Out-Law News | 09 Jan 2020 | 5:00 pm | 3 min. read
Jonathan Davidson, the FCA's executive director of supervision, retail and authorisations, has written directly to the chief executives of wholesale general insurance firms in response to "recent, publicised incidents of non-financial misconduct". The letter (3-page / 435KB PDF) emphasises the role that firm leadership should play in addressing misconduct, and warns that senior managers could fail the regulator's 'fit and proper' assessment if they fail to tackle known issues.
"How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation and bullying, is indicative of a firm's culture," Davidson said in the letter. "We view both lack of diversity and inclusion, and non-financial misconduct, as obstacles to creating an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken."
"We expect firms, and senior managers, to embed healthy cultures by identifying and modifying the key drivers of their culture," he said.
The FCA's emphasis on conduct, culture and purpose as well as its push on diversity show clearly that it is looking to stamp out [non-financial misconduct].
A number of allegations of sexual harassment and discrimination centred on the Lloyd's of London insurance market emerged in press reports last year. In December, the Prudential Regulation Authority (PRA) imposed new requirements on Lloyd's (8-page / 621 KB PDF) to report annually on its whistleblowing arrangements and training.
The 'fit and proper' test forms part of the Senior Managers and Certification Regime (SMCR), which came into force for insurers on 10 December 2018 along with new conduct rules. The SMCR was extended to insurance brokers, intermediaries and other FCA solo-regulated firms on 9 December 2019.
Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said that the letter "could not send a clearer message" that the FCA was committed to tackling sexual harassment and inappropriate behaviour.
"Although there seems to be a distinction between 'financial misconduct' and 'non-financial misconduct', the FCA's rules don't make this distinction - a person is 'fit and proper' or they are not," she said.
"Fitness and propriety looks at a number of areas but at its heart is integrity. This is a wider concept than honesty. Until recently, across the board in the financial services industry, too many blind eyes were being turned to inappropriate behaviour: it was 'just banter'. The FCA's emphasis on conduct, culture and purpose as well as its push on diversity show clearly that it is looking to stamp out such behaviour," she said.
"There have been previous statements from the FCA on non-financial misconduct. This 'dear CEO' letter could not send a clearer message that the FCA considers such misconduct to be completely unacceptable and that not only will it look at the individuals concerned but it will look at senior management for failing to ensure that their firm has a good environment. The letter indicates the type of action that the FCA expects senior managers to be taking and there will be no excuse if senior managers fail to follow through," she said.
In his letter, Davidson said that the extension of the SMCR "provides and opportunity and catalyst" for firms to transform their culture".
"The regime emphasises the importance of senior managers taking responsibility for what happens in their areas," he said.
Firms should focus their efforts on identifying and addressing four "key drivers of culture": leadership; the firm's purpose; its approach to rewarding and managing people; and its governance, systems and controls, he said.
Senior managers should be under no illusion that any finding by the FCA that they have failed to take reasonable steps to address non-financial misconduct could lead to a determination that they are not fit and proper to perform their roles.
Financial services employment law expert Ben Brown of Pinsent Masons said that although the letter was addressed to insurers, its contents "are equally relevant to all firms and individuals regulated by the FCA and subject to the SMCR".
"The letter sets out the FCA's unambiguous expectations in respect of the development and maintenance of healthy cultures in regulated firms," he said. "This includes an expectation that firms will actively work to improve equality, diversity and inclusion in their businesses."
"Senior managers should be under no illusion that any finding by the FCA that they have failed to take reasonable steps to address non-financial misconduct could lead to a determination that they are not fit and proper to perform their roles. Such a determination by the regulator would obviously have serious consequences for the individual senior manager and require immediate action by their employers. However, this should be a rare case because boards are being encouraged to properly consider non-financial issues, including culture and diversity, when assessing the suitability of prospective senior managers and the performance of existing senior managers," he said.
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