While financial misconduct has been an issue long understood by the industry, non-financial misconduct (NFM) is presenting firms with a trickier – but no less pressing – challenge. As ‘the other side of the coin’ to financial misconduct, it presents itself differently but is still inherently connected - and we very rarely see one without the other.
The Financial Conduct Authority (FCA), true to its name, has been prioritising conduct and cultural issues of late, and raising big questions: How deep does finance’s NFM issue go, and how can firms do something about it?
In January, the FCA sent a ‘Dear CEO’ letter to senior executives at wholesale brokerages. In it, obligations with respect to financial crime, prudential risk management, and NFM were laid out, along with a new strategy for supervising brokers.
It follows the regulator’s landmark survey into NFM, which found that, across the 1,000+ firms it surveyed between 2021 and 2023, 2,347 instances of NFM were reported – averaging nine incidences per day. Emily Sheppard, the FCA’s chief operating officer, compared the contagious nature of both good and bad culture to that of a ’winter bug’, identifying that culture “shapes decisions and actions at every level. And those decisions, whether they’re made on the trading floor or in the boardroom, directly impact outcomes for consumers, markets and our economy.”
As a result of these findings, the FCA indicated that over the coming years it will be “focused particularly on ensuring that regulatory compliance and good standards of conduct are adhered to by all firms,” stressing that they “expect firms to have suitable controls in place to detect misconduct and to take appropriate action against those found to be committing misconduct.”
With expectations set, businesses operating under the FCA’s authority need to demonstrate they are actively challenging NFM in the workplace. Thankfully, there are several tools that firms can employ to show this clearly, namely training, surveillance and remuneration.
Training
In many respects, workplace culture can be viewed as intangible, something that is absorbed over time. However, businesses can no longer remain passive in shaping it — they must clearly define expectations and procedures, regularly review them, and update as needed.
Firms need to be explicit about which behaviours they consider to constitute NFM. FCA chief executive Nikhil Rathi acknowledged that the regulator won’t “realistically give completely precise rules for everything,” leaving firms responsible for some degree of interpretation. This is where anonymised, real-world examples of NFM can be especially useful in illustrating which behaviours are acceptable and which are not.
It needs to be made clear to employees that incidences of NFM will be discovered — either through reporting or surveillance — and treated with zero tolerance. This requires a clear operating procedure for reporting instances and confidence in the belief that each case will be treated indiscriminately, and one that is continually reviewed and updated as businesses evolve.
Surveillance
No matter the operating framework for flagging and disciplining NFM incidents, effective risk identification is essential.
By specifically including communications surveillance as a tool firms can use in its ‘Dear CEO’ letter, the FCA has highlighted the essential role it has to play in tackling all types of misconduct, not just market abuse.
Voice surveillance must take priority, as brokers and traders favour this fast communication method, and 'old habits' persist across the industry. Artificial intelligence is a game-changer for voice surveillance solutions, quickly sifting through calls, enabling rapid, accurate voice transcription, and flagging potential incidents. This dramatically streamlines surveillance workflows, reduces false positives, and creates accurately transcribed data records of calls.
While those familiar with the trading floor may have a higher tolerance to the language used, recent fines against Danske Bank by Norway’s regulator demonstrated that language can signal potential misconduct, and can fall under the umbrella of NFM. As the FCA has previously noted, one type of misconduct often signals the presence of another.
Remuneration
Sometimes the adage 'hit them where it hurts' is necessary, especially if we want to challenge deeply ingrained cycles of misconduct.
The FCA outlined remuneration arrangements as a powerful tool to guide good behaviour, and will be paying attention to “whether remuneration is used as an effective disciplinary tool by firms to address broker misconduct, including non-financial misconduct (NFM)” going forward. It pointed out cultures where NFM enforcement is sidelined because the perpetrators are ‘star performers,’ effectively giving them a free pass to bully and harass while rewarding them financially – despite their negative impact on the firm.
Penalising those who commit NFM is a valuable deterrent. It not only provides direct recourse against bad actors, but also shows other employees how seriously the matter is taken, prompting them to carefully consider their own behaviour.
Equally, firms can use remuneration positively when looking to reward good behaviour. While we don’t want to create an environment where employees act positively solely for financial gain, ensuring that all tools in a firm’s kit are leveraged will be key to maximising success. After all, if the benefits of using remuneration as a ‘stick’ are clear, why shouldn’t we also reward good actors with a ‘carrot’?
Is NFM still an FCA priority?
With the recent shelving of the FCA’s controversial ‘name and shame’ proposals and any further work on diversity and inclusion in the immediate future, it will be interesting to see whether NFM remains as much of a priority for the regulator as it has been to date. However, the FCA has invested significant time and resources into NFM and, frankly, the regulator needs a win – doubling down here could provide it.
Non-financial misconduct involves repeated patterns of behaviour, both from those that commit it, and those that systemically overlook or downplay it. Those historic attitudes have allowed NFM to take firm root in the finance space and created cultures of complicity where misconduct goes unchecked and unchallenged.
The FCA’s work – and the work that firms and individuals need to ensure they cooperate on – is only just beginning. Action needs to come both from the top down and the bottom up. By utilising the tools at our disposal, including training, renumeration, and surveillance technologies, we can work to make NFM a thing of the past.
