YOUR COMPLIANCE MATTERS:    Non-Financial Misconduct

YOUR COMPLIANCE MATTERS:   Non-Financial Misconduct

 Relevance:                   All firms.

 Action required:           Consider the culture of your business – are there issues to be addressed?.

Earlier this month, the Financial Conduct Authority (FCA) published a Dear CEO Letter aimed at the wholesale insurance market setting out the regulator’s expectations concerning non-financial misconduct. This seems to have been deemed necessary because of a series of well publicised incidents of non-financial misconduct and urges firms to be ‘proactive in tackling such issues.’

Clearly this can also be linked to the recently implemented Senior Manager and Certification Regime (SMCR) and the introduction of the associated Conduct Rules.

Client firms should be aware that while the regulator’s current focus is in the wholesale market, its underlying message is that non-financial misconduct is not acceptable anywhere.

The “Dear CEO” letter can be accessed using the following link:

https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-non-financial-misconduct-wholesale-general-insurance-firms.pdf

So, what should firms be doing?

In the first instance, you should understand that the FCA expects firms, and senior managers, to embed healthy cultures.

The FCA defines culture as “the habitual behaviours and mindsets that characterise an organisation. We do not attempt to assess mindsets and behaviours directly; instead we recognise that there are many drivers of behaviour which firms can identify and manage.”

The FCA go on to indicate that there should be a “focus on 4 key drivers of culture which we believe can lead to healthy cultures and reduce the potential for harm. These drivers are:  

·      leadership;

·      purpose;

·      approach to rewarding and managing people; and

·      governance, systems and controls.

One particular paragraph of the FCA’s letter encapsulated the FCA’s concerns:

‘Poor culture in financial services can lead directly to harm to consumers, market participants, employees and markets. It was a key root cause of recent major conduct failings within the industry. How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation and bullying, is indicative of a firm’s culture. We view both lack of diversity and inclusion, and non-financial misconduct as obstacles to creating an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken.’

Then it will be case of making sure the following is or has been carried through the whole firm:

·      Embed healthy cultures;

·      Provide appropriate leadership;

·      Provide clarity of purpose about the firm to drive healthy outcomes among their employees; and

·      Deliver culture change to create a healthy and sustainable culture. 

The FCA points firms towards information on its website at: https://www.fca.org.uk/firms/culture-and-governance which can assist with this.

A sign of the FCA’s approach to this matter is in the sign-off to the letter: ‘Through our supervision of the industry, we will work to improve standards of behaviour in financial services firms and hold firms and senior managers to account for their cultures.’

We can’t say we have not been warned!

We will continue to assist firms in endeavouring to meet culture expectations but if any individual firm would like specific assistance, please contact us.