FCA warns insurers must be proactive in tackling non-financial misconduct
On 6 January 2020, the Financial Conduct Authority (FCA)’s Director of Supervision, Retail and Authorisation, Mr Jonathan Davidson, wrote to the chief executives of wholesale general insurance firms to set out the FCA’s clear expectations that firms must be proactive in tackling non-financial misconduct (the Dear CEO letter).
The regulator expects firms and senior managers to embed healthy cultures by identifying and modifying the key drivers of their culture. The letter states that poor culture in firms can lead directly to harm to consumers, market participants, employees and markets. It highlights four key drivers which the FCA believes can lead to healthy cultures and reduce the potential for such harm:
- Approach to rewarding and managing people
- Governance, systems and controls
The FCA considers that non-financial misconduct can only be effectively addressed if there is appropriate leadership and refers to the Senior Managers and Certification Regime (SM&CR) as an opportunity and catalyst to transform culture in financial services. The regime emphasises the importance of senior managers taking responsibility for what happens in their areas.
The FCA warns firms that a senior manager’s failure to take reasonable steps to address non-financial conduct could lead to a determination that they are not fit and proper. It expects firms and their boards to take this into account when considering the suitability and performance of potential senior managers and other senior leaders.
The regulator also comments that clarity of purpose is fundamental to culture, and that a firm that has a clear purpose is more likely to have clarity of direction and drive the right conduct. It expects firms to have, among other things, strong whistleblowing processes and appropriate incentive structures.
The Dear CEO letter follows “recent publicised incidents of non-financial misconduct in the wholesale general insurance sector”. In September 2019, a survey strongly suggested a widespread problem of sexual harassment at Lloyd’s of London, with 8% of its members witnessing such behaviour in the past year alone and more than one in five respondents stating that they had seen people in their organisation turn a blind eye to inappropriate behaviour. The survey was commissioned by Lloyd’s following an investigation by Bloomberg Businessweek which uncovered evidence of sexual harassment at the marketplace in March 2019.
The FCA’s interest in non-financial misconduct is not new. In June 2019, Nausicaa Delfas, FCA Executive Director of International, gave a speech emphasising that tolerance of non-financial misconduct, including serious personal misbehaviour and bullying as well as sexual discrimination and/or sexual misconduct, “would be a clear example of a driver of unhealthy culture”. A year before that, in her letter to Maria Miller, Chair of the Women and Equalities Committee, Megan Butler, FCA Director of Supervision – Investment, Wholesale and Specialist, confirmed that the FCA consider “sexual harassment as misconduct which falls within the scope of our regulatory framework”.
The Dear CEO letter follows on from the recent extension of the SM&CR to solo-regulated firms on 9 December 2019, which reminded all firms within scope that the FCA will take a holistic approach to determining fitness and propriety. The Dear CEO letter serves as a reminder that the FCA’s rules regarding fitness and propriety relate to an individual’s overall integrity and do not distinguish between financial misconduct and non-financial misconduct. It tells firms in no uncertain terms that the FCA will hold accountable not only the individuals involved in such misconduct but also senior managers who fail to ensure that their firm has a healthy working environment.
To avoid falling foul of the regulator, firms need to promote diverse environments in which everyone feels able to voice concerns. This should of course also help them retain the best talent and to make better business and risk decisions.
Looking ahead, non-financial misconduct is likely to remain a key focus for the FCA. The regulator expects CEOs to share the letter with senior staff and work with boards to identify and remedy where current arrangements fall short of the FCA’s expectations. The FCA recommends that firms visit its website for guidance and information on psychological safety, leadership and management capabilities and recognition and incentives, and attend its events series including its webinar on firms’ assessment of culture, its conference in March 2020 and its CultureSprint for the insurance sector in Q2 2020.