Non-financial misconduct – further warning shots fired

There were two interesting developments last week on the regulatory hot topic of non-financial misconduct. This is against the backdrop of the FCA considering industry feedback to its Consultation Paper on Diversity and Inclusion in the financial services sector, which sets out a proposed new regulatory framework for this area.

A rise in whistleblower reports in the asset management sector

First, according to a report in Ignites Europe (Ignites Europe - Sexual harassment and culture complaints rise sharply at firms), the FCA has confirmed that the number of whistleblower reports received by the regulator from UK asset management firms increased notably in 2023, particularly with respect to sexual harassment and culture. 

The FCA has yet to publicly release this data, but according to the press report, in 2023:

• the FCA received 172 whistleblowing complaints from asset managers between January and October;
• eight complaints of sexual harassment within asset management firms were reported to the FCA (compared with none in the previous two years); and
• 20 complaints relating to culture were made (up from 12 in 2022 and nine in 2021), making culture the third most common area of concern.

It is likely that increased awareness of the issues, following recent high-profile cases and the FCA’s campaign to encourage whistleblowers to come forward, has led to an uptick in reports.  

The use of NDAs in non-financial misconduct cases 

Second, senior FCA executives made comments to Parliament last week about the use of non-disclosure agreements (NDAs) in settlement agreements. 

Nikhil Rathi, the FCA’s Chief Executive, and Sarah Pritchard, Executive Director for Markets and International appeared before the Treasury Committee on 17 January to give oral evidence on the Treasury Committee’s  inquiry into ‘Sexism in the City’ (17 January 2024 - Sexism in the City - Oral evidence - Committees - UK Parliament). The inquiry is considering whether enough is being done to tackle sexism and misogyny in the financial services sector.

Mr Rathi said that in cases of non-financial misconduct the FCA could “certainly see” that there may be a case for gathering information about the use of NDAs as part of the FCA’s supervisory function. 

Ms Pritchard announced during her evidence that the FCA will shortly be launching a survey of wholesale banks and insurers to gather data about the number of non-financial misconduct cases they are seeing, including methods of detection and resolution. The information obtained through this survey will be used both to share best practice and to inform the FCA’s supervisory processes. 

Ms Pritchard confirmed that this survey will gather statistics about the use of NDAs as one of the methods of resolution being used by firms with respect to bullying, harassment and sexual misconduct complaints. She added that while there may be valid reasons why a firm might use NDAs to keep settlement terms confidential, being party to an NDA should not be a barrier to reporting non-financial misconduct to the FCA as a whistleblower. 

Ms Pritchard did not comment on how the FCA might view a firm that was consistently using NDAs to settle non-financial misconduct cases. However, if a firm has a particularly high level of cases and corresponding NDAs, that could be indicative of a poor culture promoting complicity over challenge.

Comment

Both of last week’s developments are illustrative of the intensifying regulatory scrutiny over this area. 

The FCA is a self-professed “data-led” regulator and its D&I proposals, once finalised later this year, will provide it with much better visibility over non-financial misconduct cases. While there will be an implementation period for the new rules, firms should be taking action now to ensure that they are prepared for the upcoming changes and have robust policy, governance, oversight and data collection processes in place with respect to diversity and inclusion issues.