Non-Financial Misconduct: How will the FCA Supervise the New Rules?

Firms don’t have long until the FCA's new rule and guidance on non-financial misconduct (NFM) take effect. Given how long this has been coming, it would be reasonable to assume firms are well prepared.

In this article, Peter Haines, Director of GRC Training, examines how ready firms actually are, the questions firms are still asking and what FCA supervision is likely to look like.

Are firms well prepared?

In a survey conducted by Elephant's Don't Forget earlier this month, 42% of respondents described themselves as very ready or fairly ready, while 38% said they knew what was required but the work was still in progress. With the UK holiday period at its height, that is a demanding position to be in so close to the deadline.

What needs to be in place before 1 September?

The building blocks of an effective NFM programme are well established by now:

• Updated policies and procedures
• Training for all employees
• A settled firm position on work life versus private life, on behaviour on social media, and on how the FCA's requirements interact with your employee handbook
• Collaboration between Compliance and HR
• A proportionate senior management response covering decision-making, reporting and remediation

We set these out as a six-step guide earlier this year.

One point worth drawing out is the interaction between the FCA’s requirements and your firm’s own employee handbook. Many firms have taken the view that misconduct by an employee might not breach the FCA's NFM requirements but may nevertheless engage their own disciplinary procedures. That position needs to be settled internally and communicated clearly. 

The questions firms are still asking

Nigel Sydenham has already addressed a number of the questions coming from Compliance and HR teams, including the relationship with employment law, personal social media, and what happens when the individual concerned is a senior executive. Three further questions have come up recently in our training sessions.

1. Is a mature, customer-centric culture enough?

It is a strong starting point, but it does not remove the need for the building blocks, or the ability to evidence that potential NFM has been carefully considered and the right outcomes reached. I have seen NFM arise in firms where senior management were confident about the maturity of the culture.

It is also worth remembering that NFM is primarily about conduct towards colleagues in the workplace. Client outcomes are addressed by a different FCA initiative that you might have come across. Confidence in one does not necessarily transfer to the other.

2. How can you evidence that your NFM training is effective?

This applies to all training, not only NFM. Effective training can act as an important defence for the firm and senior management should an employee act inappropriately. Regulators around the world do ask firms for copies of their training materials and for evidence of how effectiveness is demonstrated.

How you evidence the effectiveness depends on the format. For eLearning, an end-of-module test offers a useful baseline, but tracking granular question data and post-training behaviour provides more focused analytics.

 Instructor-led training (ILT) is often harder: experienced trainers will instinctively recognise through group exercises, case studies and Q&A which attendees have really understood the key concepts but converting that into specific and measurable data during a live session can be difficult. Short online tests following ILT sessions are a practical solution we often implement. Effectiveness can also be indirectly considered, through conduct management information (MI) such as complaints data, client questions and customer satisfaction questionnaires.

3. How will the FCA supervise NFM?

This really is the million-dollar question. The honest answer is that nobody knows for sure yet. Some have suggested supervision may resemble what we saw under the Consumer Duty, so the comparison is worth examining.

There are real similarities. In both cases the FCA really nailed its colours to the mast, often during strong winds of controversy and opposition.

With the Consumer Duty, one can argue that FCA supervision was relatively soft in the first year or so. Everybody recognised that firms were on a journey and the MI required would be challenging to collate and report. The FCA asked for copies of board reports as part of its routine supervision of many firms, but there was little penal enforcement action initially. Much of the supervisory intervention was non-public, although clear and directive. More decisive enforcement action has followed since, and the bedding-in period for Consumer Duty is well and truly over now.

 Why a lighter touch on NFM is unlikely 

I have yet to be convinced that the FCA will be remotely soft in its treatment of NFM. The rules have had a long gestation period and the FCA has made some very strong public statements about their importance - to a firm’s culture, to psychological safety and even to the competitiveness of the UK as a leading financial centre. It is therefore hard to see why the FCA would hold back on firms or their senior managers who fail to take NFM seriously.

Consider the cases that will test this: treating the star revenue earner differently to the junior operations executive; deliberately omitting a breach from a regulatory reference; undercooking the internal disciplinary action for a breach of NFM in order to avoid reporting it to the FCA. I can see the FCA coming down hard on such instances.

It is also worth remembering that regulatory action is not restricted to public fines. Section166 notices and VREQs can readily be used, arguably giving the FCA less scrutiny and more flexibility in its supervision.

What should firms do now?

Once the holiday season ends, coordinated action between HR, compliance and senior management is what will determine whether the key building blocks are all in place if the FCA comes calling. Firms that have not covered all the bases on NFM by now are unlikely to have closed every gap by 1 September, so the priority should be showing clear progress, addressing the most important gaps and establishing  ownership, rather than aiming for completeness.

Firms should assume they are being assessed from the first day the rules apply and ensure they have the appropriate steps in place to show they are meeting the requirements.

How we can help

CCL has been working with clients to navigate these challenges and find practical, workable solutions. To ensure your teams are equipped to manage NFM effectively, we offer role-specific training for all levels of staff, and support in demonstrating its effectiveness to the regulator. To discuss in more detail what your firm needs in place, get in touch. 

Peter has over 35 years’ experience in the field of regulation and compliance. A chartered accountant, Peter spent 6 years working with the UK’s SFA (now the FCA) and has headed up regional and global compliance functions at Paribas, UBS Investment Bank and Bank of America.

Since 2006, Peter has specialised in training, focusing on boards, senior management and assisting the next generation of compliance officers. His coverage includes most areas of compliance and financial crime, corporate governance and risk management. His style is inclusive, interactive and based on practicalities, not just rules.

As Director of GRC Training, he works closely with our clients to ensure that our programmes are tailored to their exact needs and meet, or surpass, their expectations.