'FCA is cracking down on non-financial misconduct'

Communications surveillance may be the perfect tool to assist financial advice firms to meet potential new standards.

The financial services industry is experiencing its #MeToo moment; 2023 saw several high-profile cases of non-financial misconduct, including Crispin Odey of Odey Asset Management and Bernard Looney of BP.

Additionally there was the launch of a parliamentary inquiry into sexism and misogyny in the City, which has since been referred to as the ‘Sexism in the City’ inquiry.

High on the regulatory agenda for 2024 is the FCA’s goal to ensure much better visibility of non-financial misconduct in the workplace, effectively walking into the proverbial locker room of financial services firms.

Last month a letter went out to all regulated London insurance companies to understand their frameworks for identification and reporting of non-financial misconduct issues – these are defined as sexual harassment, bullying, and prejudice. 

At a recent Global Relay event, the FCA’s Jamie Bell, head of secondary market oversight, confirmed that the letters to insurance firms are just the start, and in fact 1,000 firms across a range of financial services verticals will receive information requests. 

Further, Bell also suggested that improper conduct can act as an indicator of other regulatory issues, including market abuse.

So, while the current request for information is not an additional FCA principle (which firms have to uphold), there is a strong suggestion that monitoring for conduct risk will become a pseudo-regulatory requirement. 

Anticipating the problem

So, how can compliance teams get ahead of the obligations and meet new requirements when (or if) they surface?

One of the key options is through communications surveillance.

Firms with trading operations will have some supervision of communications to uncover and report market abuse issues (as a regulatory requirement), but not many will have a specific conduct risk-focused review of communications in place, and it is unlikely financial advisers will have anything in place to date. 

Internal monitoring can act like a litmus test, uncovering non-financial conduct issues. Examples of problematic behaviour, such as sexual harassment, bullying, and prejudice, often stem from individuals displaying poor conduct.

More often than not, this misconduct bleeds beyond the walls of the boardroom, behind closed doors, and spills into digital communications like instant messages, emails, or phone calls.

This isn’t a one-size-fits-all approach. Implementing communication surveillance systems throws up challenges.

By leveraging communication surveillance tools, and with the support of compliance teams, firms can monitor what colleagues are saying to each other in business-related messages. Technological advancements now allow email, Microsoft Teams, WhatsApp, and iMessage to be monitored too. 

To proactively identify potential risks, compliance teams can set up reviews and models, which identify and flag words and phrases reflecting inappropriate or high-risk behaviour.

These lists may include racial slurs, swear words, and derogatory comments, and assign a risk level based on the severity of the term.

When inappropriate communication takes place, compliance teams can be notified and investigate the messages in question. In this sense, the compliance team plays a crucial role in maintaining the ethical, legal, and cultural standards of its firm. 

Triggers can be set up for communication habits too, for example an employee can be flagged for excessive use of a work phone for personal chats.

Equally, policies for repetition of flagged words can be used; swearing is often considered indicative of potential bad conduct, for example, so while certain swear words may be allocated a low-risk score, consistent use of some expletive words may result in a higher score. 

Flagged ‘conduct alerts’ can also offer a measurable and trackable metric, which can be fed into reports on how company culture is trending over time – another interest of the FCA, related to non-financial misconduct.

The objective is to address concerning behaviour before it is allowed to escalate, while tangibly demonstrating that culture is being tracked and is improving.

While it is not a silver bullet, communication monitoring can go a long way to identify and root out bad behaviour.

However, this isn’t a one-size-fits-all approach. Implementing communication surveillance systems throws up challenges, particularly when considering regional differences in language and workplace norms, which can have a heavy impact on communication styles.

For instance, the UK tends to be more tolerant of profanity in the workplace compared to the US and the Asia-Pacific region, where such language may be considered less tolerable.

Therefore, compliance teams should tailor their models and risk appetite for searches and compliance policies to consider regional variations. This ensures that the surveillance system remains effective and avoids creating unnecessary tension or misinterpretations.

In cases where an employee engages in bullying, sexual harassment, or other forms of misconduct through digital communication, organisations must take stringent action – and it is likely the FCA will have high expectations that firms disclose historical cases of non-financial misconduct and the corresponding consequences and outcomes. 

While it is not a silver bullet, communication monitoring can go a long way to identify and root out bad behaviour at first instance, before it escalates.

While we are still a far way off the eradication of non-financial misconduct in the financial advice industry, firms and their compliance teams have the tools to start mitigating risk and improving culture in earnest.

Rob Mason is director of regulatory intelligence at Global Relay