Financial watchdog cracks down on non-financial misconduct 

Financial watchdog cracks down on non-financial misconduct 
08/01/2021 Neta Meidav

Historically, national financial regulators such as the Financial Conduct Authority (FCA) in the UK have been less aggressive in pursuing ‘non-financial’ misconduct than in cases where a client’s money is at stake. But developments at the tail end of 2020 marked a sea change in the focus of the FCA, which we expect to see replicated globally. 

In November, the FCA banned three men convicted of sexual and, in one case, domestic violence offenses from working in the financial services sector ever again. Although the serious nature of the offences makes the decision seem like a no-brainer, it is unusual for the watchdog to take such an interest in non-financial incidents. That said, the FCA has put several flags in the ground over the last few years which paved the way for these developments. 

Workplace Bulying

In an open letter to CEOs almost exactly one year ago Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations, at the FCA, warned that “non-financial misconduct and an unhealthy culture is a key root cause of harm,” and said it would be a key focus for the body in its supervisory capacity. 

“Poor culture in financial services can lead directly to harm to consumers, market participants, employees and markets…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.”

Among other things, the FCA said it expects firms “to have strong whistleblowing processes and appropriate incentive structures,” in place to expose and resolve misconduct. 

In a further indication of the growing focus on culture in the financial regulation community, Davidson also gave a speech towards the end of 2020 in which he focused on the business of social purpose and purposeful, diverse, safe and inclusive cultures as a driver of profitability. 

He identified the ‘permafrost’ of trust lacking between employee and employer and noted that in cases where this permafrost has melted it is due to trust being recognised as “a two-way thing” and employee trust in senior management has been reciprocated by senior management trust and empowerment of middle management. 

But he also warned of a persistent challenge in “the domination of a compliance box-ticking mindset at the expense of a systems thinking outcome and learning mindset.”

Something we have spoken about time and again is the end of the line for ‘canned compliance’. It’s no longer enough to do the bare minimum required to operate legally, businesses now have to go above and beyond to ensure they behave ethically and with integrity. And a key component of this model is being able to accurately gauge the ethical temperature of your workplace culture. We know that incumbent models don’t encourage employees to speak up and this leaves businesses blind to systemic misconduct, whether of a financial or non-financial nature. 

This is also something we discussed in depth with compliance expert Tom Fox and the LSE’s Chief Risk Officer, Maxine Gee, at the end of 2020. We covered:

  • The difference between ‘conduct’ and ‘culture’
  • The changing nature of ethics
  • The increasingly interconnected relationship between Compliance, HR, and Legal around ethics and culture

You can listen to that webinar right here.