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In today’s dynamic regulatory environment, the focus on non-financial misconduct (NFM) has significantly intensified. Traditionally, regulatory compliance emphasised financial violations such as fraud, insider trading, or financial misreporting. However, with evolving business ethics and societal expectations, NFM has gained prominence as an equally crucial aspect of regulatory scrutiny.
NFM can take many forms, including sexism in the workplace, harassment, bullying, and similar misconduct that can damage an organisation's integrity and reputation. As highlighted in the Financial Conduct Authority (FCA)'s Consultation Paper CP23/20, companies across the UK financial services sector are under increasing scrutiny to address these issues proactively. Ensuring senior management functions uphold ethical standards and employees meet the fit and proper test for compliance is crucial.
CP23/20 outlines measures to enhance governance and culture across organisations, particularly in financial services, with a strong focus on managing both financial and NFM. It emphasises senior management accountability, proper whistleblower protections, and fostering inclusive workplace cultures. This consultation paper is especially relevant today as organisations face increasing pressure to address ethical issues beyond financial conduct, underscoring the importance of proactive governance in preventing misconduct. For more information, review Aevitium LTD's article on CP23/20.
NFM can impact organisations across all industries, from financial services and healthcare to technology, manufacturing, and even the public sector. This growing regulatory focus reflects the rising importance of ethical behaviour, corporate culture, and social responsibility in maintaining organisational integrity and legal compliance.
This article delves into the increasing importance of non-financial misconduct in regulatory compliance, its implications for businesses, and how organisations can proactively address such issues to ensure compliance.
TABLE OF CONTENTS
What is Non-Financial Misconduct?
Non-financial misconduct refers to behaviours that, although not directly related to financial mismanagement, can harm an organisation’s reputation, lead to legal penalties, or damage employee morale. Common examples include:
Harassment or Discrimination: Any behaviour that undermines equality and fairness in the workplace, including gender, race, or age discrimination.
Bullying and Intimidation: Creating a hostile or threatening work environment that impacts employee wellbeing and productivity.
Unethical Workplace Practices: Breaches in company ethics, such as violating health and safety guidelines, exploitation, or retaliation against whistleblowers.
Dishonesty and Lack of Transparency: Deliberate efforts to hide misconduct, falsify information, or fail to uphold transparency in decision-making processes.
Why Regulators Are Focusing on Non-Financial Misconduct?
The Financial Conduct Authority (FCA) and other regulatory bodies have intensified their focus on NFM due to its widespread impact. Misconduct such as sexual harassment, bullying, and harassment not only harm individuals but also erode public trust in companies, especially in the financial services sector. Several factors explain this shift in regulatory focus:
Reputational Risk: Non-financial misconduct can tarnish a company's reputation faster than financial violations. Scandals related to harassment or ethical breaches can lead to public outcry, decreased customer trust, and loss of business.
Culture and Governance: Regulatory bodies now understand that a culture of NFM often coexists with broader governance failures. Weak oversight in areas like harassment or workplace ethics can point to larger issues in corporate governance and internal controls.
Workplace Well-Being and ESG (Environmental, Social, and Governance) Criteria: Companies are increasingly evaluated based on their performance in non-financial metrics, especially social criteria like employee treatment and diversity, critical to mitigate people risk. NFM undermines ESG goals, which are critical in securing investments, particularly from socially responsible investors.
Legal Consequences: Although non-financial in nature, many types of misconduct, such as discrimination or unsafe working conditions, can lead to legal actions. Regulators impose fines, sanctions, or even disqualification of senior executives if such misconduct is proven, especially under frameworks like the Senior Managers and Certification Regime (SMCR) in the UK.
Is Your Organisation Prepared to Address Non-Financial Misconduct?
At Aevitium LTD, we help businesses navigate the complexities of non-financial misconduct management. From implementing robust whistleblower programmes and ethical governance frameworks to aligning with FCA’s CP23/20 regulations, our experts will guide your organisation through every step of the process.
The FCA Culture and Non-Financial Misconduct Survey
Here are the key findings from the FCA survey:
Incident Trends: Reported non-financial misconduct incidents have risen from 2021 to 2023. Bullying/harassment (26%) and discrimination (23%) were the most frequently reported, with significant reports in the “other” category, which included behaviors like intoxication and policy breaches.
Detection Methods: Firms primarily detected incidents via formal grievance procedures and whistleblowing. Some sectors, notably wholesale banks, also used surveillance tools. Detection varied by firm size, with smaller firms reporting fewer incidents.
Actions Taken: Only 43% of incidents led to disciplinary or “other” actions, with violence and intimidation cases more often resulting in disciplinary action than discrimination cases. Settlement agreements and confidentiality agreements fell over the period, especially in wholesale banks. Remuneration adjustments for misconduct were rare, typically impacting unvested variable pay.
Sector Differences: Sectoral and firm-size differences were evident, with wholesale banks having higher incident rates and disciplinary action frequency varying across sectors. Wholesale banks had the highest non-upheld incidents, with only 55% of incidents resulting in disciplinary measures.
Policy Gaps: Not all firms had comprehensive policies in place, such as whistleblowing and disciplinary policies. Governance gaps were noted, as 33% of firms lacked formal structures for handling misconduct outcomes, and many boards lacked management information on non-financial misconduct.
Regulatory References and Remuneration: Many firms included non-financial misconduct in regulatory references, and the use of confidentiality agreements, particularly for discrimination cases, declined across the surveyed years. Remuneration adjustments mainly targeted unvested variable pay.
Expectations and Next Steps: The FCA urges firms to benchmark against peers, enhance their culture, and maintain whistleblowing policies. The FCA will use survey insights in supervisory work, focusing on outliers, while industry improvements are encouraged through trade associations.
Industry-Specific Applications of Non-Financial Misconduct
NFM affects organisations in every industry, with varying degrees of scrutiny and regulatory emphasis. Companies, particularly in the financial services sector, must actively manage both financial and non-financial misconduct to protect their integrity and reputation. The FCA has made it clear that misconduct, whether financial or non-financial, can impact an individual’s standing under the fit and proper test, affecting their ability to perform regulated activities.
Below are key industries where NFM poses significant compliance risks:
Financial Services (Banking, Insurance, Asset Management)
Financial institutions are held to stringent regulatory standards for both financial and non-financial conduct. Misconduct such as workplace harassment, ethical breaches, and governance failures can result in individual and organisational sanctions under frameworks like the Senior Managers and Certification Regime (SMCR).
Healthcare and Pharmaceuticals
Ethical breaches in patient care, clinical trials, or workplace environments can lead to severe legal consequences and reputational damage in the healthcare sector. Regulatory bodies enforce stringent standards to maintain integrity and public trust.
Technology and Telecommunications
In this rapidly evolving sector, ethical misconduct, particularly around data privacy, diversity, and employee treatment, can trigger significant regulatory penalties. Misuse of data, bias in algorithms, and employee discrimination are major areas of concern.
Regulatory Frameworks Addressing Non-Financial Misconduct
Under frameworks such as UK SMCR and CP23/20, senior managers and employees in regulated roles must meet the fit and proper test to ensure they maintain high ethical standards. These frameworks place a strong focus on both financial misconduct and non-financial misconduct, holding those in senior management functions accountable for promoting a safe, inclusive workplace that adheres to conduct rules.
Several regulatory frameworks worldwide now incorporate provisions that specifically target NFM:
Senior Managers and Certification Regime (SMCR) – UK: This regulatory framework holds senior management accountable for both financial and NFM in their organisations. Misconduct such as failure to prevent harassment or poor workplace culture can lead to individual sanctions.
CP23/20 – UK: While SMCR provides the structural framework for senior management accountability, CP23/20 represents a critical shift in regulatory focus by placing equal importance on managing both financial and non-financial misconduct. It also emphasises the need for senior managers to actively promote ethical workplace cultures, implement strong governance practices, and ensure comprehensive whistleblower protections.
Dodd-Frank Act – USA: While traditionally focused on financial reforms, Dodd-Frank has provisions related to whistleblower protection that also cover NFM, encouraging employees to report unethical behaviours without fear of retaliation.
European Union Whistleblower Protection Directive: Protects employees across the EU who report NFM, such as ethical breaches or unlawful activities, ensuring they do not face retaliation.
Modern Slavery Act – UK: Requires companies to ensure that slavery and human trafficking do not exist in their supply chains, pushing businesses to audit their operations and prevent such ethical violations.
Implications for Companies
The increasing focus on non-financial misconduct in regulatory compliance has several implications for companies:
Increased Scrutiny of Corporate Culture
Regulators now closely evaluate whether companies promote an ethical culture that prioritises integrity, diversity, and fairness. A toxic work culture where non-financial misconduct is prevalent can lead to regulatory sanctions and a loss of public trust.
Reputation Management
Companies must be proactive in managing their reputations by ensuring that issues like harassment or discrimination are dealt with promptly and effectively. Failure to do so may result in reputational damage that extends beyond the regulatory environment, affecting customer loyalty and investor confidence.
Legal Accountability of Senior Managers
Under frameworks like the SMCR, senior executives can be held personally accountable for non-financial misconduct. This means they must ensure that the right governance structures, training, and reporting mechanisms are in place to prevent and address misconduct.
The Role of Leadership in Setting Ethical Standards
Leadership plays a pivotal role in shaping a company’s ethical culture and ensuring compliance with non-financial misconduct regulations. Strong leadership not only sets the tone for the entire organisation but also helps establish systems and frameworks that prevent misconduct across industries. By integrating best practices that transcend specific sectors, organisations can foster a culture that prioritises ethical behaviour, accountability, and open communication.
Setting the Tone from the Top
Senior management must lead by example, modelling the ethical behaviours expected of all employees. A strong ethical culture begins with leadership demonstrating a commitment to integrity, transparency, and inclusivity. Companies with successful ethical governance, such as Patagonia and Ben & Jerry’s, have built reputations for social responsibility by aligning their corporate actions with strong ethical leadership. These companies show that when leaders set clear ethical standards, employees are more likely to follow, creating a work environment that naturally deters NFM.
Strong Leadership Examples in Ethical Governance
Companies like Patagonia and Ben & Jerry’s have successfully aligned their corporate actions with social responsibility and regulatory compliance, driven largely by strong leadership. Patagonia’s commitment to environmental sustainability is reflected in its governance structure and workplace culture, where employees are encouraged to speak up about ethical concerns. Similarly, Ben & Jerry’s has long championed social justice issues, with senior leaders embedding these values into both their corporate policies and their daily operations. These companies serve as prime examples of how leadership can proactively manage non-financial misconduct by integrating ethics and governance into the very fabric of the business.
Empowering Ethical Decision-Making
Leaders must also empower their employees to make ethical decisions. This involves providing adequate training, resources, and reporting mechanisms for employees to raise concerns about NFM without fear of retaliation. When employees see their leaders take action on reported misconduct and uphold ethical standards, they are more likely to follow suit, fostering a culture of accountability and integrity.
Cross-Industry Best Practices for Preventing Non-Financial Misconduct
While leadership is critical in shaping a company’s ethical culture, effective prevention of non-financial misconduct requires the adoption of industry-wide best practices. Regardless of the specific challenges faced by each sector, these principles provide a framework for fostering compliance and ethical behaviour across the organisation.
Effective prevention of non-financial misconduct requires not only leadership but also fostering an inclusive culture. Building robust diversity and inclusion programmes and addressing issues like bullying and sexual harassment helps organisations maintain their ethical standards. Regular training should cover harassment, sexism, and similar misconduct to ensure employees understand what is expected of them.
These strategies are applicable regardless of the specific challenges a sector may face, making them universal principles that contribute to healthier, more compliant workplaces:
Regular Training and Awareness Programmes
Consistent training across all organisational levels is critical for preventing non-financial misconduct. Training on topics like diversity, harassment prevention, and ethical decision-making should be mandatory for all employees. Industry-specific concerns, such as workplace safety in healthcare or financial transparency in banking, should be addressed through tailored training programmes.
CP23/20 specifically highlights the need for continuous staff education, ensuring that all employees understand their responsibilities concerning diversity, harassment, and other non-financial misconduct topics.
Fostering a Culture of Open Communication
Open communication is a cornerstone of ethical workplaces. Employees should feel empowered to raise concerns without fear of retaliation. This culture of transparency can be supported by anonymous reporting mechanisms, which are valuable across industries like manufacturing, finance, and technology, where power dynamics may discourage whistleblowing.
Establishing Effective Whistleblower Programmes
Whistleblower programmes provide a secure and confidential way for employees to report misconduct. Organisations should ensure that these programmes are easily accessible and well-publicised, with clear policies for protecting whistleblowers from retaliation. The importance of whistleblower programmes spans sectors, from financial services to healthcare, where ethical violations can have significant consequences.
In alignment with CP23/20, firms must implement whistleblower systems that ensure anonymity and protection from retaliation, fostering a culture where misconduct is reported without fear.
Conducting Regular Ethical Audits
Routine audits of ethical practices, company policies, and workplace culture help organisations identify potential risks early. Regular reviews ensure that companies remain compliant with evolving regulatory standards and prevent minor issues from escalating into larger compliance failures. This is particularly critical in sectors like finance, healthcare, and technology, where regulatory oversight is intense.
Implementing Clear Accountability Structures
Leaders must take responsibility for ethical governance at every level. Clearly defined roles and accountability structures prevent NFM from going unaddressed. In highly regulated industries like banking or pharmaceuticals, assigning dedicated ethics officers or forming oversight committees ensures that ethical standards are maintained.
A Checklist for Preventing Non-Financial Misconduct
The importance of managing non-financial misconduct is reinforced by key regulatory frameworks like the FCA’s CP23/20, which outlines enhanced standards for corporate governance, ethical leadership, and accountability. CP23/20 particularly stresses the role of senior managers in embedding a culture of integrity and transparency, establishing clear reporting channels, and conducting regular audits to prevent both financial and non-financial misconduct.
The checklist below maps out the checklist items and best practices from this article, aligning them with actionable strategies for preventing NFM and the regulatory principles outlined in FCA's CP23/20.
Checklist Item / Best Practices | Article Key Points | CP23/20 Principles |
Leadership and Accountability | - The role of leadership in setting ethical standards. | - Senior management accountability under SMCR. |
- Leaders must take a proactive role in preventing misconduct. | - Senior managers responsible for embedding ethical culture. | |
Training and Awareness | - Regular training programmes on diversity, harassment, and ethics. | - Firms must ensure ongoing education on diversity and conduct. |
- Training helps employees understand acceptable behaviour. | - CP23/20 emphasises continuous training for staff at all levels. | |
Whistleblower Protection | - Establishing clear and confidential reporting channels. | - Firms must implement confidential reporting systems. |
- Protecting whistleblowers from retaliation. | - Whistleblowers must be protected from retaliation. | |
Open Communication and Culture | - Fostering a culture of openness and transparency. | - Firms must promote psychological safety and inclusion. |
- Encouraging employees to raise concerns without fear. | - Ensuring open communication across all levels of the firm. | |
Monitoring and Audits | - Conduct regular audits and reviews of workplace culture. | - Firms should perform regular audits and assessments of their conduct frameworks. |
- Ethical audits help identify potential risks before escalation. | - Conduct risk frameworks should be monitored and measured. | |
Developing a Strong Ethical Culture | - Embedding respect, inclusion, and integrity in the workplace. | - Leadership accountability for embedding a culture of integrity and fairness. |
Clear Reporting Channels | - Confidential, accessible mechanisms for employees to report misconduct. | - CP23/20 emphasises confidential reporting systems and protection for whistleblowers. |
Regular Audits and Reviews | - Periodically assess workplace culture and update policies. | - Ongoing monitoring and assessment of conduct and culture. |
Senior Management Accountability | - Proactive management involvement in misconduct prevention. | - Senior managers responsible under SMCR for overseeing ethical standards. |
Conclusion
Addressing non-financial misconduct isn’t just about meeting regulatory expectations but about fostering a culture that promotes diversity and inclusion. With frameworks like CP23/20 and the FCA’s ongoing focus on fitness and propriety, companies must be prepared to manage misconduct both in the workplace and in an employee’s private life to maintain compliance and a strong reputation.
NFM has emerged as a critical issue that can influence a company’s legal standing, reputation, and even its financial health. Companies must recognise that ethical breaches, harassment, discrimination, and other forms of NFM are serious regulatory risks that require robust governance and proactive management.
With the introduction of frameworks like CP23/20, regulatory bodies are making it clear that NFM must be addressed with the same rigor as financial violations. By implementing the right frameworks and fostering an ethical workplace culture, businesses cannot only meet regulatory expectations but also safeguard their long-term success.
By implementing the right frameworks and fostering an ethical workplace culture, businesses can not only meet regulatory expectations but also safeguard their long-term success. Addressing NFM is not just about avoiding penalties; it’s about building a sustainable, responsible organisation that thrives in a modern regulatory landscape.
Frequently Asked Questions (FAQ)
1. What is non-financial misconduct?
Non-financial misconduct refers to behaviours or actions that violate an organisation's ethical, legal, or moral standards but are not directly related to financial wrongdoing. Examples include harassment, discrimination, bullying, unethical workplace practices, and breaches of transparency. These actions can damage a company's reputation, affect employee morale, and lead to legal or regulatory penalties.
2. Why is non-financial misconduct becoming a focus in regulatory compliance?
NFM has gained regulatory attention because it directly impacts corporate culture, governance, and reputation. Scandals related to harassment or unethical workplace practices can severely damage trust and business relationships. Regulatory bodies, including the FCA, now recognize that a strong ethical culture is vital for long-term business integrity and compliance.
3. What is FCA's CP23/20, and why is it important?
The FCA’s Consultation Paper CP23/20 outlines enhanced measures for improving governance and culture in organisations, with a particular focus on addressing both financial and NFM. CP23/20 emphasises senior management accountability, whistleblower protections, and the importance of fostering ethical workplace cultures. This paper is important as it reflects a growing regulatory expectation that companies manage NFM with the same rigour as financial violations.
4. How does CP23/20 relate to SMCR (Senior Managers and Certification Regime)?
While SMCR provides the framework for holding senior managers accountable for both financial and NFM, CP23/20 expands on these principles by emphasising the proactive role that senior management must take in promoting ethical culture. CP23/20 places particular emphasis on creating inclusive, transparent, and ethically governed workplaces, ensuring that NFM is effectively managed and prevented.
5. What are the main consequences for companies that fail to address non-financial misconduct?
Companies that fail to prevent or address NFM may face significant consequences, including:
Reputational damage: Public scandals can severely impact customer trust and investor confidence.
Regulatory penalties: Firms can face fines, sanctions, or even disqualification of senior executives.
Legal liabilities: Legal actions related to harassment, discrimination, or unsafe working conditions can lead to financial and reputational losses.
Cultural deterioration: Failure to address misconduct can foster a toxic workplace culture, leading to low employee morale and high turnover.
6. How can leadership help prevent non-financial misconduct?
Leadership plays a critical role in preventing NFM by setting a strong ethical tone from the top. Senior management should model the ethical behaviours expected throughout the organisation, foster transparency, and ensure that employees feel safe reporting concerns without fear of retaliation. Leaders are also responsible for implementing training programs, establishing whistleblower protections, and conducting regular audits of workplace practices.
7. What are some best practices for preventing non-financial misconduct across industries?
Several cross-industry best practices can help prevent NFM, including:
Regular training programs: Mandatory training on diversity, harassment prevention, and ethical decision-making.
Open communication: Encouraging a transparent culture where employees can raise concerns freely.
Whistleblower programs: Providing confidential, secure reporting channels for employees to report misconduct.
Regular audits: Conducting routine ethical audits to identify risks and ensure compliance.
Clear accountability structures: Ensuring senior management is held accountable for preventing misconduct and maintaining an ethical culture.
8. How does non-financial misconduct impact ESG (Environmental, Social, and Governance) criteria?
NFM directly undermines a company’s performance in ESG criteria, especially in the social and governance components. Poor workplace practices, harassment, or discrimination can negatively impact how a company is perceived in terms of ethical governance and treatment of employees. As more investors focus on ESG performance, NFM can also reduce access to capital from socially responsible investors.
9. How can companies ensure their whistleblower programs are effective?
For whistleblower programmes to be effective, companies should ensure:
Confidentiality: Employees should be able to report misconduct anonymously and without fear of retaliation.
Accessibility: Reporting mechanisms must be easy to use and available to all employees.
Promotion: Employees should be regularly informed about the whistleblower program and its protections.
Follow-up: Reports of misconduct should be thoroughly investigated, and appropriate actions should be taken when necessary.
10. How often should companies audit their workplace culture and practices?
Organisations should conduct regular ethical audits to assess their workplace culture, governance frameworks, and compliance with ethical standards. The frequency of audits can vary depending on the organisation’s size and risk exposure, but annual reviews or bi-annual assessments are common. These audits help companies identify potential risks and ensure that their policies and practices align with evolving regulatory standards, such as those outlined in CP23/20.
11. What industries are most impacted by non-financial misconduct regulations?
All industries are subject to scrutiny regarding NFM, but certain sectors face particularly stringent oversight:
Financial services: With frameworks like SMCR and CP23/20, the financial sector faces significant regulatory expectations regarding governance and culture.
Healthcare: Ethical concerns related to patient care, clinical trials, and workplace conduct are heavily regulated.
Technology: Issues like data privacy, diversity, and workplace practices receive increasing regulatory attention.
Manufacturing and supply chain: NFM, particularly in relation to labor practices and workplace safety, is a major focus.
12. How can CP23/20 help companies improve their governance frameworks?
CP23/20 provides a clear regulatory roadmap for improving governance frameworks, particularly around NFM. By following the principles outlined in CP23/20, companies can:
Strengthen senior management accountability.
Implement effective whistleblower protections.
Foster an ethical, inclusive culture that aligns with ESG goals.
Conduct regular audits and ensure ongoing education for all employees. Adhering to these principles not only improves governance but also helps firms mitigate regulatory risks and enhance their reputations.