Managing the increased focus on non-financial misconduct

Written by Rhodri Kettle and Jonathan Bowdler on Tuesday June 16, 2020

In this article we will look to define non-financial misconduct and highlight why it is of increasing importance to firms and other organisations across most industry sectors and jurisdictions. We need to understand the risks associated with misconduct behaviours and we will demonstrate these risks through real-world examples that have been reported on in the public domain recently.

We need to identify what solutions can be deployed to manage non-financial misconduct risks.  And consider if these solutions must be bespoke and exclusive to specific scenarios, or whether we can apply existing misconduct control typologies to an evolving landscape?

As the ICA is an educational and professional body, we will also ask you to reflect upon your own experiences. We will task you to take away some simple next steps that should enable you to better understand and manage the risks associated with this emerging risk area in your own organisation.

Why are we talking about this now?

Let’s start with a quote from a ‘dear CEO’ letter issued by the UK’s Financial Conduct Authority (FCA) to wholesale general insurance firms in January 2020[1]:

“Following recent, publicized incidents of non-financial misconduct in the wholesale general insurance sector, I am writing to set out clear expectations that you should be proactive in tackling such issues. We expect you to identify what drives this behaviour and, where appropriate, modify those drivers to shape proper conduct.”

According to the FCA, the number of recorded incidents regarding harassment, bullying and homophobia have significantly increased during the last two years. Non-financial misconduct is closely linked with the more general concept of organisational conduct, and that suggests that it is another example where poor workplace practice and behaviours are giving the regulator cause for concern. 

Consequently, other key stakeholders, such as investors and  consumers, will no doubt place greater emphasis upon the systems and controls put in place to achieve the appropriate standards of conduct by firms when assessing with whom to do business. So non-financial misconduct certainly has the potential to cause financial risk.

We can define non-financial misconduct as unacceptable or improper behaviours, including (but not limited to):

• discrimination on the grounds of gender, race, religion, physical characteristics, or sexual orientation
• harassment, including bullying, victimisation and sexual harassment
• a lack of diversity and inclusion – either within the workplace or by employees within a workplace
• the placing of obstacles to the creation of an environment where it is safe to speak up.

These are some of the accepted definitions: the challenge comes in agreeing what they mean in practice. To help understand what these definitions mean in practice, there are recent examples we can look at as evidence:

• Lloyds of London banning first employees, then pass-holders from lunchtime drinking to tackle what was seen as a ‘laddish’ culture
• a City bank senior trader being suspended over ‘alleged food theft’ from his employer’s restaurant facilities[2]
• Tidjane Thiam, CEO of Credit Suisse, quit after an alleged spying scandal were two former employees were tailed by private investigators[3]
• Barclays CEO Jes Staley fined by the UK regulators, the FCA and the Prudential Regulation Authority (PRA) for his attempts to identify a whistleblower,[4] and more recently facing media scrutiny over his previous professional relationship with Jeffrey Epstein
• Jonathan Burrows, a managing director at BlackRock Asset Management Ltd., was banned from working in the financial sector by the FCA following revelations that he avoided paying for up to £43,000 of rail tickets for his daily commute to London over a 5-year period.[5]

What are the associated risks?

Legal action may be taken by victims of harassment, bullying or discrimination. Aside from the financial costs of litigation, investigations and consequent remedial actions will be a demand upon resources and will consequently impact on the efficiency and focus of those involved.

Of course, the direct financial consequences are probably not the main concern for firms. Consumers and other stakeholders could call into question both the firm’s business model and strategic objectives if the only way it believes it can meet them allows such poor culture and behaviour to exist. This is particularly true where damage to reputation follows on from a highly public example of non-financial misconduct.

Add into this equation the increasing potential for personal consequences for senior managers, such as under the FCA and PRA Senior Managers and Certification Regime, and it becomes even more clear that non-financial misconduct should be high on the risk agenda for most organisations.

Achievable solutions

It is possible to argue that changing culture in firms, and even whole industry sectors, is the ideal solution. But, that is not an easy task. Culture tends to be generational, and therefore to bring about change in the short-term would be very difficult, and yet taking a long-term approach is unlikely to satisfy the demands of key stakeholders (including regulators).

However, just because something is difficult to do is not a good excuse for not doing it! Senior management is accountable for embedding a healthy culture in their organisations, and they must do this by first of all identifying the key drivers of culture within the firm, and then (where needed) working to bring about the desirable changes in these key driver areas.  They include:

1. Leadership: As accountable leaders, senior managers have to understand what this means for their business. Not only in embedding the ‘do as I do’ message, but in ensuring they remain the right person for the role by addressing non-financial misconduct should it arise. Failure to do so questions their continued fitness and propriety for their roles.
2. Management: The cultural values and messages from the leadership must not be diluted (or manipulated) as they pass through the management chain. Consistency is critically important to build acceptance throughout the firm. Any inconsistencies must be identified and understood, and appropriate steps taken to fix these anomalies. 
3. Speaking up: This could be the most important alert mechanism available to staff to express concerns, or to highlight actual or potential non-financial misconduct. Firms must handle speaking up reports fairly and objectively, and identify causes and solutions that can be implemented to improve internal culture. 
4. Incentive structures: These can help by rewarding the ‘right’ behaviours. The re-emergence of ‘balanced scorecards’ applying an equal emphasis on ‘how’ as well as ‘what’ is achieved, draws personal conduct into the spotlight, and can be as measurable as other targets. A remuneration structure which incentivises sales at all costs is likely to lead to both financial and non-financial misconduct.
5. A Code of Ethics: one that is supported, promoted and implemented with the backing of senior management, if drafted properly, will encompass financial as well as non-financial conduct. It should encourage everyone to ask the question ‘should I be doing this?’ rather than ‘can I do this?’. 
6. Governance mechanisms: One role of any governance mechanism is to act as a control framework for the firm. Control frameworks must be sufficiently robust to be able to deal with any risk as and when it arises. More important is the ability of the control framework to prevent any risks from escalating to the position that they have become issues that have to be dealt with.

In this situation, quality governance therefore incorporates the leadership, management, reward and remuneration, Code of Ethics and speaking up structures already discussed, supported by robust MI evidence that they are performing as designed. And they have to be flexible enough to consider emerging risks (for example, the misconduct risks associated with remote working during social distancing situations following the Covid-19 pandemic) which have yet to manifest themselves as issues to be managed.

In summary

We are seeing an increased focus on non-financial misconduct and are acutely aware of the risks associated with inappropriate behaviour. Solutions require leadership and governance, and flexibility in identifying, assessing and managing the current and emerging risks, and applying them in visible and direct actions.

We did mention in our introduction that we would be tasking you with some actions to that should enable you to better understand and manage the risks associated with this non-financial mis-conduct risk in your own organisation, so consider the following, and try to be honest with yourself.  “I didn’t think that kind of thing went on here” is not a good defence!

1. What examples have you seen, or have read about, of non-financial misconduct?
2. How well (or how poorly) do you believe it was handled?
3. What do you think could have been done better, or differently, to handle the issue?
4. Where do you think non-financial conduct sits in your firm’s priorities?
5. Where in your organisation do you believe the highest risk sits? Why? What are you going to do about it? 

This article was originally published by Compliance Monitor.

References:

[1] FCA Dear CEO letter, 6 January 2020, Jonathan Davidson: https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-non-financial-misconduct-wholesale-general-insurance-firms.pdf

[2] Paras Shah / Citigroup: https://www.standard.co.uk/news/uk/citigroup-bank-canteen-canary-wharf-paras-shah-a4352711.html

[3] Tidjane Thiam / Credit Suisse: https://www.bbc.co.uk/news/business-51411640

[4] Jes Staley / Barclays: https://www.theguardian.com/business/2018/may/11/barclays-jes-staley-fined-whistleblower-fca

[5] Jonathan Burrows: https://www.fca.org.uk/publication/final-notices/jonathan-paul-burrows.pdf

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