UK Financial Services – FCA surveys wholesale insurers and intermediaries on non-financial misconduct

Why should I read this?

The Financial Conduct Authority (FCA) has written 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) as part of a sector-wide information gathering exercise on Non-Financial Misconduct (NFM). In response to an Eversheds Sutherland freedom of information request last year, the FCA has confirmed that since August 2021, NFM cases reported to it have been allocated into 6 categories (discussed below), which firms should bear in mind. 

The recent letter and survey follows evidence given to the Treasury Committee’s “Sexism in the City” Inquiry and the FCA and PRA consultations on diversity and inclusion in financial services, which proposed the introduction of rules and guidance to codify and clarify the regulators’ expectations on NFM. The data will give the FCA greater visibility of how firms in these sectors are tackling NFM, including for incidents that were not reported or did not meet FCA reporting thresholds. The deadline for responding to the survey is 5 March 2024.

What should I do?

Affected firms need to gather and submit the requested information as soon as possible. If firms are unable to provide some or all of the requested information by the deadline, they must notify the FCA immediately (and not wait for the deadline before doing so). The survey has been issued as part of a statutory information requirement, which means that firms are required to respond. Failure to comply with an FCA information requirement could have serious consequences, including potential enforcement action, although in practice firms that do not respond to the survey are more likely to find themselves facing difficult conversations with their FCA supervisors.

The FCA says it expects firms to have effective systems to identify and mitigate against NFM. According to the letter, the survey asks for detailed information on the type and number of NFM “incidents”, which we understand to relate to conduct rule staff (whether reported or not), methods of detection and actions taken, as well as high level information on other matters. The survey refers to NFM incidents connected with work, with many examples given of what that nexus could include, and what it would not. Firms should consider that since August 2021, the FCA has been categorising NFM cases reported to it as follows:

• bullying, harassment, physical aggression
• exclusion of others
• out of office or after hours
• sexual misconduct
• social misbehaviour
• “other”

From the Eversheds Sutherland freedom of information request, the FCA also confirmed that between July 2021 and June 2023, the highest numbers of NFM cases were in the “bullying, harassment and physical aggression”, “other”, and “sexual misconduct” categories. It is unsurprising that bullying, harassment and sexual misconduct feature prominently in the FCA’s proposed new rules on NFM.

In the survey, however, we understand that the FCA has used different and perhaps clearer categories to work with. For example it asks for high-level, aggregated statistics for the years 2021, 2022 and 2023 on “the number of non-financial misconduct incidents recorded (by type/category of incident e.g., sexual harassment, bullying, and discrimination)”. It is our understanding that the survey categories are:

• sexual harassment (as outlined in the Equality Act 2010, and including allegations of sexual assault)
• bullying and harassment
• discrimination (not limited to the Equality Act “protected characteristics”)
• possession or use of illegal drugs
• violence or intimidation; and
• other non-financial misconduct. 

Firms will need to find records of how these NFM incidents were detected (e.g. formal whistleblowing, grievances, firm surveillance, conflict of interest disclosures, or “other” – in which case, we understand that the method of detection should be specified). They will also need to find and submit their outcome (e.g. dismissal, written warning, complaint not upheld, training etc.) as well as where they led to non-disclosure agreements (NDAs) and employment tribunals. They should be separated into incidents involving Senior Management Functions (SMFs) and non SMFs. 

The FCA recognises that some firms may not have this readily available and it may be a manual process of going through HR files – hence the need for immediate contact with the FCA if firms believe they may not achieve the deadline. It is our understanding that the FCA does not expect firms to reassess historical cases against regulatory reporting requirements.

What else do I need to know about the FCA’s survey on Non-Financial Misconduct?

The survey includes high level questions on aspects such as regulatory references, Diversity and Inclusion (D&I) policies, remuneration and disciplinary/whistleblowing policies and procedures. 
Some of this information may help to identify poor cultures within specific firms which deter victims of NFM from coming forward. Increasing D&I across the sector may help to increase psychological safety and encourage people, especially those from underrepresented groups, to speak up. 

By seeking information on “methods of detection and resolution”, the survey will provide visibility of whether people other than victims make complaints, whether firms take active measures to detect NFM or respond reactively (e.g. by relying on complaints), and how firms deal with complaints (including the use of settlement agreements waiving claims, which may include any confidentiality agreements signed (NDAs)). Firms should be aware than any NDAs they have entered into that attempt to prevent protected disclosures under employment laws or disclosures to a regulator would go against regulatory rules and guidance. Firms must always ensure they get legal advice on any proposed settlement agreement. We understand that for the subject of the complaint, adjustments in remuneration should be reported and that firms are asked to state where a complaint was not investigated, or where a complaint was upheld but no action was taken. 

The FCA recognises that a high number of allegations collected but not substantiated does not necessarily reflect a bad environment, but could indicate a good speak up culture; conversely a low number of allegations or nil-returns does not necessarily mean an environment is working well. However, large gaps between the numbers of complaints made, complaints that are substantiated by firms, and cases reported to the regulators may point towards problems in the way in which NFM complaints are handled by firms. 

Challenges for regulators and firms

The survey is part of the FCA’s supervisory work across multiple wholesale markets sectors, which are receiving the same letter. The FCA may use the outcomes to inform any broader learning and best practice it shares across industry. In addition, answers from the survey concerning:

• regulatory references (which may include references given or received, and to what extent firms have provided NFM information either in initial or updated references; or received references with NFM information on them);
• remuneration;
• appointed representatives;
• D&I; and
• disciplinary and whistleblowing policies and procedures

all of which are presumably asked in connection with the core topic of NFM, are likely to inform the FCA’s supervisory approach and possibly even influence the Policy Statements arising from the recent regulators’ D&I consultation papers. In the interim period, firms should ensure they are capturing data on the number and categories of NFM complaints they receive (using the FCA survey categories, whether they involve SMFs, and including complaints that result in no further action), and how they detect and resolve NFM complaints (including the use of NDAs). This information should be used to identify problem areas and take preventive action.

A major challenge shown by the Sexism in the City Inquiry is that, even with the consultation proposals, regulators are only likely to know about NFM if a complaint is made which results in disciplinary action and a regulatory report, or through whistleblowing. The Inquiry highlighted that victims of NFM are overwhelmingly unwilling to come forward. There is “compelling evidence that everybody knows who [the perpetrators] are, but nobody actually reports them, because it is not practical for the victims and, if they are reported via HR or within companies, they are protected”. Not only did the Inquiry find a widespread view that NFM complaints will not be treated seriously but, even more worryingly, that any complaint would put the victim’s job and career at risk.

If, as the FCA has said in its Dear CEO letter to wholesale insurance markets on 20 September 2023, it is “ready to use its full range of regulatory tools, including enforcement action, against firms and individuals where it sees instances of non-financial misconduct”, we should expect to see more regulatory investigations and enforcement action against individuals for NFM that falls short of criminal conduct. Such action may also deter others from committing NFM.

From a firm’s risk management perspective, protecting staff, reducing levels of NFM, preventing reputational damage (which, in extreme cases, could lead to a firm failing), and minimising the risk of greater scrutiny by regulators should motivate firms to be proactive in detecting and dealing with NFM. Alongside this, firms should remember that a new, expanded duty on employers to prevent sexual harassment, with greater penalties, is due to come into force this October.

For more information on Non-Financial Misconduct in Insurance markets and Financial Services.

New proposals on Diversity and Inclusion (D&I) in UK financial service

Direction of travel: Diversity & Inclusion in Financial Services | UK |

Non-financial misconduct – an update 

When misconduct outside the workplace becomes an issue of personal integrity