Water cooler and triangular chairs

How should Financial Institutions manage the rise of non-financial misconduct?

19 February 2024. Published by James Wickes, Partner and Amber Oldershaw, Associate

Over the last few months, Parliament's Treasury Committee has sought to examine the many barriers faced by women in financial services through the aptly named "Sexism in the City" inquiry.

This inquiry has accepted evidence from high-profile industry figures, including: Yvonne Braun (Director at Association of British Insurers), Amanda Blanc (Women in Finance Charter Champion and CEO at Aviva Plc) and Sarah Pritchard (Executive Director, Markets and Executive Director, International at the Financial Conduct Authority (the FCA)). 

What is the inquiry all about?

Importantly, on 17 January 2024 several representatives from both the FCA and the Prudential Regulation Authority (the PRA) gave oral evidence as to whether enough is currently being done to tackle misogyny and the "old boys club" culture within the financial services sector. This comes just three months after the FCA published its latest proposals relating to diversity and inclusion, which focus extensively upon the issue of non-financial misconduct. Non-financial misconduct is not currently defined but, in 2018, the FCA referred to it as being "misconduct, pure and simple" and it includes actions such as bullying and harassment, which may be relevant to an individual's fitness and propriety to work in the industry whether occurring in the workplace or in a person's private or personal life. Such behaviour may also breach the FCA's Individual Conduct Rules, including the requirement for individuals in financial services to act with integrity. 

At the inquiry, FCA executives told MPs that regulators would be investigating how issues of non-financial misconduct are being handled via their diversity and inclusion regime, following evidence that firms are not taking action against known offenders. It is hoped that the data gathered from improved supervisory notification will enable the authority to hold firms more accountable for maintaining a "healthy culture".  

The FCA has since exercised its formal powers under section 165(1)(a) FSMA, publishing a notice to all regulated Lloyd's Managing Agents & London Market Insurers and Lloyd's and London Market Insurance Intermediaries, requiring them to provide information to the FCA on incidents of non-financial misconduct by 5 March 2024. A failure to provide such information could result in FCA enforcement action and/or contempt of court. Whilst the survey will not gather information on specific allegations, it seeks to collate statistics for 2021- 2023 on: (i) the number of non-financial misconduct incidents recorded by type/category and their method of detection, (ii) the outcome of those incidents (e.g. dismissals), and (iii) the number of further outcomes recorded (i.e. non-disclosure agreements (NDAs) and employment tribunals).

Initial commentary suggests that many non-financial misconduct cases (particularly those relating to sexual harassment and bullying) are being resolved via NDAs which protect perpetrators within the company. Ms Pritchard has come forward to call out the use of NDAs in these circumstances, reminding the market that settlement agreements cannot be used to prevent "whistleblowing". NDAs have hit the press in recent times, including the Law Society calling for the legal framework to be improved to stop the use of NDAs to hide matters of public interest following the Legal Services Board's call for evidence on the misuse of NDAs.  In a press release last July, when the call for evidence had closed, Law Society President, Lubna Shuja said, "We urge the government to commit to making it harder for NDAs to be misused when they involve settling issues around workplace harassment or discrimination."  Further analysis is being carried out in this area.  It was nevertheless acknowledged that there may be valid reasons for using NDAs when maintaining the confidentiality of commercial settlement terms. 

What does this mean for Financial Institutions and their insurers? 

Overall, it will be vital for financial services and insurance firms to consider the health (or decline) of their (and their clients') cultures and governance structures and whether these fall short of the FCA's and PRA's rising standards and to prioritise enhancing these where necessary. Poor survey results may have lasting negative impacts for companies in a world where work-life balance and happiness and wellbeing are at the forefront of many employees' minds, making the hiring and retention of talent particularly challenging. 

Poor corporate culture may also lead to an influx of employment practices and D&O claims against Financial Institutions in circumstances where employees consider this misconduct to be a substantial breach of the duties of obedience, loyalty and/or diligence. It may also lead to regulatory investigations being initiated against Financial Institutions and their senior managers if an individual's "fit and proper person" status is open to question in light of non-financial misconduct issues. 

Companies may be left open to wider criticism, with investors more likely to withdraw their funds and/or cut ties from companies in the limelight. We have seen the downfall of a large hedge fund in 2023 arising from such issues and it is clear that reputational damage can be crippling if non-financial misconduct issues surface indicating poor corporate culture is pervasive. This may ultimately result in claims (including securities claims) against companies and their directors and officers where shareholders believe there has been a resulting loss in share value(s). It is therefore important for Financial Institutions and their insurers to keep abreast of the developments in this area, including the inquiry, and to give detailed consideration to company culture and governance when assessing risks to non-financial misconduct internally and when underwriting Financial Institutions risks.