SMCR & Non-financial Misconduct

Posted by

Vivek Dodd

on 08 Jul 2021

A lack of public confidence and some damaging press stories have renewed the FCA's focus on conduct, including non-financial misconduct.

SMCR & Non-financial Misconduct

The FCA's Financial Lives Survey in 2020 found that 1 in 4 consumers lacked confidence in the financial services industry. Only 35% of respondents agreed that firms are honest and transparent in their dealings with them.

These results also illustrate why the regulator is strengthening rules and guidance around culture and conduct.

For example, the FCA’s expectation that all firms will comply with the SMCR, Conduct Rules and several other initiatives, such as finalising guidance on the treatment of vulnerable consumers and the recent consultation regarding a new Consumer Duty.

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Non-financial misconduct reflects poor cultures

The FCA believes that how a firm handles non-financial misconduct is indicative of a firm’s culture. Nausicaa Delfas, recently appointed as Interim CEO of the Financial Ombudsman Service, has highlighted that tolerance of non-financial conduct “would be a clear example of a driver of unhealthy culture“.

The FCA has repeatedly made it clear that it expects firms to be proactive in tackling misconduct of all types, including identifying what drives this behaviour and, where appropriate, modifying those drivers to shape proper conduct.

Consequences of non-financial misconduct

We have seen the FCA and PRA take action when they find individuals in breach of the standards expected, fining and, in some cases, banning individuals from operating within approved roles in financial services.

The insurance firm, Atrium Underwriters, was fined a record amount of £1 million for inappropriate and unprofessional conduct over a number of years during an 'annual boys' night' out. This is the only fine Lloyd's independent disciplinary committee has imposed for non-financial misconduct.

In line with this focus on culture and individual responsibility and accountability at all levels of the financial services industry, the FCA has indicated its view on non-financial misconduct is evolving (i.e. serious personal misbehaviour, harassment, bullying, sexual discrimination or sexual misconduct in the workplace).

All this activity and focus is centred around encouraging and expecting firms to really focus on building and maintaining a healthy culture “…where people do the right thing and take responsibility for outcomes”.

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How can you promote a healthy company culture?

So, what we really need to do is ensure that our people (at all levels of seniority) are behaving in a way that:

  • Promotes a healthy conduct culture;
  • Meets business objectives; and
  • Ensures great outcomes for customers.

By doing this, we can be confident in satisfying the regulators.

This means not just capturing and reporting quantitative culture data but also considering supporting qualitative data. In other words, ensuring that we properly look at what’s going on under the bonnet!

Key questions to ask

  • Why are misconduct incidents occurring?
  • Are they systemic?
  • What can be done to prevent them?
  • What can be done to encourage positive change in employee’s behaviour?
  • Are temperature checks been taken, measuring employee culture regularly?
  • Is it clear about what good behaviour looks like?
  • Do staff understand what is expected of them?
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Mechanisms needed to answer these questions

You should ensure that you have the appropriate mechanisms to help answer the key questions above. These include at a minimum:

  • Processes to identify, handle and escalate potential non-financial misconduct involving their employees
  • Clear purposes and values that drive good conduct and check whether in practice the business is consistent with these
  • Considering non-financial misconduct when carrying out fitness and propriety assessments on Certified employees and Senior Managers
  • Ensuring that Senior Managers take responsibility for tackling non-financial misconduct within their area.

How non-financial misconduct relates to SMCR

The FCA considers that the SMCR provides it with an additional tool to encourage cultural change in firms. The way that Senior Managers tackle cases of non-financial misconduct may be relevant to the FCA's assessment of an individual’s fitness and propriety.

The FCA expectation is that Senior Managers should play a key part in encouraging healthy cultures and that there needs to be appropriate leadership to address non-financial misconduct.

A Senior Manager’s failure to take reasonable steps to address non-financial misconduct could lead the FCA to determine that a Senior Manager is not fit and proper.

If they are a Senior Manager, they need to understand not just what is expected of their own conduct but also what is expected in leading and taking responsibility for the conduct of their people.

All employees need to understand what is expected of them personally, what the Conduct Rules really mean for them and what is considered misconduct.

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Non-financial misconduct & training

The SMCR and Conduct Rules training you provide is a key tool in helping you achieve this.

Providing appropriate training and clearly documented guidance for all employees is vital to help ensure that everyone has a clear understanding of their responsibilities and their obligation to inform their managers of relevant matters, including those that happen in their personal lives.

This training needs to include examples of non-financial misconduct to allow employees to learn using relevant and practical scenarios – considering both conducts within and outside the workplace.

For example, some might argue that everyone should know what it means to have integrity or act with due care, skill and diligence. However, as we said at the start, knowing something doesn’t mean it’s transferred into our behaviour and day to day practices and decisions.

So, it’s important to be explicit and that this is translated into how an individual behaves within the workplace, their role and personal lives and how each may impact their work life.

We know that our regulators will continue to focus on good conduct and healthy cultures. We also know that this is good not just for customers but also for our people and business - a win-win.

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