Financial Institutions – Global Directors’ and Officers’ Survey Report 2024

The highest perceived risk for respondents from the financial services and insurance industry remains cyber-attacks, and we expect the unease around governance and the focus by regulators on systems and controls correlates at least in part with that concern. However, strikingly for the first time this year we see health and safety coming in as a very close number four with 83% of financial services and insurance respondents identifying it as a risk concern (compared to only 35% in last year’s survey). We consider below why this might be.

What might have triggered health and safety as a board concern?

The Financial Times recently reported that across all industries employee health has barely improved since the COVID-19 pandemic, noting that indicators of ill health include alcohol consumption, obesity and lack of sleep. The financial services industry scored particularly high in the FT-Vitality Britain’s Healthiest Workplace survey regarding the former. We have also witnessed a rise in health and safety investigations and prosecutions by the Health and Safety Executive, who have maintained an impressive conviction rate.

That said, we think there is another trend which may be influencing the results in the financial services industry, and that is the focus on non-financial misconduct in the industry and a recognition that such behaviour can impinge on well-being as well as financial results.

Non-financial misconduct

While not appearing in the top seven risks for financial services and insurance, this year’s survey nonetheless indicates an increasing concern in respect of employment claims (57% identifying it as a risk concern compared with 36% last year). This is echoed by increasing concern about the breach of human rights within or by business operations (64% this year, up from 42% last year) and all other social factors featuring as questions in this year’s survey. This arguably in part reflects regulators’ increasing interest in non-financial misconduct.

In 2018, the Women and Equalities Committee of the UK Parliament published its report on sexual harassment in the workplace, leading the UK's financial conduct regulator, the Financial Conduct Authority (FCA) to explain the basis on which it sees sexual misconduct as falling within the scope of the regulatory framework. The FCA has also brought a number of cases against individuals whose non-work-related conduct was deemed to affect their integrity such that they could not be considered “fit and proper” to work in financial services. The FCA has placed increasing weight on the role of culture in recent years – for example in a ‘Dear CEO letter’ to insurance firms in January 2020, the FCA identified non-financial misconduct and an unhealthy culture as a key root cause of harm:

This issue is not abating, and firms may be coming to appreciate that there is a correlation between culture and employee well-being. Specifically, the impact on employees’ health and well-being within a culture which tolerates bullying and discrimination.

In July 2023, the House of Commons Treasury Committee (TC) called for evidence on the barriers faced by women in financial services as it launched an enquiry into sexism in the city, examining the progress made in removing gender pay gaps and what role firms, the government and regulators should play in combatting sexual harassment and misogyny.

The report, published in March 2024, concluded that there have been “incremental improvements for women working in financial services on certain metrics, such as the proportion of women holding senior roles. Overall, there has been a disappointing lack of progress on sexual harassment and bullying, including serious sexual misconduct. Despite the best efforts of some far too little progress has been made and serious problems which should have been rooted out still persist.” The TC enquiry was prompted, at least in part, by allegations of sexual misconduct at Odey Asset Management. Ultimately, those allegations led to the winding down of the firm and investigations into both the firm (now closed) and Mr Odey himself. The FCA’s response to the report notes that it shares the TC’s view that change is needed, which is why it is consulting on its diversity and inclusion proposals (a consultation was launched in September 2023 in this regard).

Recommendations

Addressing these issues is a key regulatory focus and both of the UK regulators, the FCA and the Prudential Regulatory Authority (PRA), confirmed proposals to require certain firms to provide data, with a view to understanding how cases of non-financial misconduct are resolved. We will be carefully monitoring the proposals. In the meantime, directors may wish to satisfy themselves that their D&O and E&O policies cover regulatory investigations and consider employment practices liability insurance.

References

1. FCA, Dear CEO letter
2. Clifford Chance, non- financial misconduct
3. FCA, diversity and inclusion financial sector
4. Committees parliament
5. Financial Times