Sexism in the City Inquiry: A spotlight on non-financial misconduct and the role of the regulators

Originally published by Global Relay Intelligence & Practice (GRIP)

Frustration has been the omnipresent theme of the Treasury Select Committee's "Sexism in the City" inquiry, with evidence sessions spotlighting the slow progress to address sexual harassment and misogyny faced by women across the financial services industry against the backdrop of recent high-profile cases. According to the Chair of the Committee, Harriett Baldwin MP: "…talking to women, nothing seems to have changed very much in reality for the last 20 years. It [the financial services industry] is lagging behind".

Sarah Pritchard, Executive Director of Markets and International of the Financial Conduct Authority (FCA), reiterated as part of the inquiry that "non-financial misconduct is misconduct" and therefore lies squarely within its remit. This is a sentiment which the FCA has consistently repeated, confirming in a 2018 letter to the Women and Equalities Committee that sexual harassment in the workplace falls within its regulatory scope through: 

• its supervision of firms' culture; 
• individual accountability of senior managers and assessment of fitness and propriety under the Senior Managers and Certification Regime; and
• expectations for firms to have appropriate internal whistleblowing and complaints processes. 

The question being asked in the inquiry is therefore: what more needs to be done?

This article explores the regulators' remit to tackle non-financial misconduct, including sexual harassment and discrimination, and the tools and actions financial services firms should be considering in light of increased public, regulatory and Government scrutiny.

The role of the regulators in tackling non-financial misconduct

How does non-financial misconduct fall within the regulator's remit?

The FCA has confirmed that as part of its statutory objectives (including consumer protection, market integrity, and the promotion of competition), it is focused on improving the culture of the firms it regulates, stating in its 3 July 2023 submission to the Treasury Select Committee that: 

"A corporate culture that tolerates sexual harassment or other non-financial misconduct is unlikely to be one in which people feel able to speak up and challenge decisions, or one in which they will have faith that concerns will be independently and fairly assessed. Such a culture also raises questions about a firm’s decision making and risk management."

In September 2023, the FCA and Prudential Regulation Authority (PRA) each published consultations setting out wide-ranging proposals on diversity and inclusion initiatives, including:

• proposed amendments (including to the Conduct Rules, staff fitness and propriety assessments, and the Threshold Conditions) to clarify how their rules apply in relation to non-financial misconduct; and
• requirements for firms to establish and maintain a D&I strategy that falls within their risk and governance frameworks and set diversity targets, including in relation to gender.

The FCA is also rolling out information requests to gather data regarding incidents of non-financial misconduct recorded at firms, including their detection and outcomes. We expect this data to inform the FCA's finalisation of its rules, supervisory work and subsequent enforcement action, which will in turn provide an indication of the processes the FCA expects firms to have in place.

For more details on the proposed changes (included uncertainties in the present wording of the draft rules) and the information requests, please see our previous briefings here and here. 

What are the limits to the regulators' remit?

The FCA is clear that there are limitations to its (and by extension the PRA's) role, stating that it is "not an alternative to criminal prosecution, a firm's internal disciplinary processes, or for proceedings through the Employment Tribunal". Indeed, regulatory intervention has thus far generally focused on scenarios where regulated individuals (whether senior managers or certified staff) have been prohibited as a result of convictions for sexual or violent offences in their private lives, on the basis that they were not fit and proper to carry out their roles. 

However, as reflected in the 2021 Frensham case  before the Upper Tribunal, a criminal offence alone will not mean that the individual lacks the requisite fitness and propriety to carry out their role. The regulator must in each case demonstrate that the conviction is sufficiently relevant to the financial services role that the individual is performing. 

In evidence submitted to the Treasury Select Committee, the FCA has indicated that it considers convictions of violence, sexual offences, or offences related to a person/group's demographic characteristics, to be particularly relevant to an assessment of fitness and propriety. However, the FCA has not officially proposed that the Government legislate for a prescribed list of offences that would automatically prohibit an individual convicted of such offences from the regulated sector (including financial services), stating that such a uniform approach may not be appropriate in all cases.²

Future grounds of enforcement

While we expect the FCA to continue to rely on the rules around the fitness and propriety of regulated individuals to take action, comments made by the regulators in the inquiry together with the consultation proposals indicate further avenues under which the FCA may in future act (including public censure or financial penalties) to address non-financial misconduct, namely:

• where such conduct is deemed a "serious breach" of COCON; 
• where there are failings in a firm's systems and controls regarding the way it has received, investigated and/or assessed allegation(s) of non-financial misconduct (i.e. the rules around conducting the firm's business with skill, care and diligence); and/or
• where there is a failure of governance, such that the senior leadership of the firm has failed to ensure a healthy culture. 

Key considerations for firms

The evidence sessions of the inquiry and the regulators' recent proposals and communications together emphasise that tackling sexual harassment and discrimination in financial services firms is a deep-rooted issue that cannot be resolved by taking a tick-box approach. 

Firms must be willing to continuously examine their cultures, and the systems and controls they have in place to detect, investigate and address such incidents. 

In this regard, we set out below some key considerations for firms. 

1. A healthy culture

"Part of the problem here is that a lot of our focus has been on diversity and counting the number of women in an organisation, rather than on inclusion. We need to start focusing on inclusion, because we need to change the culture." – Mark Freed (CEO of E2W and Men for Inclusion) in oral evidence sessions before Treasury Select Committee as part of the Sexism in the City Inquiry

• Does the firm have a defined purpose and values that are clearly set out and disseminated throughout its people policies and procedures? 
• Does the firm regularly monitor and assess how its culture is embedded at all levels?
• Is it clear from the firm's culture (and related people policies and procedures) that there is a zero-tolerance policy towards exclusionary behaviour, such as sexual harassment and discrimination? Does the firm's culture allow for "psychological safety", defined by the FCA- as an environment where employees feel safe to share ideas and speak up where they see issues?
• Is there regular and (where necessary) ad hoc training on the firm's culture, including its approach to exclusionary behaviour and other concepts such as unconscious bias and active bystander behaviour?

2. Detection, investigation and escalation processes

"The really striking thing from all 20 of the testimonies that have come forward is the fear factor. It has really taken my breath away, if I am honest, because there is such nervousness, if these women come forward, about their confidence being broken. There is also testimony that each time the women have escalated, it has made their working lives worse." – Baroness Helena Morrissey (Chair at Diversity Project) in oral evidence sessions before the Treasury Select Committee as part of the Sexism in the City Inquiry

• Does the firm have defined investigation and escalation (i.e. whistleblowing) procedures? Such procedures should include controls to ensure the confidentiality of the whistleblower and that there are no adverse effects to them making a report. The procedures should also make clear that it is not the responsibility of the victim alone to make a report – rather, there needs to be a "psychologically safe" environment in which others feel able to make such reports when necessary. 
• Is there sufficient awareness of the firm's investigation and escalation processes? This includes making clear that a whistleblower can make a report to the FCA if they are unhappy with the way in which their report was handled or assessed. In its evidence session, the FCA confirmed that it has received a steady increase in reports of non-financial misconduct through its whistleblowing processes – on receipt of such reports, it either works with the whistleblower to see whether they are prepared to report the incident to criminal law enforcement authorities or examines the investigation and escalation processes of the firm to determine whether there has been a failing. 
• Is the firm satisfied that it is using all available tools to monitor the conduct of its staff for the detection of exclusionary behaviour? For example, firms may wish to consider communication surveillance tools which allow for compliance teams to set lexicon-based searches to flag inappropriate terminology (e.g. derogatory comments and racial slurs) which can be indicative of high-risk behaviour within digital communications. 

3. Oversight and governance

"A culture of senior management making bold interventions to remove unacceptable behaviour is the way forward." – Nishma Gosrani OBE (Partner at Bain & Company) in oral evidence sessions before Treasury Select Committee as part of the Sexism in the City Inquiry

• Does the firm's leadership facilitate a healthy culture? Are leadership bodies made up of an appropriate mix of experience, skills and diversity that will guard against the risk of group-think? 
• Does the board (or equivalent) receive adequate and regular management information regarding the firm's culture and occurrences of non-financial misconduct?

As the Sexism in the City inquiry has identified, moving the dial on sexual harassment and discrimination in financial services is a necessary challenge that will take the combined effort of multiple parties – the Government, regulators, trade bodies and, of course, financial services firms themselves.

^{1 Jon Frensham v The Financial Conduct Authority [2021] UKUT 0222 (TCC)
2 https://committees.parliament.uk/publications/43519/documents/216294/default/}