority (FCA) has thrown something of a curveball, firing a warning shot in the form of a letter and survey sent to insurers and insurance intermediaries. These letters request information on what may well prove to be one of the regulator’s key focuses this year: non-financial misconduct.
Letter of intent
On February 6, 2024, the FCA distributed a letter (and included survey) to “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)”. The FCA began the letter:
“We are writing to require you under section 165(1) of the Financial Services and Markets Act 2000 (FSMA) to provide information related to incidents of non-financial misconduct in your firm”.
The letter describes non-financial misconduct as individual conduct including “bullying, sexual harassment, and discrimination, whether in or outside the workplace”. The scope of these incidents includes:
“Incidents that took place at the office, working from home, working offsite, and social situations related to work. This can include incidents that happened in any work-related capacity or event and may include events that have been organized through work, including staff social events, off-site training and conferences, client entertainment or sponsored events.”
In a Fireside Chat with Global Relay, the FCA’s Head of Secondary Market Oversight, Jamie Bell, confirmed that this letter will not be the only one, and that 1,000 firms should expect to receive the same. These firms are being given one month’s notice to complete the survey. The information requested 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 the 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)
- The number of further outcomes recorded (e.g., non-disclosure agreements and employment tribunals)
The survey is described as a “sector-wide information gathering exercise” designed to enable the FCA to build a clearer understanding of when and where non-financial misconduct occurs and to inform ongoing supervisory work programs.
Conducting the investigation
The letter lays out the FCA’s reasoning for beginning their investigations into non-financial misconduct with the insurance sector specifically, highlighting that, in a portfolio letter from 2023, it was stated:
“The wholesale insurance market in particular has a long way to go in having an inclusive culture … Areas for improvement include … preventing and handling non-financial misconduct, including discrimination, harassment, victimization, and bullying.”
The portfolio letter warns that “tolerance of such behaviors can create or indicate unsafe or unhealthy cultures”, and that the regulator stands “ready to use [its] full range of regulatory tools, including enforcement action, against firms and individuals” where it sees instances of non-financial misconduct and where firms have failed to ensure appropriate systems and controls are in place.
Sending a clear message
For those that have been keeping an eye on the FCA’s recent messaging around non-financial misconduct, this letter will have come as little surprise, and will merely serve as a formal first step down a path that the regulator had already set out on.
In October 2023, the FCA and Prudential Regulation Authority (PRA) set out proposals to reduce non-financial misconduct in order to help boost diversity and inclusion within financial services. Announcing these proposals, FCA Chief Executive Nikhil Rathi said:
“We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes. We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry.”
Rathi’s speech laid out in no uncertain terms that firms need to consider non-financial misconduct as much of a risk as others such as market abuse or recordkeeping failures, because regulators will take instances of non-financial misconduct just as seriously as other areas of non-compliance.
The Consultation also looks to increase fitness and proprietary threshold conditions to include considerations of non-financial misconduct as part of ‘fit and proper’ assessments. The FCA acknowledged that a person’s actions outside the workplace should be considered, and that “serious behavior in a person’s personal or private life is also relevant”. In a wider cultural landscape where non-financial misconduct is becoming more scrutinized both within the financial space and outside of it, expectations are higher than ever that those in positions of authority and import conduct themselves properly and professionally. With the FCA requesting data on non-financial misconduct incidents, we may have witnessed them setting up the first regulatory domino – expect others to follow suit.
