Our experts were very interested in the FCA’s attempts to gather intelligence and data on non-financial misconduct (NFM). Both lauded the efforts by the regulator to utilize data to shape its strategy and tactics.

Wright, however, was cautious when it comes to this particular survey. She suggested that if you take a step back and examine this exercise critically it becomes clear that the fundamental problem is that NFM per se is not very clearly defined. Moreover, an FCA definition of NFM simply does not exist. While market manipulation, for example, is clearly defined, the whole concept of non-financial misconduct is problematic because it covers such a wide variety of behaviours and infractions.

In Wright’s view a structured approach would be to “define the conduct, establish what data might manifest it, examine what that data looks like and how you might be able to detect the conduct using it.” The FCA, in her view, is at the very start of this process: “there is a path, and we are on it, which is great, but we need to remember where we are.” She feels that it is premature to be critical of a firm’s inability to respond because of this.

According to Mason it is important to remember the reason for the survey, which is the “deplorable behavior of senior executives – the sexism in the city stuff.” He feels that, in effect, the regulator is “trying its utmost to establish how pervasive the issues are in order to respond to a knee-jerk reaction from government” (specifically the monetary policy committee). And he is very positive about the attempt to approach industry in the first instance, despite the issues highlighted by Wright, instead of just issuing a directive.

“There is a path, and we are on it, which is great, but we need to remember where we are.”

Emily Wright

Mason feels that there is “some value in the approach being taken”. And he sees this exercise as “a form of consultation” asking industry to “help sort an issue out”. And he is sympathetic of the plight of the regulator, particularly given the scarcity of resources and the potential of non-financial misconduct “snowballing and creating a real conundrum on how to tackle.”

In support of the regulator, Mason drew attention to the surprising number of complaints reported that were upheld, but where no action was taken by the firm. He said that this would almost certainly attract regulatory attention because “if you have detected something and it is upheld, then the question is what sort of a culture have you got that does not lead at that point directly to a disciplinary outcome.” According to Mason this is “a scary place for firms to be.”

Both Mason and Wright mused about the possibility that the results are skewed by the divergence in the way that things are defined and reported by firms rather than variance in conduct by firm type.

Having said this, Mason felt that “there is a large delta between those who have felt regulatory pain and those who have not.” He cites insurance as an example of an outlier because it has “not had the level of scandal that has required intense regulatory focus” and contrasts this to the firms who have gone through the Libor and FX scandals and others, who understand the dangers of a culture that turns a blind eye to misbehavior.

“If you have detected something and it is upheld, then the question is what sort of a culture have you got that does not lead at that point directly to a disciplinary outcome.”

Rob Mason

Finally, Wright found it “shocking how few of the outcomes had a financial impact” given the fact that the “entire industry claims that it has bonuses that are discretionary and variable because they are linked to performance and conduct and yet nobody is using them for that purpose.”

Ashurst lawyers expressed the view that the FCA’s expectations of firms using remuneration as a lever was somewhat ’naive’. Wright noted that “it appears Ashurst’s concerns were centred on salary clawbacks, where conduct impact is applied after a bonus payment is made and this may be too dismissive of the powerful role bonus allocations could play”. She feels that the FCA approach could be developed, as bonuses are “not paid through the clawback framework” in the first instance. Bonuses are discretionary and allocated following the internal policies and processes of the institution, which can be revised to achieve behaviour change outcomes, based on known NFM, at the time of allocation.

She suggested that “if you don’t have a variable discretionary bonus that genuinely does link to performance and conduct, potentially because HR and compliance don’t talk to each other about this, then you have a problem.” And, according to Wright, to fix this you need some strong leadership from these departments on bonus allocations.

Bonuses, according to Wright, are an “important lever” and the “biggest carrot the industry has to affect behaviour change” and feels that many firms are missing a trick by not using it in alignment with conduct requirements. She questions why some firms are prepared to ‘donut’ based on revenue performance but not on conduct.

Other articles in this series

• Compliance and HR in the second line of defense – a new paradigm
• Ensuring senior management follows the rules
• Compliance training and the promise of AI
• Challenges and opportunities in surveillance today