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FI Observer: FCA turns its sights on sexual harassment

Financial, Executive and Professional Risks (FINEX)|Talent

September 5, 2018

The FI Observer looks to provide insight into the risks associated to financial institutions. In this edition, we look at how the The financial sector has long been struggling with its attitude to women. Now the FCA is hoping to put things right.

The financial sector has long been struggling with its attitude to women. Now the Financial Conduct Authority (FCA) is hoping to put things right.

The FCA has made a great deal about its determination to clean up the image of the financial sector, but until now its attention has been almost solely on financial matters. That has now changed as the regulator’s Director of Supervision – Investment, Wholesale and Specialists, Megan Butler, revealed they intend to use their regulatory powers to actively tackle sexual harassment. The tool they have chosen to do this is the Senior Manager’s and Certification Regime (SMCR), so can the regulator really force the city to change its ways?

Sexual harassment and SMCR

The purpose of SMCR is to place a greater onus on firms to ensure that their managers are fit and proper people to work in their roles. It requires them to consider, at least once every year, whether there are any grounds under which the FCA/PRA should withdraw approval of their managers. Until now that has been mostly interpreted as relating to financial matters, but Butler’s comments show that the FCA is taking a more holistic approach to the matter.

Speaking to the Women and Equalities Committee in Parliament, Butler said: “Misconduct is misconduct, whether it is financial or non-financial. The key tool that we deploy in this area is what we call the Senior Managers and Certification Regime.”

It is the clearest sign yet that, despite not explicitly mentioning sexual harassment, the SMCR will be extended to cover a much wider group of concerns than merely financial. It’s a more holistic approach and is one which some may argue blurs the lines between what is proper and improper conduct.

We do not believe that a culture that tolerates sexual harassment and other forms of behavioural misconduct is a culture that will encourage a 'safe to speak up' environment, an environment where the best business decisions get taken, the best risk decisions get taken” she added.

We do not compartmentalise that away from a consideration of what makes an individual fit and proper and we expect firms to take all those aspects into account when they look at whether their key individuals are fit and proper to do their roles.”

The FCA though, does have some form in this. The case of the Co-operative Bank’s disgraced former boss Paul Flowers shows that the city regulator is prepared to consider non-financial matters in its assessment of good conduct. True, the Flowers case is extreme: he pled guilty to possession of drugs including crystal meth, paid a male escort for sex, used his work email to source drugs and had also been forced to resign from Bradford Council after pornography which was classed as ‘almost but not quite illegal’ had been found on his work email.

However, these statements from Butler show that the FCA is determined to stamp out sexual harassment and inappropriateness in the financial services sector of all kinds, whether that’s something extreme as in the Flowers case or something less serious.

The approach has been warmly welcomed and it comes not a moment too soon. Despite attempts to change the situation, the financial world still suffers from a toxic environment in which women feel harassed, victimised and marginalised. A report in the Financial Times unearthed dozens of women who said they had been victims of sexual harassment. Women claimed they had inappropriately propositioned and faced constant discrimination. One woman said she struggled to convince co-workers that she was competent in maths because of the way she looked. In a male-dominated culture, women say they feel discouraged from speaking up through fear of being branded a ‘snowflake’.

Another poll showed a sharp rise in sexual harassment in fund management firms. The Financial Times Women in Wealth Management survey found that a third of women said they had experienced abuse. The number of women reporting sexual harassment had increased from 20% in 2015 to 32% in 2017. The vast majority (72%) of respondents said they had witnessed sexist behaviour in the office – up from a third in 2014 and one in three women said they had considered leaving because of the environment.

The clearest demonstration, though, came at the now infamous Presidents Club Dinner. Under cover reporter Madison Marriage exposed an event where waitresses were told to wear revealing outfits and to expect misbehaviour from the guests. Those guests did not disappoint. Hostesses reported being groped, offered money for sex and being propositioned. In one incident a guest is said to have exposed himself. Waitresses were asked to sign a five-page non-disclosure agreement when they arrived at the hotel.

This is then, a sector which badly needs to refresh its image but enforcing change is always challenging. There is plenty of talk about the reputational impact on a firm, and of the benefits a more diverse leadership team can bring to the financial performance of a company. However, it may well be the case that real and lasting change will only come when regulations demand it.

How does this renewed focus on conduct play with liability insurances designed to protect the company and the individual? The most relevant insurances in this context are Employment Practices Liability (EPL) and Directors and Officers insurance (D&O). The former is designed to protect not just the senior managers accused of misconduct (including sexual misconduct) but also the employer company. The latter will cover the senior managers (and often other employees too) for “wrongful acts” but does not generally cover the company.  In theory, both insurances will pay out defence costs as well as awards of damages payable to employees for example in respect of sexual discrimination. What they will not (and cannot) do is pay any fines or penalties exacted by FCA.

It might be asked why these forms of protection should be available in cases of for example sexual harassment. Should such conduct not result in appropriate punishment? The principle perhaps most relevant here is “innocent until proven guilty”. Insurers do though have other potential defences at their disposal in egregious cases. These include the English public policy principle that you cannot procure insurance in respect of your own deliberate misconduct and, in relation to ongoing misfeasance, under the Insurance Act you must make a fair presentation of the risk. Each policy will also have its share of contractual protections in the form of terms, conditions and exclusions so the principle of “caveat emptor” is also very much in play.

As things stand, the FCA’s strategy remains an issue of intent. It has already pledged to take action on gender inequality and Butler’s statements can be seen as a sign that firms will have to show they are taking action against sexual harassment within their organisation.

However, to date the FCA has not taken any action against a company for failing to prevent sexual harassment in the workplace. The big test of SMCR will come when and if it takes its first enforcement action.

For now, compliance teams should incorporate sexual harassment as part of their wider approach to SMCR. Senior managers must realise that they are now held personally accountable for the conduct of their team beyond just financial matters. To the FCA it is all part of the wider issue of conduct and by placing responsibility firmly at the feet of the bosses, they have a greater chance of securing some real and lasting change. 

About Enforcd

Set up by a team of industry professionals and technologists with experience in regulation at the FCA, JP Morgan, UBS and Thomson Reuters, Enforcd is a global regulatory intelligence platform designed to help financial services firms embed a strong compliance culture, whose first client was The Bank of England. The platform pulls together key thinking in the industry on regulatory issues from over 20 leading law firms, and builds out a library of advice, analysis and news linked to qualitative themes founded on a central database of enforcement actions. These cases, from 30 regulators, are analysed by advanced algorithmic techniques and in-house compliance specialists to enable quick and easy identification. The power of Enforcd has been recognised by many leading insurers, including Willis Towers Watson and Liberty Mutual.

This article was originally authored by Francis Kean.


Executive Director
Coverage Specialist, FINEX

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