Non-financial misconduct: FCA talks the talk but expects firms to walk the walk

The FCA has stated clearly that "non-financial misconduct is misconduct", and followed this up with publicised enforcement action including a trio of final notices and a later decision notice (subject to an Upper Tribunal referral) banning individuals for serious non-financial misconduct offences.

And FCA Director of Enforcement Mark Steward has touted the way the SMCR uses individuals' self-interest to improve conduct generally by imposing personal liability by way of regulatory enforcement action.

But is that threat really borne out?  All may not be as it seems.

It's challenging for the FCA to take action in respect of specific instances of non-financial misconduct.  Such cases are highly fact-specific; can be fraught from an evidentiary perspective; and suffer from the current lack of a clear way to identify what non-financial misconduct does or does not affect an individual's fitness and propriety from a financial services perspective.

In reality, the FCA has very few open investigations into non-financial misconduct.  Here the numbers don't lie:

• At 23 December 2020 it had one active investigation in this space, having closed an investigation into an individual sometime in the month prior.  Both of these investigations were into financial advisers.
• In all of 2020 it opened no investigations in this space.
• In 2019 it opened five investigations, all into individuals and relating to sexual harassment, sexual discrimination or other forms of sexual misconduct.  It's unclear how many were senior managers.
• In 2018 it opened no investigations.
• This adds up to the following stark fact: throughout 2018-2020, only 1% of the investigations that the FCA opened into individuals related to non-financial misconduct.  And only 0.32% for firms.

Given the above, a senior manager would be forgiven for not taking overly seriously the threat of FCA enforcement action against that senior manager for non-financial misconduct (except of course in the most serious and cut-and-dried situations).

What's the takeaway, then?  Perhaps the clue is in Mark Steward's recently expressed view that the SMCR is "a cogent framework for injecting sharper focus on conduct risk into the fabric of an organisation. The rules here do not exist as externalities, they are under the skin of the firm."

What the FCA really wants here is for firms themselves to address non-financial misconduct occurring within their ranks.  This saves the FCA the effort of dealing with the most fraught individual cases, freeing them up to pick and choose enforcement actions to take against the occasional firm for systemic culture and governance failings, and using those actions as vehicles to deliver desired messages to the industry at large.

In other words: business as usual.