Member Article

The published findings of the FCA's recent survey on culture and non-financial misconduct demonstrates how financial services firms have been responding to Employment issues and what might be on the horizon.

Sexual Harassment

In June 2023, the FCA found itself under pressure when it was asked to respond to the Treasury Committee’s questions about Odey Asset Management following an investigative report published by the Financial Times detailing allegations of sexual harassment against the firm’s founder: Crispin Odey. Although these allegations remain unproven in court and have been strongly disputed by Mr Odey, they were prominent enough to prompt the Treasury Committee to write to the FCA. The FCA has since made it clear that it takes allegations of sexual harassment, as well as the response to such allegations, seriously.

The publication of the FCA’s findings coincided with the introduction of the new duty for employers to take reasonable steps to prevent sexual harassment of employees in the course of their employment (including harassment by third parties).

The survey results show that:

• disciplinary or other action was taken in 64% of reported sexual harassment incidents;
• 22% of the reported incidents of sexual harassment resulted in dismissal; and
• 22 employees had their fitness and propriety assessments amended due to a finding of sexual harassment.

These findings demonstrate that allegations of sexual harassment are already being reported and firms are taking decisive action, including dismissal. As firms are now required to take proactive steps to prevent the occurrence of sexual harassment, we hope to see the number of incidents decrease over the coming years.

Settlement Agreements

The survey suggests that the number of confidentiality and settlement agreements signed by complainants of misconduct has decreased, whilst the number of agreements signed by subjects of misconduct allegations has stayed at a similar level. The FCA has indicated that these trends have been slightly skewed by data received from wholesale banks, so it is possible that other firms may not have identified the exact same patterns.

Despite the possible flaws with the data, firms should continue to be mindful of how they use settlement agreements both for complainants of misconduct and the subjects of such complaints.

The reported decrease in the number of settlement agreements entered into by complainants of non-financial misconduct indicates a move towards greater openness and transparency. The FCA expects settlement agreements to state that nothing will prevent the employee from making a protected disclosure or from reporting concerns to the FCA (or other regulators). In other words, settlement agreements must not be used as a means to silence whistleblowers. The government has also proposed that complaints of sexual harassment should be expressly include in the statutory definition of protected disclosures in whistleblowing legislation.

Where firms enter into settlement agreements with the subject of misconduct allegations, they should be mindful of their duty to give regulatory references particularly where a finding of misconduct has already been reached. 92% of the respondents to the survey confirmed that they would include incidents of non-financial misconduct in a regulatory reference.

Remuneration

The survey indicates that non-financial misconduct rarely leads to a change in remuneration with adjustments typically affecting unvested variable pay such as bonus awards as opposed to firms exercising clawback provisions.

The Investment Firms Prudential Regime (IFPR), which was introduced by the FCA to discourage poor conduct and instil healthy work cultures, has only been in effect since 1 January 2022. We will likely need to be patient as it may take time before we see the effects of appropriately balanced fixed and variable remuneration and stringent uses of deferral, malus and clawback in response to non-financial misconduct.

Reporting vs Monitoring

The survey found that grievances and “other formal escalation processes” were the main ways in which non-financial misconduct was identified. In contrast, detection through monitoring and surveillance systems remained relatively low.

This is not to say that monitoring should not be used to identify potential misconduct (although data protection advice should always be sought before going down that route) but rather that formal grievance and whistleblowing processes as well as other channels that allow individuals to raise concerns informally should be actively promoted.

Firms that do not have whistleblowing policies in place, are reminded that there is a requirement to establish, implement and maintain arrangements for whistleblowers to report concerns. Firms that do have a whistleblowing policy should consider how the policy can be promoted internally to ensure that staff know how to report a concern.

Alongside formal policies it is also crucial to maintain a positive workplace culture that encourages employees to speak up against misconduct.

Watch this space

This survey, alongside the FCA’s previous consultation on diversity and inclusion, demonstrates the FCA’s commitment to improving culture in financial firms. Meanwhile, the regulator’s ongoing focus on non-financial misconduct shows no signs of waning, with its policy framework on non-financial misconduct expected later this year - just in time for the festive party season.

 

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