In response to the FCA’s publication of its non-financial misconduct survey results, global law firm Ashurst organized a webinar to mull over the content.

The partners looked back at the original questionnaire released in February and highlighted the fact that responding to this was a real challenge to some firms. The questions were very specific in a number of areas, and the way in which the FCA expected data to be provided and presented was not aligned with the manner in which it was held by many of the firms themselves.

Data and result interpretation a challenge

There is no doubt that the classification of 41% of misconduct types as ‘other’ is connected with these data capture and harmonization issues. There is also very little detail being provided on what precisely this ‘other’ category covers. The presenters drew attention to the fact that this could include a very diverse range of behaviors including:

• unauthorized expenses;
• off-site misbehavior;
• intoxication;
• offensive communication styles (verbal and electronic);
• data protection and technology breaches;
• misuse of confidential information.

An interesting point made was that despite the fact that the firms were asked to report any alleged or confirmed occurrence of non-financial misconduct that was reported or identified, there is a swathe of data that is simply not being reported because it is not being captured by firms. This might include internal informal concerns raised with a manager or with HR, staff surveys, HR exit interviews, or one-to-one interactions where concerns about misconduct are raised informally.

Irrespective of the data challenges clearly present, the presenting partners believed that the release of this survey is a “consumer duty moment for non-retail firms” and is a signal from the FCA of a data-led approach to regulating wholesale front office operations going forward.

Data-led regulation

The data request and release of survey results marries up very well with the aspirations of the FCA to be a data-led regulator. In particular the regulator is very keen to be able to show cause and effect stemming from its rule changes. There are more information requests coming through in many areas of firm operations as a result of this change in approach.

But there is a significant amount of work to be done before the regulator’s aspirations in this area become a reality. A good example of this is data interpretation – the regulator itself, just like many firms, struggles to interpret the data and draw definite conclusions from it. This is exacerbated by the fact that there is not necessarily a great deal of commonality between firms as to what disciplinary outcomes look like. And so there is a wider point to be made here – firms do need to exercise some caution when examining this data themselves.

The first year in the data set was 2021 which, as one of presenters pointed out, was a Covid year. It is therefore unsurprising that the number of reported incidents was comparatively low. But no commentary has been provided by the regulator explaining the increase in incidents reported since, including between 2022 and 2023.

One possibility is that this trend is not entirely reflective of an increase in incidents, but rather of increased disciplinary action being taken as firms want to present what they consider to be ‘good’ data on their operations and culture to the regulator.

The number of settlement and confidentiality agreements has fallen.

However, it was also noted that quite a few cases were being reported where the complaint was upheld, but where no action was taken. The expectation is that the FCA will be looking at these types of incidents quite closely moving forward.

An interesting point worth noting is that the number of settlement and confidentiality agreements has fallen. And while this in itself cannot account for the increase in incidents being reported it is an illustration of the regulator’s messaging about its concerns that these types of agreements are stifling the speak up culture that it wants to see at firms.

To a certain extent the presenters felt that this attitude represents a practical issue for the legal teams at firms who utilize these agreements to waive liability and reduce the possibility of a legal claim – without any intention to suppress the speak-up culture. Another related issue is what the team felt was a somewhat ‘naïve’ approach by the FCA to firms being able to use remuneration as a lever, particularly in a claw-back scenario. According to the team this is a very hard lever to utilize in real terms, with the actual costs and the legal uncertainty making it prohibitive in most cases.

Another point that the Ashurst team was worth drawing attention to was that 38% of respondents said the board did not receive management information about non-financial misconduct. The team believe that this is going to have to change. Particularly when one considers some of the firm scenarios taking place recently (for example, Odey) that make very clear that non-financial misconduct is a risk to a firm even financially. And a position by management that such misconduct cannot affect the position of the firm is now probably unsustainable.

Next Steps

So where do firms go after the release of this survey?

Although there are no best practice recommendations, a policy statement is being eagerly awaited by firms and is meant to be published sometime in Q4 2024, although this publication date may now slip to Q1 2025 as a result of changes to the regulatory agenda.

At this point in time, while awaiting a policy statement it might be useful for compliance, HR and legal teams to consider doing the following:

1. benchmark your firm’s performance against the relevant sector;
2. if the results are not reflective of your sector make sure to consider why this might be the case;
3. ensure that your board is informed and ready to be in a position to assess and explain your performance vis-à-vis your peers;
4. ensure that you are firmly in control when it comes to the fitness and propriety regime, particularly as it applies to senior management;

It may also be useful from an operational perspective to ask yourself the following three key questions:

1. Do you have systems and processes in place to identify and mitigate risks connected with all types of non-financial misconduct?
2. Are your systems and processes fit for purpose?
3. Should non-financial misconduct come to light are you in a position to investigate and respond?