Understanding the FCA’s Report on Non-Financial Misconduct: Key Insights for Financial Firms

Key Findings: The Scale of Non-Financial Misconduct

Increase in Reported Cases

One of the most striking findings from the FCA’s survey is the rising number of non-financial misconduct incidents reported by firms over the last three years. The statistics reveal a clear upward trend:

• 2021: 1,363 incidents
• 2022: 1,670 incidents
• 2023: 2,347 incidents

This increase is indicative of a growing awareness of misconduct within the sector. Wholesale banks, as larger firms with more employees, reported the highest number of cases per 1000 employees, while smaller firms with fewer than 50 employees reported fewer incidents, perhaps due to less formal reporting systems or lower levels of awareness.

It is important to note, however, that the reported increase in incidents could also reflect improvements in reporting mechanisms, with employees feeling more comfortable reporting misconduct than in previous years. Whether driven by genuine behavioural changes or improvements in detection and reporting mechanisms, these numbers point to a pressing need for firms to take proactive steps in managing non-financial misconduct.

Types of Incidents

When examining the types of misconduct reported, the FCA identified a number of recurring themes. The most commonly reported types of misconduct were:

• Bullying and harassment (26%)
• Discrimination (23%)
• Other misconduct (41%), including violence, intimidation, substance misuse, and breaches of company policies.

These figures suggest that financial firms face a range of behavioural issues, with bullying and harassment and discrimination being the most common forms of misconduct. The ‘other misconduct’ category, while broad, also includes very serious behaviours such as violence and intimidation, which are often harder to manage and address due to their severity.

How Firms Responded

The report also highlighted how firms have responded to non-financial misconduct incidents. Interestingly, the upheld rate for misconduct cases varied significantly:

• 62% of discrimination cases were not upheld
• 47% of bullying/harassment cases were not upheld

This discrepancy between reported incidents and upheld cases may indicate issues in the investigative process, the evidence available, or even the perception of the seriousness of these issues. However, disciplinary action was common for more severe forms of misconduct:

• 73% of violence and intimidation cases
• 64% of sexual harassment cases resulted in disciplinary action.

Further, dismissal was the most frequent outcome in cases of:

• Drug use (21%)
• Sexual harassment (22%)
• Violence/intimidation (21%)

This suggests that firms tend to act decisively when faced with the most severe misconduct, but it also raises questions about the consistency of handling other types of misconduct. Are firms treating all forms of non-financial misconduct with the same level of seriousness, or are some behaviours being overlooked or downplayed?

A further key point is that where settlement agreements are being used in finalising incidents, these should incorporate an explicit exclusion allowing for disclosure to certain parties – including us, other regulators, and law enforcement agencies – and that the agreement makes a reference to this point.

How Firms Identify Non-Financial Misconduct

The report provided insights into how financial firms detect non-financial misconduct. According to the findings:

• Formal grievances were the primary method of reporting misconduct, with 50% of incidents being detected through this channel.
• Whistleblowing was another key detection method, especially within wholesale banks, where whistleblowers may feel more secure in reporting serious misconduct without fear of retaliation.
• Monitoring and surveillance played a smaller role in detecting misconduct, suggesting that firms may not be leveraging technological solutions to their full potential.

While formal grievances and whistleblowing are important methods for detecting misconduct, it’s clear that firms need to do more to encourage openness and support victims of misconduct. Employees need to feel confident that their concerns will be taken seriously and acted upon swiftly.

Governance Gaps and Areas for Improvement

Another key takeaway from the report is the governance gaps that still exist within many firms:

• 38% of firms do not provide board-level reports on non-financial misconduct.
• 33% of firms have no formal governance structure to handle misconduct cases.

These statistics highlight that a significant portion of the financial services industry is still lacking in comprehensive oversight and accountability. This is concerning, as effective governance is essential to ensuring that misconduct is addressed appropriately and that firms remain compliant with FCA expectations. Without robust governance frameworks, firms risk failing to address issues at the root level, leading to unresolved cases and regulatory scrutiny.

What Firms Must Do Now

In light of these findings, the FCA has set clear expectations for firms:

• Benchmark performance against peers using the data from the survey.
• Review and improve processes for detecting and addressing misconduct.
• Ensure that Boards and senior managers (especially those with Senior Management Functions) engage with these issues proactively and consistently. Consideration should also be given to deciding outcomes by committee rather than individuals.

While the FCA has not introduced new rules, firms must adhere to existing regulatory responsibilities. The FCA expects firms to take appropriate action when misconduct occurs, particularly in relation to their governance and cultural frameworks. It’s no longer sufficient to simply react to incidents after they arise; proactive management of culture and misconduct risks is now an imperative.

Editorial Perspective: The Challenge & Opportunity for Firms

The FCA’s report should act as a wake-up call for financial services firms. A toxic culture, if left unchecked, can significantly damage employee morale, increase operational risks, and ultimately harm consumers and market integrity. Additionally, many firms face the challenge of underreporting or unresolved misconduct, often due to fear of retaliation or weak internal structures.

Addressing non-financial misconduct should not be viewed solely as a compliance obligation; rather, it must be seen as a critical element of an organisation’s overall success. A workplace culture that encourages respect, inclusion, and accountability leads to greater employee engagement, improved business performance, and reduced staff turnover.

Furthermore, as regulatory expectations continue to evolve, firms must be proactive rather than reactive. Waiting for enforcement action from the FCA is not a viable strategy. Firms need to invest in better reporting systems, establish clear leadership accountability, and integrate a strong cultural framework throughout every level of the organisation.

What Should Firms Do?

In light of the findings and recommendations from the FCA, financial services firms should:

• Ensure boards and senior management teams are aware of this survey and review its findings in the context of their business.
• Encourage a culture of openness where employees feel safe reporting concerns without fear of retaliation.
• Strengthen governance by implementing structured decision-making processes for handling misconduct cases.
• Improve data management to ensure clear, accurate records are kept of reported issues and their outcomes.
• Be aware of the FCA’s finalised policy when it is published in due course