The Financial Conduct Authority (FCA) has taken a significant step forward in addressing the rising regulatory focus on non-financial misconduct in insurance firms. In October 2024, the FCA published the findings from its non-financial misconduct survey, which was conducted with 1,028 regulated firms being asked about recorded incidents of non-financial misconduct in 2021, 2022 and 2023. It is a subject that has been the source of multiple difficult headlines for our industry and the data collected by the FCA suggests the number of such cases continues to increase. Though it is not clear whether the growth is an increase in incidents or a growth in reports. The first would be alarming given all of the FCA and Lloyd’s work in recent years whereas the latter may give rise to some comfort if it evidences that individuals feel safe enough to report inappropriate and/or unacceptable behaviour. What is clear is that the publication of the survey results will not be the last action taken by the FCA on this matter.
If you would like a refresher on the background to the wider issue, it was covered in our webinar “Non Financial Misconduct The FCA & PRA Action On Diversity & Inclusion In The Insurance Industry” back in June 2024.
The survey results provide key insights into how firms are managing cultural risks related to behaviours that fall outside traditional financial misconduct issues, such as bullying, harassment, and discrimination. These behaviours have increasingly been linked to broader issues of governance and risk management and the survey findings are being presented with an immediate regulatory call to action for firms to strengthen their approach to fostering healthy cultures. Of course, what that means for firms is that they will also need to evidence their fostering or promotion of healthy cultures in the knowledge that the regulators are very adept at scratching the surface of thinly veiled cultures created by management teams which do not see the benefits of a healthy culture and do not invest in creating the firm’s culture. Even before scratching the surface a simple question such as “How much does the firm invest in monetary terms and as a percentage of turnover” can enlighten them so much.
A Broader Definition of Risk
The FCA’s survey reinforces the growing consensus that non-financial misconduct is not a peripheral issue but a core aspect of effective risk management. Poor behaviour at any level of an organisation can have damaging repercussions for a firm’s governance, employee wellbeing, and ultimately, its financial performance. The survey findings make it clear that non-financial misconduct is an indicator of a firm’s overall culture and can contribute to the breakdown of trust within firms, potentially leading to significant regulatory, reputational, and financial risks.
Andrew Bailey, at the time the CEO of the FCA, previously described non-financial misconduct as a “barometer” for the wider culture of an organisation. These results reaffirm this viewpoint, with the FCA showcasing examples of firms taking these issues with a level of seriousness that it infers approval of—but also highlights examples where many firms still have room to improve in their handling of such misconduct.
Key Findings from the Survey
- Increased recognition of the problem: Most firms surveyed acknowledged that non-financial misconduct has a direct impact on their culture and are beginning to integrate this into their governance structures. But the current data shows:
- 37% of London Market insurers and 39% of London market intermediaries have “no formal governance structure or committee that decides on the outcomes and disciplinary actions for those involved in NFM cases”;
- At 44% of London Market insurers and 26% of London market intermediaries the “Board or board-level committee does not receive any MI around non-financial misconduct.”
- Room for improvement in accountability: Despite increasing recognition of the issue, the survey revealed gaps in holding individuals accountable for non-financial misconduct. Awareness has improved, but there is still a lack of robust systems and processes for dealing with problematic behaviour.
- Training and education: the most common outcome following a finding of NFM is for some ‘other’ form of action to be taken, such as training or coaching, or a written warning to be given.
- Cultural measurement and tracking: While the majority of firms claimed to have mechanisms in place to track aspects of their culture, fewer than half could demonstrate regular reporting or feedback loops that measure the impact of non-financial misconduct on culture. This suggests that while firms are tracking culture in theory, they may not yet be effectively using sufficient or appropriate data to refine their approach to managing issues of misconduct.
Percentage of large firms with no formal governance structure/committee for NFM decisions or no board level MI
This table, taken from the FCA survey findings, suggests that London Market insurers and intermediaries may well find themselves the initial focus of the FCA as it takes its next steps on the path to addressing NFM. The general picture is of the insurance sector lagging behind the banking industry in adapting its approach to addressing these regulatory concerns.
FCA’s Expectations Going Forward
The FCA has made it clear that firms are expected to go beyond box-ticking exercises when it comes to managing non-financial misconduct – an approach that we should all be familiar with now. It expects the management of such conduct-related matters to be a live issue embedded within a firm’s strategy for managing conduct risk. The FCA’s key message is that non-financial misconduct should be considered in the same context as financial misconduct, with equivalent levels of seriousness and management oversight. Firms will need to consider how these issues are escalated, tracked, and acted upon in a timely manner.
One of the notable implications of the FCA’s report is how non-financial misconduct will increasingly be linked to the SMCR. The FCA has suggested that firms should consider whether senior managers are being held accountable when these incidents arise under their leadership Firms may need to ensure that their MI is able to identify those functions or business units which have higher levels of NFM with a view to holding the senior individual responsible. Many firms do not seem to realise that it is not the HR function which is accountable for culture but leaders as a team and individually for their function or business unit. With the ongoing review of the SMCR framework, it is possible that the regime could evolve to strengthen this connection even further.
What Actions Should Firms Now Be Taking?
For firms seeking to improve their handling of non-financial misconduct, the FCA’s findings provide a useful framework for action. Key steps include:
- Benchmarking performance: there is a clear expectation from the FCA that all insurance firms will take action to benchmark their performance against their peers and ensure their boards are briefed on this.
- Reassessing governance structures: firms should ensure that their governance frameworks specifically address non-financial misconduct and provide clear routes for escalation, accountability, and oversight which intrinsically includes reporting and MI reaching the right people and this may involve a review of Governance models including Board and Committee arrangements and Terms of References Other key areas that need to be considered include reviewing the policies, procedures and governance, controls and oversight arrangements for Annual Objective setting and Appraisal, Remuneration, management of investigations, and decision-making and reporting of incidents again taking account of the need to ensure that all the necessary people are involved. Often this does not mean just the CEO and HR but also legal, compliance and risk.
- Review your Remuneration Committee (RemCo) terms of reference: thegeneral purpose of RemCo is to shape and set the remuneration strategy at senior levels of the organisation, taking account of good governance standards and regulatory expectations. RemCo should uphold corporate integrity, balancing business interest and ethical business practices with how employees are rewarded in the organisation. Firms should undertake a review of the RemCo terms of reference to ensure they are consistent with the regulator’s expectations and review their remuneration strategy. The approach to ‘malus’ clawback provisions is one specific aspect that should be discussed and agreed at RemCo level. Whilst introduced as a result of the financial crash in 2008, their use is increasingly common for senior executives in all financial services firms and the range of circumstances when such clauses may apply is growing. There is certainly an argument that in circumstances when Non-Financial Misconduct is sufficiently egregious to warrant dismissal, activating the terms of a malus clawback provision may be warranted and the regulators are aware of their purpose and have expectations regarding their application.
- Reflect on your approach to objective setting and appraisals: are company values communicated and embedded as part of the objective setting and appraisal process and is the language used for determining this consistent with regulatory expectations? Firms need to ensure the approach taken is cascaded throughout the organisation, with expectations on acceptable behaviours set for all employees.
- Embedding a culture of accountability: Senior managers must take ownership of these issues, both in their day-to-day management responsibilities and in how they shape overall firm culture. This includes ensuring that appropriate disciplinary actions are taken where necessary.
- Investing in training: Beyond basic awareness, firms should offer targeted training for senior managers, helping them understand the wider implications of non-financial misconduct and its potential impact on governance and regulatory compliance. That training should include how to create psychological safety within a business unit or function and how to identify issues, encourage people to speak up and how to deal with incidents appropriately when things to do wrong.
- Improving measurement and reporting: Firms should focus on creating actionable data and feedback loops that allow them to assess how effectively they are dealing with non-financial misconduct. Regular reporting to boards and senior management will be key to ensuring that issues are identified and addressed promptly.
The FCA is clear that is sees action on NFM as a collective responsibility and it is actively seeking to encourage relevant trade associations to bring members together to help co-ordinate action.
CP23/20: Diversity and inclusion in the financial sector – working together to drive change
Publication of these survey results is simply one more step on the regulatory path to improving culture, including diversity and inclusion, across the insurance sector. But the associated commentary with the survey results contain no explicit best practice or updated policy for firms. But that is coming with a full Policy Statement on ‘Tackling Non-Financial Misconduct in the Financial Sector’ promised around year-end 2024, to be followed by FCA and PRA Policy Statements on the remaining Diversity & Inclusivity proposals in 2025.
It is difficult to imagine that firms taking clear action based on the FCA ‘expectations’ following publication of the NFM survey results will not find themselves well on the path to meeting any new requirements in either of those Policy Statements.
Conclusion
The FCA’s focus on non-financial misconduct is part of a broader shift towards emphasising the importance of culture within financial services firms. Non-financial misconduct can no longer be dismissed as a ‘soft’ issue; it has tangible implications for governance, risk management, and the ability of firms to meet their regulatory obligations. The survey results provide a clear message to the industry: firms must take a proactive and structured approach to managing these risks, with both board members and wider senior management taking a leadership role in shaping a healthy culture.
By addressing non-financial misconduct with the same rigour as financial misconduct, firms not only protect their employees and stakeholders but also enhance their long-term resilience and reputation. The FCA will undoubtedly continue to monitor this area closely, and firms should be prepared for further regulatory developments as the industry’s approach to non-financial misconduct evolves.
With the emphasis placed on expecting firms to benchmark their own approach, MGAA members who who wish to understand how their own governance compares to firms of a similar status are reminded that they are entitled to an hours introductory free advice from the MGAA Compliance & Regulatory partner, ICSR. Find out more about ICSR here.
