Feeling the pressure: the FCA is asking firms about non-financial misconduct and NDAs

The Treasury Committee this week in its “Sexism in the City” inquiry expressed concern that the industry is falling short on non-financial misconduct by not acting against known offenders.

As part of the inquiry, FCA Executive Director for Markets and International Sarah Pritchard confirmed in her evidence that the regulator has started a supervisory work program into how firms deal with NFM cases in response to evidence that firms are not acting against known offenders. 

What’s happening – and why now?

The FCA cited a “steady increase in the number of reports” to their whistleblowing line in recent months as part of the rationale for the increased supervision. 

It’s engaging with wholesale insurance intermediaries and broking, alongside banks and insurers at present, asking them to disclose the number of NFM cases, as well as how they are detecting and resolving such cases.

NFM: enforcement difficulties

Alongside Pritchard, FCA Chief Executive Nikhil Rathi also gave evidence to the inquiry.

He explained that while anonymity is understandable, it makes it difficult for the FCA to take NFM enforcement action. He also cited the Frensham case in the context of the FCA’s difficulties establishing a nexus between NFM and individuals’ financial services professional roles. 

Supervisory work alongside policy work

The supervisory work announced is not unexpected, and nor are Rathi’s comments around the difficulties the FCA face taking NFM enforcement action. Both the FCA and PRA are proposing rule changes to address these difficulties in their recent joint consultation on diversity and inclusion in the financial sector with final policy statements expected in 2024. 

Subsequent supervisory and indeed enforcement action will no doubt be informed by what the FCA uncovers in this supervisory work.

NDAs in the spotlight

The FCA is particularly interested in how NFM cases are being resolved within firms. Non-disclosure agreements (“NDAs”) are drawing special attention, with Pritchard specifically calling out their use in her evidence and Rathi stating that “there could be a case” for requesting specific data on NDAs. 

Pritchard noted that the FCA already prohibits the inclusion of terms in any agreement that prevent someone from making a protected disclosure, but also acknowledged that there are valid reasons to use an NDA to keep confidential the commercial terms of a settlement. 

How will this impact firms?

NFM is a particular focus for the FCA. We expect their activity in this space to continue. It may well be a precursor to an uptick in NFM enforcement activity. 

Drawing on the FCA’s evidence to the Committee, there are some things firms can focus on in the near term.

Data 

When engaging with the FCA on NFM firms should be ready to produce data that may not be easily obtainable, including case numbers, policies and procedures for detection of NFM and ultimately resolution methods. This data can be stored across a number of systems, including policy libraries, leaver data, case management systems, document management systems and email inboxes. Firms should not underestimate the time and resource required to collate this data and prepare a suitable response to the FCA.

Regulatory strategy

When responding to FCA engagement on NFM, firms should be strategic and factor in a number of aspects. These include individual privacy; employment law considerations; the need to engage with the regulator in an open and cooperative way; and the need to maintain constructive regulatory relationships. Often there is tension between these factors and firms face a real tightrope to cross, with mis-steps leading to significant legal or regulatory implications.

NDA use

Where firms have used NDAs in the context of non-financial misconduct investigations, they will need to be prepared to engage with the FCA on this topic and explain the business rationale for these agreements in a coherent and sensitive fashion and to demonstrate the commercial imperative for confidentiality.

Summing up

In light of the FCA’s intensified scrutiny and clarifications on handling NDAs and non-financial misconduct, firms must be prepared and act prudently. It is crucial for firms to demonstrate robust and transparent mechanisms for detecting, resolving, and reporting NFM where relevant, ensuring compliance while maintaining the delicate balance between confidentiality and treating employees fairly with the imperative of regulatory transparency. 

The FCA’s focus on ethical conduct in financial services clearly signals that to the FCA integrity is paramount and that the FCA will continue to seek to shape the industry’s standards through rigorous supervision and the looming potential of enforcement action.