Skip to content

Update on non-financial misconduct for the insurance industry

Briefing
31 January 2025
8 MIN READ
2 AUTHORS

In October 2023, the FCA and PRA published a joint consultation  on Diversity and Inclusion in the Financial Sector, which ran until December 2023.  Although a year has now passed, we have not yet seen the outcome of this consultation.  In this second article1 since the consultation we discuss recent developments.

Consultation Recap

In the October 2023 Consultation, the regulators included proposals on data, targets and publication in relation to D&I.  Secondly, the Consultation put forward amendments in relation to non-financial misconduct.  These included:

  • making clear that firms must take into account certain non-financial misconduct in considering whether individuals performing a Senior Management Function (SMF) are “fit and proper” to carry out the role;
  • expanding the scope of the Code of Conduct Sourcebook (COCON) to make clear that certain conduct towards fellow employees will be a breach of the rules; and
  • adding guidance to the Handbook on how non-financial misconduct in relation to other members of the firm’s workforce or in relation to someone outside the work context should be incorporated into regulatory references.

Sexism in the City Inquiry

Since then we have seen various developments, including the report of the Sexism in the City Inquiry which included a suggestion that the FCA should prioritise taking forward the non-financial misconduct proposals.  The Inquiry said it was concerned that the D&I proposals would not be effective, and suggested that the focus should be on ensuring that boards and senior leadership of firms take greater responsibility for improving D&I and culture.  

The FCA has indicated in response3 that it will consider these recommendations along with the other parts of the report.  It intends to publish its policy statement on non-financial misconduct early in 2025, as well as strengthening and better promoting its whistleblowing reporting channels.  The PRA has indicated that it is also considering the responses to the consultation.

Survey

In October 2024, the FCA published the outcome of its non-financial misconduct survey, in which it found that the number of reported non-financial misconduct incidents increased significantly over three years (from 1,363 in 2021 to 2,347 in 2023)4.  The most common type of incident (41%) was described as “other” and this was reported by the firms to include misuse of alcohol, inappropriate language or communication, data protection and IT security breaches, and retaliatory behaviour. The second most common type was bullying and harassment (26%) followed by discrimination (23%)5.

Firms identified incidents via various routes including formal processes as well as whistleblowing and other methods.  Disciplinary or “other” actions were taken in 43% of cases, the main “other” category including mediation between the parties, management training or employee resignation. 

The survey has also noted a drop in settlement and confidentiality agreements being used, and this drop, it is said, comes almost all from the wholesale banking sector.   It was also noted, surprisingly from an HR and employment law perspective, that not all firms had a whistleblowing and disciplinary policy in force, 38% did not provide management information about non-financial misconduct to the board, and 33% had no formal governance structure or committee to decide the outcome and disciplinary actions for those involved in non-financial misconduct.

The FCA did not publish any further best practice or guidance at the time of the survey, but it suggests the importance of firms getting to grips with these issues.

Lloyd’s

In addition to the above, Lloyd’s released its own consultation in September 2024 on proposed reforms to its approach to addressing poor conduct and behaviours, including non-financial misconduct. The consultation proposes introducing a new Market Conduct and Behaviours Framework (LMCBF) aimed at advancing and protecting the interests, reputation, and culture of the Lloyd’s market. Lloyd’s says it will operate the framework in accordance with a set of market conduct and behaviours principles and Lloyd’s emphasises it will operate on the basis of trust where firms are meeting expected maturity levels under the Culture Principle and will use enforcement powers only when oversight powers are insufficient.

The consultation proposes to introduce a new category of “improper conduct” to the main categories of “discreditable” and “detrimental” conduct. The consultation says it is clarifying the definition of misconduct by setting out various examples of behaviours capable of amounting to ‘improper conduct’, such as harassment, bullying, and actions detrimental to the Lloyd’s brand.

The consultation makes clear that Lloyd’s will follow the same approach as the FCA when considering alleged misconduct (especially non-financial misconduct) outside the workplace.  That is, Lloyd’s will have an interest in incidents at work-related events or in a work-related capacity, but not private events between members of staff with no other connection to work.  However, Lloyd’s may have a legitimate interest in an issue outside the workplace if it engages the market conduct and behaviours overarching objective (such as a conviction for a fraud offence).  The consultation also makes clear that it is not necessary for Lloyd’s to demonstrate that harm has been suffered by it at an institutional level for misconduct to occur – for example, conduct inherently unacceptable by its nature such as illegal drug taking or bullying would be actionable irrespective of tangible harm to Lloyd’s or the market.

Additionally, the consultation introduces a “pre-investigation” filter process for early discussions with Lloyd’s of potential concerns and an Early Account Scheme to encourage firms to address issues promptly and efficiently.

The consultation says on the one hand that Lloyd’s is not looking to become interventionist and most matters will be dealt with via firms’ own HR and disciplinary processes.  However, failing to cooperate with Lloyd’s in a timely and open manner can itself relate to misconduct or a failure to report.

The consultation closed on 16 December 2024, and the outcome is awaited.

New Law on Employer Duty to prevent Sexual Harassment

Also relevant to the insurance industry in this context is the new mandatory duty on employers to take reasonable steps to prevent the sexual harassment of their employees in the course of their employment.  This was introduced by the Worker Protection (Amendment of Equality Act 2010) Act 2023 (the Act), which came into force on 26 October 2024.  It imposes a positive obligation on all UK employers, regardless of their size, to act.

We set out details of this new obligation, together with practical tips for complying with the duty here.

Conclusion

Non-financial misconduct is clearly an issue of significant focus for regulators at present, and we wait to see developments.

Footnotes

  1. Our previous article is here: Insurance Bulletin, March 2024 – HFW
  2. For more detail on the consultation see here: 005451-HFW-Diversity-and-Inclusion-in-the-Financial-Sector.pdf
  3. The responses are available here: Sexism in the City: HM Treasury, Prudential Regulation Authority and Financial Conduct Authority Responses to the Committee’s Sixth Report – Treasury Committee
  4. The survey was sent to 1028 wholesale financial services firms across a number of sectors including insurance.
  5. Distribution varied by industry.
Main Bulletin
Insurance Bulletin January 2025